When a commercial building is constructed or renovated, may the owner begin depreciating it for tax purposes before it is even open for business? In January 2015, the District Court for the Western District of Louisiana answered this question in the affirmative with its holding in Stine LLC v. US.
According to the IRS, taxpayers may begin to depreciate their commercial buildings when they place them in service for use in their trades or businesses or for the production of income. The only issue in Stine was whether the taxpayer’s buildings could be considered “placed in service” although they had not yet opened for business. Stine, the taxpayer, was a retailer that sold building supplies and other materials. On its 2008 tax returns, Stine had claimed a substantial depreciation allowance for two newly constructed buildings under the Gulf Opportunity Zone Act of 2005, which was enacted to spur development in areas ravaged by Hurricanes Katrina and Rita. The IRS denied the allowance, claiming that because Stine’s buildings had not opened their doors to customers at the time that Stine began depreciation, the buildings had not been placed in service. Although the case was brought under the Gulf Opportunity Zone Act, the “placed in service” test applies to building owners across the country through I.R.C. § 167. Stine’s belief that it was able to begin depreciation was based on the fact that the buildings were substantially complete and ready to fulfill their intended uses of storing equipment and merchandise, and had therefore been placed in service. Stine proffered certificates of completion and occupancy in support of its argument.
The court firmly ruled in favor of the taxpayer, noting that the IRS had provided no evidence to suggest that a building must be open for business in order to satisfy the “placed in service” requirement. The court looked favorably upon evidence cited by Stine, such as Prop. Reg. § 1.168-2(e)(3) and the IRS’s Audit Technique Guide for Rehabilitation Tax Credits. Prop. Reg. § 1.168-2(e)(3) states that a building is placed in service “when a significant portion is made available for use in a finished condition,” while the IRS Guide considers a certificate of occupancy to be a means of verifying the placed in service date.
What is the bottom line for building owners? According to Stine, they may begin depreciating a building even before it is open for business, as long as it is substantially complete and available for the purpose for which it was constructed. In determining when a building is placed in service, courts may consider evidence such as certificates of completion and occupancy.
At Capital Review Group, we make it our business to stay current on the latest developments in tax law in order to harness maximum savings for our clients. Contact CRG to learn more about how we can help you optimize your depreciation deductions and other incentives.
(Sources: http://www.irs.gov/publications/p946/ch01.html#en_US_2013_publink1000107327, Stine LLC v. USA (No. 2:13-cv-03224, LA W.D. Ct.)).