By using "component depreciation," you may be able to write off some parts of depreciating business real estate faster than other parts.
With this approach, you separate the cost of a large asset, such as a building, from its parts that are not structural components. The result is shorter depreciation methods for the non-structural components and increased cash flow because you don't have to wait so long for your deductions.
For example, a commercial building is generally depreciated over 39 years. But with component depreciation, you may be able to write off some of the property in five, seven or 15 years.
The IRS has given its approval to component depreciation. Recent example: A hotel complex, which included a casino, constructed a large pylon sign to attract passers-by. The sign wasn't attached to any building in the complex. The hotel complex operators wanted to write off the entire cost over a five-year period.
Since the sign should be treated as a land improvement, the IRS said the cost must generally be written off over 15 years. However, the cost attributable to the sign's electronic circuitry can qualify for a five-year write-off (IRS Field Service Advice 200203009).
Moral of the story: Whenever possible, separate component costs to speed up deductions. Examples of property that qualify for a shorter life write-off are carpeting, kitchen plumbing, electrical wiring, landscaping, parking lot improvements, site lighting and underground utilities.
Ask your attorney or accountant for more information about conducting a "cost segregation study," which helps substantiate component depreciation deductions on your tax return.
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