02 Sep 2014
New tax laws went into effect at the beginning of this year that change the rules regarding how owners of warehouses, distribution centers and other similar assets can deduct the cost of certain improvements to their property.
The Internal Revenue Service is using new definitions when it comes to facility improvements. For example, an improvement could qualify as a “betterment” to the property, such as installing a new machine that does the same job better than the old one; a “restoration” of the asset, such as replacing a warehouse roof damaged in a hailstorm; or an “adaptation” to the facility, an example of which would be partitioning an existing warehouse to create space for a temperature-controlled section.
The new tax rules mean owners can no longer fully deduct those repair costs in the tax year that the work was done. Instead, they now must write off the expenses over the asset’s useful life, which can range from seven to 39 years, depending on the type of asset.
Dean Sonderegger, senior product management executive for the software segment of Bloomberg BNA — a unit of Bloomberg L.P. that provides legal, tax, regulatory, and business information — said stretching out the deductions over a multi-year period represents less favorable tax treatment than “expensing” the costs in the year the work was performed.
“The changes could reduce the value of depreciation-related deductions by between 5 and 10 percent,” Sonderegger told DC Velocity.
The rules may also spark renewed interest in leasing certain assets rather than owning them.
Of course, there will always be exemptions. For example, the changes will not apply to work performed as routine maintenance as long as the asset owner provides a documented maintenance schedule. And the rules will effectively exempt assets with a line-item value of $5,000 or less.
Asset owners also will be allowed to deduct the original value of the component being replaced, minus the number of years of the asset’s projected useful life that it was in operation, according to Sonderegger. That means an asset owner could write off $25,000 if the asset being replaced originally cost $50,000 and was removed from service five years into its estimated 10-year useful life.