It generally takes 39 years—nearly a half century—to completely recoup the cost of a commercial building through depreciation deductions. By that time, you or your business may no longer be around. But you can move faster by taking matters into your own hands.
Strategy: Conduct a cost-segregation study. If you qualify, you can use the study to write off certain building components in just five or seven years, without applying to the IRS for an accounting method change.
That’s not to say that the IRS will give you a free pass to write off separate building components over a short period of time. It often challenges cost-segregation studies used by taxpayers to justify faster write-offs. But you may still pass inspection under the latest IRS guidance.
Here’s the whole story: 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 can be written off over just five years if the property has a useful life between four to 10 years. (A seven-year period may be used for property with a useful life between 11 and 15 years.) As a general rule, “personal property” is defined in the regulations as tangible depreciable property other than buildings and their structural components.
Several recent court cases have held that parts of a commercial building can be treated as 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 can include components such as specialized electrical systems, plumbing systems in restaurant kitchens and removable carpeting.
Because the write-off periods for components often depend on the use of the building, taxpayers repeatedly commission tax pros and other experts to provide cost-segregation studies with breakdowns of the write-off periods for various components. After years of uncertainty, 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.
No secrets: The IRS isn’t hiding anything up its sleeve. Both taxpayers and their cost-segregation experts can check out the ATG. The guidance explains why cost-segregation studies are performed, how they are prepared and what agents should review. If anything, the ATG may help you nail down faster write-offs when they are warranted.
To be on the safe side, enlist the services of a tax pro if you think you would benefit from a cost-segregation study of building components. The tax pro can tell you where you’ve gone wrong in the past and how to change things in the future.
Tip: When it makes sense, you can reclassify certain components and file amended returns for the appropriate tax years.