Industry directives are used for risk analysis and the effective utilization of IRS resources. The property matrix represents a planning opportunity for taxpayers to determine whether certain return positions may be challenged by the Service. Though directly applicable only to the restaurant industry, the property matrix provides some insight into positions the Service may take in other industries and it is consistent with the previously released industry directive on cost segregation issues in the gaming industry.
A copy of the industry directive, (reproduced in full below), may be found here.
* * *
If you have any questions regarding the above article, please [contact us]. Our in-house CPA’s and cost segregation specialists stand ready to address any needs you or your client may have.
MEMORANDUM FOR INDUSTRY DIRECTORS, LMSB
DIRECTORS, FIELD OPERATIONS
DIRECTOR, FIELD SPECIALISTS
DIRECTOR, PREFILING AND TECHNICAL GUIDANCE
AREA DIRECTORS, SBSE
FROM: Robert
E. Brazzil /s/
Industry Director
Retailers, Food,
Pharmaceuticals & Healthcare
Thomas R. Hull
Director, Compliance,
SBSE
SUBJECT: Field
Directive on the Planning and Examination of Cost
Segregation Issues in
the Restaurant Industry
Introduction
This memorandum is intended to provide direction to
effectively utilize resources in the classification and examination of a
taxpayer who is recovering costs through depreciation of tangible property used
in the operation of a restaurant business. This Directive is not an official
pronouncement of the law or the position of the Service and cannot be used,
cited or relied upon as such.
Background
The crux of cost segregation is determining whether
an asset is I.R.C. Section 1245 property (shorter cost recovery period
property, 5 or 7 years) or Section 1250 property (longer cost recovery period
property, 39, 31.5 or 15 years). The most common example of section 1245
property is depreciable personal property, such as equipment. The most common
examples of section 1250 property are buildings and building components, which
generally are not section 1245 property[1].
2
The difference in recovery periods has placed the
Internal Revenue Service and taxpayers in adversarial positions in determining
whether an asset is section 1245 or 1250 property. Frequently, this causes the
excessive expenditure of examination resources. The Director for the Retailers,
Food, Pharmaceuticals and Healthcare Industry chartered a working group to
address the most efficient way to approach cost segregation issues specific to
the restaurant industry. The group produced the attached matrix and related
definitions as a tool to reduce unnecessary disputes and foster consistent
audit treatment.
Planning and Examination Guidance
Attached Exhibit A is a matrix recommending the
categorization and general depreciation system recovery period of various
restaurant assets. (For recovery periods under IRC section 168(g) alternative
depreciation system see Revenue Procedure 87-56, 1987-2 CB 674.) If the
taxpayer’s tax return position for these assets is consistent with the
recommendations in Exhibit A, examiners should not make adjustments to
categorization and lives. If the taxpayer reports assets differently, then
adjustments should be considered. The Industry intends to update Exhibit A
regularly.
See also Revenue Procedure 2002-12, I.R.B. 2002-3,
374 (
If you have any questions, please contact Philip J.
Hofmann Technical Advisor, Food at (316) 352-7434, or Jolanta
Sander, Senior Program Analyst, Retailers Food, Pharmaceuticals and Healthcare
Industry at (630) 493-5935, or Milton Pagan, SBSE Senior Program Analyst at
(619) 230-8148.
Attachments
cc: Commissioner and Deputy Commissioner, LMSB
Director, Quality Assurance and Performance
Management
LMSB DIRECTIVE ON
COST SEGREGATION IN THE RESTAURANT INDUSTRY
EXHIBIT A
|
Asset
|
Description |
Property Type |
Recovery Period |
|
Beverage Equipment |
Equipment for storage and
preparation of beverages and beverage delivery systems. Beverage equipment
includes the refrigerators, coolers, dispensing systems, and the dedicated
electrical, tubing or piping for beverage equipment. The dispensing system may
be gravity, pump or gas driven. |
1245 |
57.0 Distributive Trades and Services -- 5 Years |
|
Canopies and
Awnings |
Readily removable equipment or
apparatus used for providing shade or cover. Includes canopies that are
largely decorative. Does not include canopies that are
an integral part of a building’s structural shell, such as in the casino
industry. |
1245 |
57.0 Distributive Trades and Services – 5 Years |
|
Ceiling |
Includes all interior ceilings
regardless of finish or décor, e.g. drywall or plaster ceilings, acoustic
ceilings, suspended ceilings (including all hangers, frames, grids and tiles
or panels), decorative metal or tin finishes, kitchen plastic panels,
decorative panels, etc. |
1250 |
Building or
Building Component – 39
Years |
|
Computers |
Desktop and laptop computers,
monitors, printers, and other peripheral equipment. Excludes Point of Sale
(POS) systems and computers that are an integral part of other equipment (e.g., fire detection systems,
heating or cooling systems, etc.). |
1245 |
00.12 Information
Systems – 5 Years |
|
Concrete
Foundations and Footings |
Includes formwork, reinforcement,
concrete block, and precast or cast-in-place work
related to foundations and footings necessary for the proper setting of the
building. |
1250 |
Building or Building Component – 39 Years |
|
Foundations or footings for signs,
light poles, canopies and other land improvements. |
1250 |
00.3 Land Improvements 15 Years |
|
|
Copy Machines |
Includes copiers and other
duplicating equipment, calculators and adding machines. Excludes computers
and computer peripheral equipment. |
1245 |
00.13 Data Handling Equipment,
except Computers 5 Years |
|
Doors – Eliason |
Eliason Doors are specialty kitchen doors
providing easy access to and from the kitchen area to the dining area. (Usually swings in both
directions.) |
1245 |
57.0 Distributive Trades and Services -- 5 Years |
|
Doors and
Windows |
Includes interior and exterior
doors and their hardware (such as doorknobs, closers, kickplates, hinges, locks, etc.) regardless of
decoration. Exterior windows, including drive-through service windows and
carousel windows and exterior storefront and vestibule. |
1250 |
Building or Building Component – 39 Years |
LMSB DIRECTIVE ON
COST SEGREGATION IN THE RESTAURANT INDUSTRY
EXHIBIT A
|
Asset
|
Description |
Property Type |
Recovery Period |
|
Doors and Windows - Accessories |
Window accessories such as drapes, curtains, louver,
post-construction tinting that is readily removable and interior decorative
theme décor. |
1245 |
57.0 Distributive Trades and Services -- 5 Years Drive-Through Equipment |
|
Drive-Through
Equipment |
Drive-through equipment includes the order taking, food
delivery and payment processing systems whether mechanical or electronic.
This category does not include building elements such as doors, bays, or
windows; see Walls – Exterior, and Doors and Windows for drive-through bays
and windows. |
1245 |
57.0 Distributive Trades and Services -- 5 Years |
|
Electrical |
Includes all components of the building electrical system
necessary to provide general building services such as lighting, heating,
ventilation, air conditioning and general electrical wiring and outlets used
in the operation or maintenance of the building. See also Kitchen Equipment Hook-up. |
1250 |
Building or Building Component – 39 Years |
|
Electrical-
Light Fixtures - Interior |
Includes lighting such as recessed and lay-in lighting, night lighting, exit lighting, as well as decorative lighting fixtures that are the only artificial illumination in the building and along building walkways. See Fire Protection Systems for emergency and exit lighting. |
1250 |
Building or Building Component – 39 Years |
|
Decorative light fixtures are light fixtures that are decorative in nature and not necessary for the operation of the building. In other words, if all the decorative lighting were turned off, the other sources of lighting would provide sufficient light for the building. If the decorative lighting is the only source of lighting, then it will be treated as section 1250 property. |
1245 |
57.0 Distributive Trades and Services -- 5 Years |
|
|
Electrical-
Light Fixtures - Exterior |
Exterior lighting whether decorative or not is considered
section 1250 property to the extent that the lighting relates to the
operation or maintenance of the building. This category includes building
mounted lighting to illuminate walkways, entrances, parking, etc. |
1250 |
Building or Building Component – 39 Years |
|
Plant grow lights or lighting that highlights only the
landscaping or building exterior (but not parking areas or walkways) does not
relate to the operation or maintenance of the building. |
1245 |
57.0 Distributive Trades and Services -- 5 Years |
|
|
Pole mounted or freestanding outdoor lighting system to
illuminate sidewalks, parking or recreation areas. |
1250 |
00.3 Land Improvements – 15 Years |
LMSB DIRECTIVE ON COST SEGREGATION IN THE RESTAURANT
INDUSTRY
EXHIBIT A
|
Asset
|
Description |
Property Type |
Recovery Period |
|
Elevators and Escalators |
Elevators and escalators are permanently affixed to the
building and intended to remain in place. They relate to the operation or
maintenance of the building, and are therefore considered structural
components. |
1250 |
Building or Building Component – 39 Years |
|
Equipment Installation |
Expenses incurred in the installation of furnishings and
restaurant equipment. Some examples include booths, tables, counters and
interior theme décor. |
1245 |
57.0 Distributive Trades and Services -- 5 Years |
|
Fire Protection Equipment |
Includes special fire detection or suppression systems
located in equipment hoods or directly associated with a piece of equipment,
and fire extinguishers for the protection against a particular hazard. |
1245 |
57.0 Distributive Trades and Services -- 5 Years |
|
Fire Protection Systems |
Includes sprinkler heads, piping or plumbing, pumps,
visual and audible alarms, alarm control panels, heat and smoke detection
devices, fire escapes, fire doors, emergency exit lighting and signage, and
wall mounted fire extinguishers necessary for the protection of the building. |
1250 |
Building or Building Component – 39 Years |
|
Fireplace |
Includes masonry and gas fireplaces, flues, chimneys and
other components of built-in fireplaces. |
1250 |
Building or Building Component – 39 Years |
|
Floor Covering Carpet |
For purposes of the restaurant industry, all carpeting
will be treated as not permanently attached and not intended to be permanent.
This category does not include rugs or tapestries that are considered artwork
and do not suffer wear and tear (e.g. Persian rugs that may appreciate in
value are considered artwork). |
1245 |
57.0 Distributive Trades and Services -- 5 Years |
|
Floor Covering Permanent |
Examples include ceramic or quarry tile, paving brick and
other coverings cemented, mudded, or grouted to the floor; epoxy or sealers;
wood flooring affixed with permanent adhesive or nailed or screwed in place
and vinyl flooring affixed with permanent adhesive. |
1250 |
Building or Building Component – 39 Years |
|
Floors |
Includes concrete slabs, and other floor systems. Floors
include special treatments applied to or otherwise a permanent part of the
floor. For example "superflat" finish,
sloped drainage basins or raised perimeter and serving line curb or cooler,
freezer and garbage room floors. |
1250 |
Building or Building Component – 39 Years |
|
Food Storage
and Preparation Equipment |
Food storage, cleaning, preparation, and delivery systems
including all machinery, equipment, furniture and fixtures used to process
food items from storage through delivery to the customer. |
1245 |
57.0 Distributive Trades and Services -- 5 Years |
LMSB DIRECTIVE ON COST SEGREGATION IN THE RESTAURANT
INDUSTRY
EXHIBIT A
Asset |
Description |
Property Type |
Recovery Period |
|
Furnishings |
Booths, tables, chairs, lockers, benches and other
furniture needed in the business operation that is not a building component.
See also Office Furnishings. |
1245 |
57.0 Distributive Trades and Services -- 5 Years |
|
Heating
Ventilating and Air Conditioning (HVAC) |
Includes all components of a central heating, ventilating
and air conditioning system not specifically identified elsewhere. |
1250 |
Building or Building Component – 39 Years |
|
HVAC - Kitchen |
Allocation of HVAC is not appropriate. Only separate
Kitchen HVAC units that meet the sole justification test are included (i.e.,
machinery the sole justification for the installation of which is the fact
that such machinery is required to meet temperature or humidity requirements
which are essential for the operation of other machinery or the processing of
materials or foodstuffs.) Kitchen HVAC may meet the sole justification test
even though it incidentally provides for the comfort of employees, or serves,
to an insubstantial degree, areas where such temperature or humidity
requirements are not essential. |
1245 |
57.0 Distributive Trades and Services -- 5 Years |
|
Kitchen Equipment Hook-up |
The kitchen equipment hook-ups include electrical, water,
gas, sanitary plumbing, and ventilation systems for the kitchen equipment.
Items in this category include wiring and outlets, plumbing, drainage and a
hot water heater only in the kitchen area. The hook-up costs include all
items used directly with a specific item of equipment and necessary to
connect the equipment to the service source. For example, a dishwasher
requires electric and plumbing hook-ups. Costs associated with connecting the
dishwasher would only include the costs of wiring and plumbing from the
dishwasher to the source of electricity (such as an outlet or junction box),
plumbing, and drainage within the kitchen room. Use of reasonable functional
allocation methods to determine the electrical and plumbing components
directly related to the equipment is acceptable. This category does not
include outlets in the dining area or kitchen hand sink plumbing; see
Electrical and Plumbing categories. |
1245 |
57.0 Distributive Trades and Services -- 5 Years |
LMSB DIRECTIVE ON COST SEGREGATION IN THE RESTAURANT
INDUSTRY
EXHIBIT A
|
Asset
|
Description |
Property Type |
Recovery Period |
|
Millwork - Decorative |
Decorative millwork is the decorative finish carpentry in
the restaurant. Examples include detailed crown moldings, lattice work placed
over finished walls or ceilings, cabinets and counters. The decorative
millwork serves to enhance the overall theme of the restaurant and is not
related to the operation of the building. Cabinets and counters in a restroom
are excluded from this category; see Restroom Accessories. |
1245 |
57.0 Distributive Trades and Services -- 5 Years |
|
Millwork - Structural |
General millwork is all building materials made of
finished wood for example, doors and frames, window frames, sashes, porch
work, mantels, panel work, stairways, and special woodwork. Includes
pre-built wooden items brought to the site for installation and items
constructed on site such as restroom cabinets, door jambs, moldings, trim,
etc. |
1250 |
Building or Building Component – 39 Years |
|
Music and PA System |
Equipment and apparatus used to provide amplified music or
sound; also includes wiring. Does not include a public address system that is
an integral part of a fire protection system. |
1245 |
57.0 Distributive Trades and Services -- 5 Years |
|
Office Furnishings |
Includes desk, chair, credenza, file cabinet, table, or
other furniture. Also includes telephone equipment. See Furnishings for tables, chairs, and other furniture in the
dining area. |
1245 |