Monthly Archives: August 2009

New Rules of Depreciation for Qualified Retail Property

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As is the case with Qualified Leasehold Property and Qualified Restaurant Property, a newly allowable 15 year recovery period will be usable when depreciating Qualified Retail Property.  This is the first time this will be so, but can only occur if the given parameters are met.
1)  Effective Date of 1/1/2009
2)   Not Elective, if the qualifications below are met:

  • A)  The property depreciated must be to the interior portion of a building that is non-residential real property.
  • B)  The interior portion of the building must be open to the general public and used in the retail trade or business of selling tangible personal property to the general public.
  • C)  The improvements must be placed in service more than years after the building was first placed service.
  • D)  The building must be placed in service between 1/1/2009 – 12/31-2009

3)  If these qualifications are met, the qualified leasehold improvements can be depreciated over 15 years under MACRS GDS Straight Line, as opposed to the normal 39 year recovery period.
4)  Section 1245 (Personal Property) may be depreciated under Cost Segregation Rules.  This allows for a shorter recovery period of 5 or 7 years.
5)  Bonus Depreciation is NOT ALLOWED
*  Qualified Retail Property does not include improvements consisting of building enlargements, internal structural frameworks, any elevator/escalator, or a structural component benefiting a common area in the building.

Unfortunately, retail businesses have suffered tremendously as a result of the current tumultuous economy.  To help alleviate the pressures preventing businesses from surviving and growing, legislation such as this has been passed.  However, much of it is confusing, and many businesses may not be aware of the benefits that can be found.  Hopefully, this will have helped provide some insight on the topic.  Also, if there is anything else you would like to know, feel free to ask below or on the questions page.

More information about Bassets eDepreciation software can be found at Bassets.net. While there you can set up a demonstration, download a free evaluation copy and get a personalized pricing estimate.

Additions or Improvement to Qualified Restaurant Property

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One of the hardest hit industries as a result of the current recession has been the restaurant industry.  Thus, it has been exceedingly difficult for many restaurants to maintain day-to-day operations, much less for them to make additions or improvements to their existing property.  However, congress has provided some incentive to do so anyway, with the new or amended provisions regarding how restaurant property can be depreciated.  Below is helpful information on the issue.

Qualified Restaurant Property:
1)  Effective date of 10/23/2004
2)  Is Not Elective, if the qualifications below are met:

  • A)  The improvement must be subject to a lease with a taxpayer as either the lessee or lessor
  • B)  The lease must be between unrelated parties
  • C)  The leased area must be occupied exclusively by the lessee.
  • D)  The improvement made must be section 1250 Property (structural components such as walls, plumbing or certain wiring).
  • E)  The improvement must be placed in service more than 3 years after the building was initially placed in service.
  • *    The 3 year requirement has been eliminated for improvements and/or buildings placed into service in 2009

3)  Restaurant buildings will also be treated the same as an improvement, when placed in service in 2009.  At least 50% of the building must be used as a restaurant.    If these qualifications are met, the qualified leasehold improvements can be depreciated over 15 years under MACRS GDS Straight Line, as opposed to the normal 39 year recovery period.
4)  Section 179 does not apply since only Section 1245 property is allowable.
5)  Bonus Depreciation at 50% allowable from 10/23/2004 – 12/31/2008, but not from 1/1/2009 – 12/31/2009.
6)  Section 1245 (Personal Property) may be depreciated under Cost Segregation Rules.  This allows for a shorter recovery period of 5 or 7 years.
*Newly constructed buildings placed in service in 2009, where more than 50% of the building is used as a restaurant, are also allowed the 15 year recovery period.

Much of this governing information is very similar to that of the qualified leasehold property.  Still, there are differences which can lead to confusion about the rules of depreciation.  Should you have any questions, please leave them here or in the questions section, and we will be glad to help clarify things.  Also, you may find the post on Qualified Leasehold Property helpful in understanding this matter, and there will be a upcoming post on Qualified Retail Property to address that area as well.

More information about Bassets eDepreciation software can be found at Bassets.net. While there you can set up a demonstration, download a free evaluation copy and get a personalized pricing estimate.

Improvements or Additions to Leasehold Property

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One of the emerging hot topics in tax depreciation is Leasehold Improvement Depreciation.  Lately, there seem to be many questions revolving around what qualifications there are for depreciating leasehold improvements and what guidelines must be followed when doing so.  This probably stems from the recent rules and allowances created through the initial law (Job Creation and Worker Assistance Act of 2002) through the stimulus plans of 2008 and 2009.  Below, are the general rules behind depreciating qualified leasehold improvements as well the current changes that have been put into place.

Generally, additions and improvements to leasehold property are depreciated under the same rules as the real property being improved, had that real property been placed in service at the same time as the addition or improvement.  In other words, additions or improvements to a building placed in service prior to MACRS would be depreciated under the current MACRS rules in effect at the time that the addition or improvement was placed in service.  This normally would mean a 39 year recovery period for non-residential real property under straight line with a mid-month first year convention.  However, there are many exceptions to this general rule, including how to handle Qualified Leasehold Improvements.

Here is what you need to know about Qualified Leasehold Improvements:
1)  Effective date of 10/23/2004
2)  It’s not elective if the qualifications below are met:
3)  Qualified Leasehold Improvements must:

  • A.  Be made subject to a lease with a taxpayer as either the lessee or lessor
  • B.  Be made for a lease between unrelated parties
  • C.  Be where the leased portion is only occupied by the lessee.
  • D.  Be of Section 1250 Property (structural components such as walls, plumbing or certain wiring).
  • E.  Be placed in service more than 3 years after the building was initially placed in service

4)  If these qualifications are met, the qualified leasehold improvements can be depreciated over 15 years under MACRS GDS Straight Line with Half-Year or Mid Quarter Convention.  This is opposed to the normal 39 year recovery period with Straight-Line and Mid-Month Convention.
5)  Section 179 does not apply since only Section 1245 property is allowable.
6)  Bonus Depreciation at 50% has been extended until 12/31/2009
7)  Section 1245 (Personal Property) may be depreciated under Cost Segregation Rules.  This allows for a shorter recovery period of 5 or 7 years.

*There are also important exceptions for Qualified Restaurant Property and Qualified Retail Property.  However, to keep things as simple as possible, these areas will be addressed in different posts which will be coming soon.

Hopefully this will have answered many questions about depreciating improvements or additions to leaseholds.  If there is any additional information that you would like, please feel free to ask below in the comments or on the questions page.

More information about Bassets eDepreciation software can be found at Bassets.net. While there you can set up a demonstration, download a free evaluation copy and get a personalized pricing estimate.

How to Use Property Class Life Tables

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In 1986, assets of different classes were given associated class lives.  These class lives are formatted into tables that are viewable on the IRS website under Publication 946.  Using these class life tables can be confusing to many.  Such confusion may occur because the tables are lengthy, some assets have no class life with assigned recovery periods, and other assets fall into multiple asset classes.  This will hopefully serve as a simplifying guide as to how to approach and use the tables.

Using Tables B-1 and B-2
As is stated on the IRS website, one needs to look at both Table B-1 and B-2 to identify the correct recovery period.  Normally, if the asset is listed under B-1, the associated recovery period there is used.  However, you must then also look at Table B-2 to see if the asset specifically matches an activity for use as listed in that table.  If it does, the recovery period from Table B-2 overrides the less specific value found in B-1.  Conversely, if there is no specific match in Table B-2, or if it is specifically excluded, the recovery period from Table B-1 stands.

What if Property is not listed under either table?
If this is the case, you should consult the end of Table B-2 to find Certain Property for Which Recovery Periods Assigned.  Normally, the recovery periods used will be 7 years when using the General Depreciation System (GDS) and 12 years under the Alternative Depreciation System (ADS).

Hopefully this gave you a basic understanding of class life tables.  Should you have any questions, please feel free to ask them here or on the questions page.

More information about Bassets eDepreciation software can be found at Bassets.net. While there you can set up a demonstration, download a free evaluation copy and get a personalized pricing estimate.

Determining Depreciation Recovery Periods

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Determining the correct monthly depreciation amounts for an asset requires the correct usage of recovery periods.  Under MARCS, assets are assigned to a property class such as 3 year, 5 year, 7 year, nonresidential real property, etc.  Associated with each property class is a recovery period in 12 month intervals (years).

The first actual recovery period of an asset is determined by when the asset is placed in service along with the particular convention being used.  Here is an example of an asset that is considered 7-year property with a 7-year recovery period.  Suppose the asset is acquired in 2009 and uses a half-year convention.  The recovery period would start on July 1, 2009.  Thus, because of the half-year convention, depreciation deductions can be expensed through June 30, 2016.

Additional considerations must also be given to which depreciation rules are being followed:  General MACRS Depreciation Rules (GDS) or Alternative MACRS Depreciation Rules (ADS).  Typically, the recovery periods under ADS are longer than GDS.  For example, residential rental property has a recovery period of 40 years under ADS, but just 27.5 years under GDS.  Below is a chart that provides more examples of common business assets and their associated recovery periods under GDS and ADS

Table B – 1: Common Business Assets Recovery Period (In Years)
GDS ADS
0.11 Office Furniture & Equipment 7 10
0.12 Computers & Related Equip 5 5
0.13 Office Machines 5 6
0.21 Airplane (airframe & engines) 5 6
0.22 Autos & Taxis 5 5
0.23 Buses 5 9
0.241 Light General Purpose Truck (<13k lbs) 5 5
0.242 Heavy General Purpose Truck (>13k lbs) 5 6
0.25 Railroad Car & Locomotives, except owned by a Railroad 7 15
0.26 Tractor Unit (tractor-trailer) 3 4
0.27 Trailer & Trailer Mounted Container 5 6
0.28 Vessels, Barges & Tugs 10 18
0.3 Land Improvements (1245 or 1250 Property) 15 20
0.4 Industrial Steam & Electric Generation & Distribution 15 22
B.1 Residential Rental Property 27.5 40
B.2 Nonresidential Real Property, pre 5/13/93 31.5 40
B.3 Nonresidential Real Property, post 5/12/93 39 40
B.4 Computer Software 3
B.5 Trees or Vines Bearing Fruit or Nuts 10 20
B.6 Qualified Leasehold / Restaurant Leasehold Property 15 39
B.7 New York Liberty Zone Leasehold Improvement Property 5 9

At this point, you may be asking how the actual recovery period for an asset is determined.  The answer is that the recovery period is normally established from the class life of the property.  For a more detailed understanding of class life periods, click here for the post on this topic.

More information about Bassets eDepreciation software can be found at Bassets.net. While there you can set up a demonstration, download a free evaluation copy and get a personalized pricing estimate.