Capitalized Costs and Depreciation. 2 ChapterTitle 1Tax Basis of Property Acquisitions 2Expensing vs. Capitalization 3Amortization, Depreciation, and.

Capitalized Costs and Depreciation

2

Capitalized Costs and Depreciation

Chapter Title

1 Tax Basis of Property Acquisitions

2 Expensing vs. Capitalization

3 Amortization, Depreciation, and §179

3

Module Overview

At the end of this module, you will be able to:

Gather the information needed to make the call on the treatment of costs as capital versus expense.

Determine the appropriate depreciation schedule based on the nature of the asset and to optimize the tax result.

A Customized Curriculum for Firms

4

Tax Basis of Property Acquisitions

Chapter 1

http://aicpalearning.org/

5

Cost Basis

Cash payments

Fair market value of non-cash property given in exchange

Acquisition costs, including

• Freight• Purchase commissions• Title fees• Transfer taxes and sales taxes

6

Cost Basis

Installation and testing costs

Real property taxes owed by seller, paid by purchaser

7

Acquisition Financing

Initial basis includes:

• Liabilities incurred to acquire property• Seller debt assumed by buyer• Debts to which property continues to be subject after

acquisition, including nonrecourse debt

Amount of purchaser debt included in tax basis determined under OID rules if not adequate stated interest

8

Lump-Sum Purchase of Business Assets

Class I: Cash and cash equivalents

Class II: Marketable securities, certificates of deposit, and foreign currency

Class III: Accounts receivable, mortgage receivables, and credit card receivables

Class IV: Inventory and stock in trade

9


Class V: All other tangible assets

Class VI: Identifiable intangible assets other than goodwill and going concern value

Class VII: Goodwill and going concern value

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Form 8594 is required to be filed in duplicate:

• Buyers to file with their income tax return• Sellers to file with their income tax return • Form shows the allocation of the asset purchase price among

the categories

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Form 8594 is required to be filed in duplicate:

• The amounts must match between the parties or an IRS notice will likely result

• The allocation agreement is usually an Appendix to the purchase/sale agreement

• The FEIN numbers of each party must be made available to each other as it is required to be entered in the form

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Capitalized Cost of Self-Constructed Assets

Direct construction costs

Allocable portion of indirect costs that directly benefit or are incurred by reason of production or resale activities

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Capitalized Indirect Costs of Self-Constructed Assets IRC Section 263A

Indirect labor and indirect materials

Officer’s compensation

Employee pension and benefits costs

Purchasing, handling, and storage costs

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Capitalized Indirect Costs of Self-Constructed Assets IRC Section 263A

Depreciation, rent, insurance, utilities, repairs, and maintenance on production facilities or equipment

Non-income taxes attributable to labor, materials, supplies, equipment, land, or facilities used in production or resale

Construction-period interest

Capitalizable service costs

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Basis of Property Acquired in Nontaxable Exchange

Basis of property surrendered in exchange

Plus gain recognized

Minus loss recognized

Minus value of cash or nonqualifying property received

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Example 1-16

Flack Inc. transferred land (Property A)

• FMV of $50,000 • Adjusted basis of $28,000

to Jennings Corporation in exchange for Other land (Property B)

• FMV $50,000.

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Example 1-16

If the transaction does not qualify for a nontaxable exchange, then

Flack recognizes gain of $22,000 disposition Property A.

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The cost basis of Property B is $50,000.

If the transaction qualifies as a nontaxable exchange, Flack will not recognize its $22,000 realized gain.

Basis Property B = $28,000 (substituted basis of Property A).

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Basis of Property Involuntary Conversion

Example 1-20

Travel Corporation owned a warehouse:

• Tax basis of $300,000 that was destroyed in a flood• Insurance reimbursement for its loss of $400,000• Realized gain = $100,000 on the involuntary conversion

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Travel Corporation owned a warehouse:

• If Travel purchases qualifying replacement property within two years at a cost of $400,000 or more, the gain is not recognized

• Assume Travel paid $460,000 for qualifying replacement property:- Replacement property = $360,000 - ($460,000 cost – $100,000 gain not recognized on the

involuntary conversion)

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Example 1-20

Assume instead Travel paid $380,000 for qualifying replacement property.

Because it did not reinvest the entire amount of the insurance reimbursement, it will recognize $20,000 of gain on the involuntary conversion

Tax basis in the replacement property = $300,000

($380,000 cost – $80,000 gain not recognized).


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Expensing vs. Capitalization

Chapter 2

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Capitalized Intangibles

15-yr. safe harbor amortization

25-yr. amortization

• Improvements to realty owned by another

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Facilitative Costs for Business Acquisitions

Acquisition of assets that constitutes a business

Acquisitions of ownership interest – related party

Acquisition of ownership interest

Restructuring, recapitalization or reorganization

Transfer to a corporation or partnership

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Formation of a disregarded entity

Acquisition of capital

Stock issuance

Issuance of debt

Writing an option

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Exceptions:

• De minimis amounts investigating < $5,000• Employee compensation and overhead• Amount paid to integrate business operations

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Exceptions:

• Bright line date-up to letter of intent or material terms- Unless inherently facilitative:

- appraisal, structuring, - preparing and reviewing documents,- obtaining regulatory and shareholder approvals, - conveying property

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Prepaid Expense12-Month Deduction Rule

Prepayment for goods & services = economic performance and therefor deduction if benefits do not extend beyond earlier of:• 12 mos. after receive first benefit• End of tax year, following year of payment

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Prepaid Expense 12-Month Deduction Rule

Example 2-10

On December 1, 2012, N Corporation

pays a $10,000 insurance premium - property insurance policy

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One-year term beginning on February 1, 2013

The right attributable to the $10,000 payment extends beyond the end of the taxable year following the taxable year in which the payment is made

The 12-month rule does not apply and N is required to capitalize the $10,000 payment

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Example 2-10

Assume the same facts, except:

• One-year term beginning on December 15, 2012

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12-month rule now applies because the right attributable to the payment does not extend more the 12 months beyond December 15, 2012 (the first date the benefit is realized by the taxpayer)

Nor beyond the taxable year following the year in which the payment is made

Accordingly, N is not required to capitalize the $10,000 payment

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12-Month Rule: Accrual Method

Economic performance

• Receive goods/services - 3½ mos after Y/E• Payment = economic performance

for insurance, taxes, licenses• Payment is not economic performance for prepaid rent

34

Accounting Method Changes

Automatic consent for tax years ending after December 31, 2005

• Form 3115 with tax return• No user fee• Rev. Proc. 2006-12• Applies to 12-mo. prepaid expense rule

35

Other Deduction Issues

Expensing environmental clean-ups:

• Capitalize to inventory (Rev. Ruls. 2004-18 & 2005-42)• Qualified contaminated sites OK per §198• Currently §198 expensing extended through 2009 only

Asbestos removal deduction (Cinergy Corp.)

Removal of depreciable assets (Rev. Rul. 2000-7)

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Expenditures Related toTangible Assets

New Temporary Regulations effective 2014 (now effective)

Replaced proposed regulations issued in 2008 which were not effective

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Materials and Supplies

Tangible property used or consumed in operations that is not inventory and that:

• Is a component acquired to maintain, repair, or improve a unit of tangible property owned, leased, or serviced by and not part of any single unit of tangible property;

• Consists of fuel, lubricants, water, and similar items, reasonably expected consumed in 12 months or less, beginning when used in taxpayer's operations;

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Materials and Supplies

• Unit of property economic useful life of 12 months or less, beginning when used or consumed

• Is a unit of property acquisition cost or production cost of $100 or less; or

• Federal Register or Internal Revenue Bulletin - (see §601.601(d)(2)(ii)(b)) as materials and supplies

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Economic Useful Life

Economic life matches that of Applicable Financial Statement (AFS), if taxpayer has one

Otherwise uses period expected to be used

Applicable Financial Statement Priority:

• SEC Filing• Certified financial statement• Other filed (with a govt. or agency) financial statement other

than return

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Capitalization Required

New buildings or permanent improvements or betterments that increase the value

Restoring property or in making good the exhaustion thereof for which an allowance is or has been made.

§263A still applies for direct and indirect costs

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Other Rules

Elect to capitalize unless a prohibited item

Optional method for spare parts

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Seven Items Requiring Capitalization

1. An amount paid to acquire or produce real or personal tangible property.

2. An amount paid to improve real or personal tangible property.

3. An amount paid to acquire or create intangibles.

4. An amount paid or incurred to facilitate an acquisition of a trade or business, a change in capital structure of a business entity, and certain other transactions.

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Seven Items Requiring Capitalization

5. Acquisition costs-land, easements, life estates, mineral interests, timber rights, zoning variances, or other interests in land.

6. Agreement between bondholders or shareholders in reorganization.

7. Guaranty of dividends in securing new capital for the subsidiary and increasing the value of its stockholdings in the subsidiary.

44

Facilitative Costs

General rule is to capitalize

Includes investigative costs with some exceptions

Allocate among separate and distinct properties that are part of the transaction

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11 Examples of Facilitative Costs

1. Transporting the property;

2. Securing an appraisal or determining the value or price of property;

3. Negotiating terms/structure of acquisition and tax advice on the acquisition;

4. Application fees, bidding costs, or similar expenses;

5. Preparing and reviewing the documents (bid, offer, sales contract, or purchase agreement);

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11 Examples of Facilitative Costs

6. Examining and evaluating the title of property;

7. Obtaining regulatory approval, securing permits

8. Conveying property (sales and transfer taxes, and title registration costs;

9. Finders' fees or brokers' commissions

10. Architectural, geological, engineering, environmental or inspection services

11. Services qualified intermediary or other facilitator of an exchange under §1031.

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De Minimis Rule for Acquisition or Production of Property

Does not apply to inventory or land

A qualifying taxpayer for this purpose must:

Have an AFS,

Have written accounting procedures for the expensing of de minimis items,

Recognize de minimis costs as expenses on its AFS, and

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De Minimis

The total aggregate of amounts paid and not capitalized under this rule and the material and supplies rule for the tax year are less than or equal to the greater of:

• 0.1 percent of the taxpayer's gross receipts• 2 percent of the taxpayer's total depreciation and amortization

expense

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Improvements

Capitalization required amounts paid that:

Result in a betterment to a unit of property,

Restore a unit of property, or

Adapt a unit of property to a new or different use.

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Unit of Property

Concept very important to understanding the new rules

• Functional interdependence• Special rules for certain types of property

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Buildings

Each building and it’s components are a single Unit of Property

Improvements to building include:

• Building structure

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Buildings

Improvements to building include:

• Building system

HVAC Fire protection

Plumbing system Fire alarms

Electrical system Security system

Escalators and elevators

Gas distribution system

53

Routine Maintenance Safe Harbor (for Property other than Buildings)

Relevant considerations include:

The recurring nature of the activity-

• expected to occur more than once during unit’s class life

Industry practice,

Manufacturer recommendations,

Taxpayer experience, and

The treatment of the activity on the taxpayer's AFS.

54

Safe Harbor Exceptions

Items that ARE NOT included in definition of routine maintenance:

Replacement of a component of a unit of property deducted as a loss (other than a casualty loss under Regulation §1.165-7)

Replacement of a component of a unit of property wherein realized gain or loss has resulted from the sale or exchange of the component.

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Items that ARE NOT included in definition of routine maintenance:

Repair of damage and a basis adjustment has been taken from casualty loss under §165, or relating to a casualty event described in §165.

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The safe harbor does not apply to the cost of replacement components to:

• Return a unit of property to its ordinarily efficient operating condition, if it has deteriorated to a state of disrepair and is no longer functional for its intended use.

• Repairs, maintenance, or improvement costs under the Optional method of accounting for rotable and temporary spare parts per Temporary Regulation §1.162-3T(e).

57

Betterments

Correction of pre-acquisition or pre-production material condition or defect

Material addition to the unit of property, i.e; physical enlargement, expansion, or extension

Material increase in the capacity, productivity, efficiency, strength, or quality of the unit of property or its output.

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Restorations

Replacement of a component of a unit of property deducted as a loss (other than a casualty loss under Regulation §1.165-7)

Replacement of a component of a unit of property wherein realized gain or loss has resulted from the sale or exchange of the component.

Repair of damage and a basis adjustment has been taken from casualty loss under §165, or relating to a casualty event described in §165.

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Restorations

Return unit of property to ordinarily efficient operating condition if deteriorated to a state of disrepair and no longer functional for its intended use;

Rebuilding to like-new condition after end of class life

Replacement parts of major component or a substantial structural part of a unit of property.

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Updated Automatic Consent Procedures

Revenue Procedure 2012-19

• Updates prior guidance for automatic changes • Automatic consent to utilize new Temporary Regulations

affecting the capitalization of tangible assets

61

Updated Automatic Consent Procedures

Revenue Procedure 2012-20

• New automatic consent procedures• Change to the methods of accounting for depreciation of

grouped assets (discussed in chapter 3)


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Amortization, Depreciation, and §179

Chapter 3

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Corporate Organizational Costs

Current rule (post 10/23/2004):

In the taxable year in which a corporation begins business

• Deduct the lesser of $5,000 (reduced by the amount of the costs > $50,000) in that year and

• Corporation may elect to capitalize excess and amortize over 180 months

• Deemed election made by capitalizing on timely filed return

All organizational costs of the corporation are considered in determining if the total is > $50,000

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Start-up Costs

Current rule (post 10/23/2004):

In the taxable year in which a taxpayer begins an active trade or business

• Deduct the lesser of $5,000 (reduced by the amount of the costs > $50,000) in that year and

• Taxpayer may elect to capitalize excess and amortize over 180 months beginning with the month active business begins

• Deemed election made by capitalizing on timely filed return

All start-up costs of the taxpayer are considered in determining if the total is > $50,000

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§197 Intangibles

Definition

• Goodwill, going-concern value• Employee, customer, supplier intangibles• Licenses, permits• Non-compete agreements• Franchises, trademarks, trade names

15-year straight line amortization

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§197 Intangible in a Stock Redemption Example

Corp.

$3.5 M for stock

$1.3 MNoncompete(5 yrs.) Corp.

$3.5 M for stock

$1.3 MNoncompete(5 yrs.)

S/H

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Cost Recovery/Depreciation

Leasehold improvements

• Capitalize and depreciate SL - 39 yrs.• Deduct at abandonment• SL-15-year amortization for qualified restaurant and retail

property acquired prior to 2014

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Cost Recovery/Depreciation

Demolition

• Capitalize to land• De Cou case:

- Not incurred “on account of” demolition- Loss must be taken in year prior to demolition

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MACRS Depreciation

Class life system

No “estimated useful life” criteria

• Asset subject to wear, tear• Asset used in business/investment

Residential rental: 27.5 yrs.

Commercial real estate: 39 yrs.

Retail motor fuel bldgs. (C-stores): 15 yrs.

Restaurant bldg. improvements: 15 yrs (through 2013)

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MACRS Depreciation Half Year Convention

Acme Corp. buys an asset (7-year class) on February 15, 2013, for $10,000 (assume expensing is not elected and a non-bonus depreciation year).

The declining balance rate:

• Divide 1 by 7 to get the basic rate of 1/7 or 14.29 percent. • Since this is 7-year property and the 200 percent declining

balance applies, Acme multiplies 14.29 percent by two or 28.58 percent.

• A half-year convention must be used.

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2013: $10,000 x 28.58% = $2,858 x ½ = $1,429 14.29%2014: $10,000 - $1,429 = $8,571 x 28.58% = $2,450 24.50%2015: $8,571 - $2,450 = $6,121 x 28.58% = $1,749 17.49%2016: $6,121 - $1,749 = $4,372 x 28.58% = $1,250 12.50%2017: $4,372 - $1,250 = $3,122 x 28.58% = $892 8.92%

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2018 Remaining basis: $2,230 ($3,133 - $892)Declining balance deduction: $637 ($2,230 × 28.58%).

2019 & 2020

Switch to straight-line: $892 deduction ($2,230 / 2.5 remaining years in recovery period).

2020* $446 deduction (half-year of write-off). $10,000 Total write-off claimed for the property the asset’s cost.

* Final year

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MACRS Depreciation Half Year Computation

Half-Year Depreciation Computation

On August 15, 2013, Ames Corp. places in service a piece of equipment used in its business that cost $1000,

Having a 5-year class (assume no bonus depreciation).

The declining balance method is used.

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MACRS Depreciation Half Year Computation

2013: $200 [$400 (40% × 1000) × ½* 2014: $320 [$1000 - $200 = $800 × 40%]2015: $192 [$1000 - $522 = $478 × 40%]2016: $115 [$1000 - $712 = $288 × 40%]2017: $1152018: $58

*Half year applied Year One

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MACRS Depreciation

Mid quarter convention applies if:

40 percent or more of the total cost basis of property additions are placed in service during the last three months of the tax year.

Does not apply to nonresidential real property/residential rental

Does not include cost of properly elects to expense under §179 (only aggregate depreciable basis is considered for the 40 percent test); and (2) property not depreciated under §168.

76

MACRS Depreciation

The mid-quarter convention may apply whether the taxpayer’s year is a full 12 months or a short tax year.

If the year consists of three months or less, the mid-quarter convention applies automatically [Reg. §1.168(d)-1(a)].

All group members included on a consolidated return are treated as one taxpayer for purposes of the 40 percent test

77

MACRS Depreciation

Determine the depreciation for the full tax year and multiply by the following percentages for the quarter of the tax year the property is placed in service.

Quarter of tax year PercentageFirst 87.5% = (10.5/12)

Second 62.5% = (7.5/12)Third 37.5% = (4.5/12)

Fourth 12.5% = (1.5/12)

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MACRS Depreciation

Nonresidential real property includes most real property (§1250 property) that is not residential rental property and real property with a class life of 27.5 years or more.

Depreciated over 39 years (31.5 years if placed in service before May 13, 1993) using the straight-line method and a mid-month convention.

79

MACRS Depreciation

Residential rental property is a rental building or structure for which 80 percent or more of the gross rental income for the tax year is rental income from dwelling units.

Depreciated over 27.5 years using the straight-line method and a mid-month convention.

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MACRS Depreciation

MACRS Depreciation - Mid-month Convention

Delta Corp buys a building for $1,000,000 plus land for $200,000 on January 5,2013.

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MACRS Depreciation

Depreciation is calculated as follows:

• $1,000,000/ 39 years = full year of $25,641• $25,641/12 = monthly depreciation = $2,137• Mid-month convention - assume building acquired in the middle

of January. • 11.5 months depreciation, assuming the property was held for

the remainder of the year of 2013 • $24,576 ($2,137 × 11.5 months).

82

Trades of MACRS Property

For assets acquired in a nontaxable exchange:

• Continue same method and life over remaining recovery period (if same recovery period)

• Excess (Boot): treat as a new asset

83

Trades of MACRS Property

Taxpayer an elect out of exchange treatment on an individual case basis

• If made, the election applies to both the relinquished MACRS property and the replacement MACRS property

• For depreciation purposes, the sum of the exchanged basis and excess basis, if any, in the replacement property is treated as placed in service at the time of the replacement.

• The adjusted depreciable basis of the relinquished MACRS property is treated as being disposed at the time of disposition.

• This does not affect the non recognition of gain on the exchange.

84

Cost Segregation

Hospital Corporation of America

• Landmark case• Assets that are not structural components can be depreciated

as tangible personal property and accelerated depreciation over 5-7 years is achieved versus straight line depreciation over 39 or 27.5 years.

IRS Legal Memo 199921045

• Dictates a “logical and objective measure” in determining what is and is not a structural component

Correction of depreciable life

• Regs. require accounting method change• Waiver of 2-yr. rule in this case a taxpayer can amend a prior

return or file a change in accounting method

85

Correcting Depreciation in Year of Disposition

Rev. Proc. 2007-16

Can file Form 3115 in year of disposition

If the error is caught after only one year, can correct with amended return as long as subsequent year’s return not filed

86


H Corp acquired and placed in service $100,000 of tangible personal property in 2012, categorizing the equipment as 7-year property.

In 2013, H Corp discovers assets should be classified as 5-year property under the MACRS recovery periods.

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H Corp has the option:”

• of either filing an amended 2012 return or • filing a Form 3115 with its 2013 return, and claiming the omitted

depreciation as a §481(a) negative (additional expense) amount in 2013.

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Bonus Depreciation§168(k)

Additional first-year depreciation (“bonus depreciation”) is allowed for “qualified property.”

The bonus depreciation is allowed at a rate, generally, of 50 percent

but 100 percent for property acquired and placed in service, generally, after Sept. 8, 2010 and before 2012).

89


Qualified property:

• NEW MACRS property < or = 20 year recovery• Depreciable computer software – not§197• Water utility property• Qualified leasehold improvement property

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The original use of the property must begin with the taxpayer after Dec. 31, 2007,

• the property must be acquired by the taxpayer either after Dec. 31, 2007 and before Jan. 1, 2014, and

• no written binding contract for the acquisition can be in effect before Jan. 1, 2008, or

• under a written binding contract entered into after Dec. 31, 2007, and before Jan. 1, 2014.

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The property must be placed in service by the taxpayer before Jan. 1, 2014, except

• certain property with a long production period or certain aircraft is “qualified property” if it is placed in service before Jan. 1, 2015.

92


Meeting the Original Use Test

Late in 2013, Sharpware, Inc., a tool and dye maker, acquires Machine A for $30,000.

Machine A was acquired from another tool and dye maker that had previously used this asset in its business.

93


Before placing Machine A in service, Sharpware spends $12,000 to recondition this asset.

No part of the $30,000 purchase price of used Machine A qualifies for the 50 percent depreciation allowance,

$12,000 reconditioning expenditure satisfies the original use test and Sharpware may claim a $6,000 bonus depreciation deduction.

94


50 percent Bonus Depreciation on Leasehold Improvements

Bellco, Inc. leases space in a shopping mall beginning in November of 2013.

Under the terms of the lease, Bellco must incur the cost of any improvements to reposition the interior walls within its lease space, as well as to add ceilings, lighting, and related interior improvements.

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Assuming that this shopping mall is more than three years old at the time of the improvements by Bellco, these leasehold improvements to the building will qualify for the 50 percent bonus depreciation.

After claiming the 50 percent deduction, Bellco depreciates the remaining basis of these improvements over a 15-year recovery period.

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Furniture, fixtures, and other tangible personalty purchases made by Bellco during 2013, assuming meeting the original use test, would also qualify for the 50 percent bonus, with the remaining depreciation claimed over a five-year recovery period.

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• Taxpayers can elect to forgo bonus and accelerated depreciation in exchange for the present allowance of certain otherwise-deferred credits.

• The election had to be made beginning with the first tax year ending after Mar. 31, 2008 (the post-Mar. 2008 election).

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• Taxpayers that didn't make the post-Mar. 2008 election can make the election only for tax years ending after Dec. 31, 2008 (the post-Dec. 2008 election).

• Taxpayers that made neither the post-Mar. 2008 election nor the post-Dec. 2008 election can make the election only for tax years ending after Dec 31, 2010.

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Bonus Depreciation§179 and § 168(k)

• The reduction in§179 expensing impacts, generally, only smaller businesses, and

• The elimination of bonus depreciation (§ 168(k) is, generally, but not exclusively, of interest to larger businesses.

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Luxury Vehicle Limits

2010-2011

$3,060 ($11,060 if 100% eligible for bonus depreciation)

$4,900 2nd yr.2,950 3rd yr.1,775*

2012-2013 $3,160 ($11,160 if 100% eligible for bonus depreciation)

$5,100 2nd yr.3,050 3rd yr.1,875*

* For each succeeding tax year in its recovery period

101

§179 Deduction

Annual dollar limit

2013 $500,000

2014 $25,000

Asset addition limit (before phase-out)

2013 $2,000,000

2013 $200,000

For 2014 and later, depreciable computer software will no longer qualify as §179 property.

102

§179 Deduction

Revocation via amended tax return

Late election via amended tax return [Reg. §1.179-5(c)]

• Effective tax years beginning in 2003• Currently allowed through 2013• Recapture of §179 Expensed Amounts

103

§179 Deduction

If a taxpayer claims expensing deduction and subsequently the property is not used predominately for business, part of the deduction may be subject to recapture.

104

§179 Deduction

Example: Browne, a calendar-year taxpayer, bought and placed in service in his business - February 15, 2011, five-year property costing $5,000.

• Expensing deduction of $5,000 for the property. • The property was used entirely for business for all of 2011 and

2012. • In 2013, he used the property for personal purposes. • The expensing benefit claimed in 2011 is recaptured (added to

taxable income).

105

§179 Deduction

• Expensing deduction claimed in 2011 $5,000• Allowable depreciation deduction

- in lieu of expensing:

2011: $5,000 x 20% = $1,0002012: $5,000 x 32% = $1,600 2,6002013: Recapture amount 2,400

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$25,000 Vehicle §179 Limit

>Applicable to highway vehicles with a 6,000 lb gross vehicle weight but not > 14,000 lb. except:

• Vehicles seating over 9• Vehicles with cargo area > 6 ft. box for use as an open area• Vans with driver-only seating

For the vehicles excepted, there is no limit on the §179 Limit

107

Tax Deduction for Energy Improvements to Buildings

For property place in service after 1/31/2005 and 1/1/2014

Taxpayers who own or lease commercial buildings and install property as part of buildings' interior

Before claiming Taxpayer must attain a certification that these items are being installed as part of a plan designed to reduce the total annual energy and power costs for interior lighting, heating, cooling, ventilation and hot water systems of the building by

50% compared to a “reference building”

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Energy Improvements to Buildings

Partially qualifying commercial building property is that which fails to achieve the 50% reduction in energy and power costs required

Deduction is allowed for energy efficient commercial building property installed as part of that system and as part of a plan to meet those targets,

However, alternative energy savings percentages permitted are 20% for the interior lighting system and the heating, cooling, ventilation, and hot water systems, and 10% for the building envelope

Questions, Wrap-Up, and Key Points/Lesson Review

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Capitalized Costs and Depreciation. 2 ChapterTitle 1Tax Basis of Property Acquisitions 2Expensing vs. Capitalization 3Amortization, Depreciation, and.

Documents

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