tax research problem
Brandy Corporation Research Memo
Facts
Brandy Corporation agreed to purchase a new air conditioning unit for its office building on December 27, 2006, for $300,000. Unfortunately, the unit was not installed until October 21, 2007 because of multiple delays throughout the shipping process. On March 28, 2008, Brandy Corporation first used its new air conditioning unit.
Issues
1. What year should Brandy Corporation recognize the air conditioning unit was first put into service?
2. How much is their deduction for that year with regards to MACRS recovery deduction?
Discussion and Analysis
1. Code Section 168(i)(6) provides the treatments of additions or improvements to property. It states that in the case of any addition to (or improvement of) any property, the applicable recovery period for such addition or improvement shall begin on the later of the date on which such addition (or improvement) is placed in service, or the date on which the property with respect to which such addition (or improvement) was made in placed in service.
Reg.1.856-3(d) of the Income Tax Regulations provides that the term “real property” means land or improvements thereon, such as buildings or other inherently permanent structures thereon (including items which are structural components of such buildings or structures). Reg.1.48-1(e)(2) further defines the term “structural components” to mean such parts of a building as walls, as well as any permanent coverings components (whether in, on, or adjacent to the building) of a central air conditioning or heating system.
Rev. Proc. 87-57(2)(.05) describes an asset as “placed/put into service” as when the taxpayer sets the newly acquired property in place and that the asset property is prepared and accessible to operate.
This date starts the recovery period for deducting depreciation of the asset in place. This means that Brandy Corporation must recognize 2007 as the year their air conditioning unit was put into service.
Facts
Brandy Corporation agreed to purchase a new air conditioning unit for its office building on December 27, 2006, for $300,000. Unfortunately, the unit was not installed until October 21, 2007 because of multiple delays throughout the shipping process. On March 28, 2008, Brandy Corporation first used its new air conditioning unit.
Issues
1. What year should Brandy Corporation recognize the air conditioning unit was first put into service?
2. How much is their deduction for that year with regards to MACRS recovery deduction?
Discussion and Analysis
1. Code Section 168(i)(6) provides the treatments of additions or improvements to property. It states that in the case of any addition to (or improvement of) any property, the applicable recovery period for such addition or improvement shall begin on the later of the date on which such addition (or improvement) is placed in service, or the date on which the property with respect to which such addition (or improvement) was made in placed in service.
Reg.1.856-3(d) of the Income Tax Regulations provides that the term “real property” means land or improvements thereon, such as buildings or other inherently permanent structures thereon (including items which are structural components of such buildings or structures). Reg.1.48-1(e)(2) further defines the term “structural components” to mean such parts of a building as walls, as well as any permanent coverings components (whether in, on, or adjacent to the building) of a central air conditioning or heating system.
Rev. Proc. 87-57(2)(.05) describes an asset as “placed/put into service” as when the taxpayer sets the newly acquired property in place and that the asset property is prepared and accessible to operate.
This date starts the recovery period for deducting depreciation of the asset in place. This means that Brandy Corporation must recognize 2007 as the year their air conditioning unit was put into service.