Depreciating Business Property

Depreciating Business Property. Depreciation deductions can be extremely valuable for a business. For example, in a recent court case, a federal judge ruled a company could begin taking its depreciation deductions for two buildings housing retail stores at a point prior to when they were \”open for business.\” The ruling allowed the company to show a loss for that tax year, which the company then used to offset income in earlier years and ultimately claim a total tax refund of over $2 million.* Although this case involved a special 50% depreciation allowance made available by the Gulf Opportunity Zone Act of 2005, the fact remains that even regular depreciation deductions can significantly reduce a company\’s tax bill.

General Rules

If business property has a useful life greater than one year, the owner generally is prohibited from deducting the full cost of the property in the year it is placed in service. Instead, a portion of the cost may be deducted each year as depreciation. The depreciation rules apply to most types of tangible property, with notable exceptions being inventory and unimproved land. Different schedules specify the proper depreciation calculations for different types of property. The most widely used schedules are set forth under the Modified Accelerated Cost Recovery System (MACRS). MACRS assigns property to a recovery class based on the property\’s \”class life.\” For example, office equipment is assigned to the seven-year MACRS class. Assume a business purchased a piece of equipment for $20,000 and placed it in service in 2012. The property would be in its fourth year of service in 2015. Applicable IRS tables indicate that the appropriate deduction percentage is 12.49% of the cost, so the business could deduct $2,498 for that equipment in 2015.**

Placed in Service

As the above-mentioned court decision suggests, the date property is placed in service can be an important consideration. Though the IRS has specific definitions for different types of assets, generally, property is first placed in service on the date the taxpayer first places it \”in a condition or state of readiness and availability for a specifically defined function.\” Because the definition is broad, taxpayers sometimes litigate how it should be applied to specific situations. In the decision mentioned above, the key issue was the \”placed-in-service\” date of two buildings that would eventually be used as building supply stores. The IRS had argued that the \”placed-in-service\” requirement meant that the buildings had to be open for business for retail customers. The court disagreed, however, holding that the buildings were placed in service when they were substantially complete and limited certificates of occupancy had been issued so that workers could enter the buildings to install necessary racks and shelving.

Related Provisions

Businesses may be able to benefit from the tax law\’s Section 179 provisions to garner faster write-offs for some of their asset purchases. Currently, businesses will be allowed to expense up to $25,000 of qualifying property placed in service during the 2015 tax year, with that limit subject to further reduction once the amount placed in service exceeds $200,000.*** In addition, a current deduction may be available for certain limited amounts paid for property that the business expenses for financial accounting purposes. We can tell you more about these \”de minimis safe harbor\” regulations. •

11 Employers: Deferred due date for Form 941, if timely deposits were made.

15 Exempt Organizations: File 2014 Form 990, 990-E7, or 990-N, if the organization reports on a calendaryear basis.

15 Partnerships and S Corporations: If an election to use a tax year other than a Tequired_tax year was made, file Form 8752 to report the required payment.

JUNE

15 Individuals: Second installment of 2015 estimated tax due.

15 Corporations: Deposit second installment of estimated income tax for 2015, if the organization reports on a calendar-year basis.

JULY

31 Employee Benefit Plan Sponsors: File 2014 Form 5500 Annual Return/ Report of Employee Benefit Plan. If your plan is not a calendar-year plan, file the form by the end of the seventh month after the plan year ends.

31 Employers: File Form 941, Employer\’s Quarterly Federal Tax Return; quarterly deposit due.

* Stine, LLC USA (DC LA, 1/27/2015) ** Calculation assumes the halfyear depreciation convention. *** Congress kept the Section 179 limit at $500,000 for 2014 in late-year extender legislation.