Depreciation Strategy

31-Dec-2013

It takes a long time – 39 years – to recover the costs of a business building through depreciation deductions.

There is a way to secure faster tax benefits – separate building component for tax purposes.

Despite certain requirements that must be met, clients may write off the costs of some building components in only five to seven years.

A business does not have to apply to the IRS for a change in its accounting method – a major plus.

And best of all, certain components may qualify for ‘bonus depreciation’ under the latest tax rules. A qualified property placed in service in 2011 is authorized for 100% bonus depreciation under the 2010 Tax Relief Act. The percentage will shrink to 50% for qualified properties placed in service in 2012. This means that instead of taking five to seven years to deduct component costs, some clients might write off the entire cost in only one year, with no limits on the amount.

This seems great, but it doesn’t give taxpayers a free-for-all to compartmentalize their buildings. The IRS will challenge “cost-segregation studies” that are used to justify these faster write-offs.

The cost recovery period for a commercial building, under the Modified Accelerated Cost Recovery System (MACRS), is 39 years. Personal property however, may be written off over five years if the property’s useful life is four to 10 years. Personal properties whose useful life is 11-15 years can be written off over seven years.

Personal property is generally defined as “tangible depreciable property (other than buildings and their structural components), including property used in specialized industries, such as transportation and communications.“ (IRS regulation 1.48-1(c))

Below is a list of building components that may qualify for faster depreciation write-offs:

  • Canopies/awnings
  • Doors
  • Electrical connections/outlets
  • Fire protection equipment
  • Floor coverings
  • HVAC units
  • Interior facades
  • Kiosks
  • Lights/lighting fixtures
  • Moveable walls
  • Music and PA systems
  • Parking lots
  • Poles/pylons
  • Plumbing equipment
  • Security equipment
  • Signage
  • Site grading
  • Wall coverings/window accessories

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