A depreciation case study: When decoration is functional

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Depreciation law is confusing and tricky. All one needs to do is compare the number (and thickness) of the guidebooks on depreciation that publishers release to those they offer on other areas of the Tax Code.

Much of this confusion comes from the fact that depreciation law is heavily driven by case law. Those who attempt to simplify the rules often overlook or incorrectly categorize assets. Take the statement, “Things that are decorative in nature are personal property.” This is not always the case, as construction methods, attachment and designed permanency must be taken into consideration.

Let’s look at the tax treatment on the installation of aluminum composite material panels, or ACM panels. These are metal panels that can be locked together. They are often used in many new construction and renovation projects, especially in the construction of car dealerships.

For depreciation purposes, the question becomes, “Are these panels solely decorative in nature, or are they related to the structure of the building?” In most cases, ACM panels are part of the building structure and also provide insulation and weather resistance.

For a recent project, my colleagues and I at McGuire Sponsel reviewed the exterior of a building consisting of plywood sheathing and Tyvek wrap covered with insulated ACM panels. Not only did the ACM panels provide insulation, but they also created a weather seal over the Tyvek wrap. Without the ACM panels, water and other elements would quickly infiltrate the building. Additionally, many of the glass storefront windows were integrated into the ACM paneling. Without the panels, the building’s windows would have little to no support.

In some cases, renovations involving ACM panels are purely decorative in nature. They might be installed to change the look of a building simply for branding purposes, similar to using wood paneling to change the look of an interior room. Anyone looking at such a project for tax purposes must review the blueprints to determine how the panels were added, if they add any structural support or weather resistance to the building, and if the storefront or other structural portions are tied into the system.

When dealing with ACM panels, it is critical for professionals to review projects on a case-by-case basis with qualified cost segregation engineers. Decision-makers must understand both applicable tax law and the building techniques used during installation.

Taxpayers may be well-advised to seek additional expertise when evaluating the installation of other decorative assets as well, both interior and exterior. It is not enough to simply state an asset is decorative. A review must address the attachment of the assets, the way the building is constructed around the assets and whether the assets have “designed permanency.”

Qualified cost segregation professionals should be able to answer these questions, provided they have experience in both tax law and construction techniques. This becomes even more critical in the new tax environment where personal property items are subject to 100 percent bonus depreciation.

Yes, depreciation law is confusing, but it also presents significant opportunity for property owners.

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Tax laws Tax regulations Cost segregation studies