Tax Tips
Chris Coyle
A Tax Breakdown for Building Deductions
As a general rule, you can write off the cost of computers used in your business in just five years—perhaps even in one year if you use the Section 179 expensing deduction. Similarly, the typical recovery period for most business equipment is seven years. But it takes decades to recoup the full cost of a commercial building through depreciation deductions.Fortunately, depending on your industry, you may be entitled to faster write-offs for parts of a commercial building. It all has to do with “component depreciation.”
That is not to say that the IRS will give you free rein to write off components over a short period of time. In fact, it has recently zeroed in on cost segregation studies sometimes used by taxpayers to justify faster write-offs. Nevertheless, it is still possible to pass muster under the latest IRS guidance.
Background: Under the Modified Accelerated Cost Recovery System (MACRS), the cost recovery period for a commercial building is 39 years. On the other hand, personal property may be written off over just five years if the property has a useful life of more than four but less than 10 years. (A seven-year period may be used for property with a useful life of at least 10 years but less than 16 years.) As a general rule, personal property is defined in the regulations as tangible depreciable property (other than buildings and their structural components) used in special industries, such as transportation and communications, and several other specialized types of property.
Several recent court cases have held that parts of a commercial building may be treated like personal property if they relate only to the equipment used in a business located in the building instead of maintenance or operation of the building. This may include components such as electrical systems, plumbing systems in restaurant kitchens and removable carpeting.
Since the write-off periods for components often depend on the use of the building, taxpayers may commission tax professionals and other experts to provide cost segregation studies that break down the write-off periods for various components. The IRS recently issued a 115-page Audit Techniques Guide (ATG) to help its agents determine when a cost segregation study is up to snuff. The ATG is available to the general public at the IRS web site.
Practical advice: Do not try to go it alone. It is important to obtain professional assistance in this area. If you qualify, you may be able to reclassify certain components and file amended returns for prior years.
