Summary: The cost of a real property leasehold improvement generally has to be depreciated over a 39 year recovery period. However, if expenditures can be properly classified as tangible, personal, movable, non-real estate property, they may qualify to be deducted currently. This can provide a tremendous tax benefit.
The analysis used to determine which costs can be classified as personal property rather than real property is referred to as “component depreciation” analysis. The foundation for this is based on the law that had applied years ago for the determination of what property qualified for the investment tax credit under prior law Code Section 48. Hospital Corp. of America & Subs. v. Comr., 109 T.C. 21 (1997). Structural components of a building do not qualify for more rapid depreciation or Section 179 expensing. Structural components relate to the operation and maintenance of a building. Treas. Reg. Sec. 1.48-1(e). These include:
Inherently permanent structures
Doors and door locks. Treas. Reg. Sec. 1.48-1(e)(2); FSA 200203009
Floors, such as permanent tiling
Acoustical ceilings. Metro Nat’l Corp. v. Comr., 52 T.C.M. 1440 (1987)
Central air conditioning and heating systems
Basic affixed electrical wiring, wall outlets and general lighting
Non-structural components and personal property can qualify for more favorable tax benefits. Structural components that do not relate to the operation and maintenance of a building as a building may qualify. These include five or seven year recovery periods, rather than 39 years, and the potential for immediate deduction under Section 179. These can include:
Equipment and machinery used to maintain temperature or humidity requirements (e.g., for food preparation)
Removable air-conditioning equipment. Scott Paper Co., 74 T.C. 137
Computers, peripheral equipment and wiring
Smart board and related wiring and equipment
Special removable lighting
Removable kitchen equipment and furnishings
Telephone equipment and wiring, including wiring related to intercom, dictation and call systems. Hospital Crop. Of America v. Comr.
Special electrical wiring and plumbing hook-ups relating to particular equipment or function. (This would include electrical loads for particular items of business equipment)
Kitchen piping, plumbing connections, dishwashers, etc.
Costs that relate to the provision of services, rather than building functions
Removable carpeting. Rev. Rul. 67-349
Vinyl wall covering
Removable floor tiles, or other floor coverings, that are not an integral part of the floor itself
Removable ceiling treatments
Signs and ornamentation
Furniture and equipment
A number of factors can be considered in determining whether property qualifies for the more favorable treatment:
Manner in which the property is attached to the building. It should not be permanently attached
The property is inherently moveable
Size, weight and construction of the property
The type of equipment and number of people required to move the property
The property or similar property has been moved in the past
Facts support that the property may not stay in place permanently
The property was not designed to stay in place permanently. L.L. Bean, Inc. v. Comr., T.C. Memo 1997-175, aff’d 145 F.3d 53 (1st Cir. 1998);
The cost, time and difficulty of moving the property
Little damage will be done to the property when moved
Little damage will be done to the building when the property is removed
The property could readily be re-used if moved.
To secure your write-offs you need to corroborate the allocation. You might use an engineering and cost analysis of construction records, engineering and cost estimation (when actual records are not available), survey of contractor data, or other estimates.
Our Consumer Webcasts and Blogs
Subscribe to our email list to receive information on consumer webcasts and blogs, for practical legal information in simple English, delivered to your inbox. For more professional driven information, please visit Shenkman Law to subscribe.