One benefit to owning a building is the ability to expense it over time. Tax depreciation starts on an asset’s “placed in service date,” as defined by the Internal Revenue Service (IRS) in Section 167(a). Currently, there is also the potential for bonus depreciation (under the PATH Act, this will be reduced in 2018 and expire after 2019). There has been much discussion over when the “placed in service date” occurs, whether that is when a building is available for use or specifically when it is “open for business.”
In a 2015 decision, Stine, LLC v. United States, the district courts ruled that depreciation started once a building was substantially complete, yet not open for business. The owners hoped to take advantage of special tax benefits before they expired. The buildings were substantially complete and had their certificates of occupancy, although they had yet to be furnished. The court stated that the IRS did not prove that “placed in service” was the same as being “open for business” and that the building was indeed in a condition of readiness and availability.
The Internal Revenue Service (IRS) recently released a Bulletin on Actions Relating to
Court Decisions to communicate their position on several court rulings. In the Bulletin, the IRS stated that they do not agree with the Stine decision, setting up the possibility for future cases. What this means is that taxpayers should expect the IRS to challenge their position if they are relying on the Stine ruling to determine when a building is placed in service for depreciation purposes.
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Material discussed is meant for informational purposes only, and it is not to be construed as investment, tax, or legal advice. Please note that individual situations can vary. Therefore, this information should be relied upon when coordinated with individual professional advice.