Sec. 179 Write-Offs

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:

• Land
• Inherently permanent structures
• Walls
• Doors and door locks. Treas. Reg. Sec. 1.48-1(e)(2); FSA 200203009
• Windows
• 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
• Fire escapes
• Stairs
• Sprinkler systems
• Basic affixed electrical wiring, wall outlets and general lighting
• General plumbing

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:

• Movable partitions. Rev. Rul. 75-178, 1975-1 C.B. 9
• 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
• Removable shelving.

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 (1^st 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.