As tax method change experts, one of the most common and contentious questions we hear is, “When is my building officially in service.”
The in-service date is critical for tax planning purposes because once the building is in-service, the taxpayer can then accelerate depreciation deductions and use 179 deductions as well as partial asset disposition deductions.
Let’s break down what the IRS says about this subject.
- §167(a) allows the depreciation deduction for buildings used in the taxpayer’s trade or business.
- §1.167(a)-10(b) provides that the period for depreciation of such an asset begins when it is placed in service and ends when the asset is retired from service.
A delay in the in-service date will not affect the total amount of the depreciation deduction over the asset’s life. However, taxpayers may prefer an earlier in-service date because of the time value of money. But the in-service date can be indistinct, resulting in many questions.
- When should depreciation begin for a building under construction?
- If a factory building is intended only to house machinery, can the building be placed in service before the machinery is installed?
- If manufacturing equipment was purchased during the tax year, but it cannot be used until the following year, when is the equipment placed in service?
- If a building is moved or relocated, does the placed-in-service date change?
These are just a subsection of our clients’ recurrent questions.
§1.167(a)-(11)(e)(1)(i) says that property is considered to be placed in service when it is “first placed in a condition or state of readiness and availability for a specifically assigned function.”
If a building is unambiguously built to house a piece of machinery, the building will be placed in service on the date the building is “ready and available to house the machinery and equipment.” The building’s readiness and availability should be evaluated without concern for whether the machinery the building is intended to house has been placed in service.
However, when the building’s use is so tied to the machinery it is intended to house, that the building will be retired when the machinery is retired, the building’s in-service date is determined by the in-service date of the machinery or equipment.
The courts have often adopted a less constricting in-service stance which has complicated the issue. Rev. Rul. 76-238, the IRS responded to the proper in-service dates for depreciating a building constructed to house manufacturing equipment. The IRS considered the building to be “placed in service on the date its construction was completed, and it was made available for installation of machinery and equipment.” Regarding the relocation of a building, The IRS ruled that relocation did not cause a new placed-in-service date unless the building was considered a new asset under the fair market value requirements of Rev. Rul. 94-31.