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 |
00.11 Office Furniture, Fixtures, and Equipment – 7 Years |
|
Plumbing |
Includes all restroom plumbing fixtures (e.g. toilets) and
piping; kitchen hand sinks; electric water coolers and all components of the
building plumbing system not specifically identified elsewhere. Does not
include water or gas connections directly to appliances or kitchen drainage
and kitchen hot water heater; see Kitchen Equipment Hook-up. |
1250 |
Building or Building Component – 39 Years |
|
Point of Sale Equipment (POS) |
Cash registers, computerized sales systems, and related
peripheral equipment. |
1245 |
57.0 Distributive Trades and Services -- 5 Years |
|
Poles and Pylons |
Light poles for parking areas and poles used in concrete
footings for signage. |
1250 |
00.3 Land Improvements – 15 Years |
|
Restaurant Décor Accessories |
Items in this category include decorative mobile props
(interior or exterior). For example playground equipment, potted plants,
hanging mirrors, ceiling fans, and theme related props (such as coat of arms,
sporting equipment or memorabilia, artifacts, pictures, plaques, etc.,
provided these items are not non-depreciable artwork, antiques or
collectibles). |
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 |
|
Restaurant Non-structural Theme Elements |
Items in this category include interior non-load bearing decorative structures. These are items that do not function as part of the building and are not integrated with building elements such as wiring, plumbing or ventilation. For example a model castle constructed of gypsum board or plaster and wood studs would be considered a non-structural theme element that functions merely as ornamentation. On the other hand, a half wall whose function is to provide traffic control or space subdivision is not considered in this category, see Walls - Interior Partitions. Does not include decorative
ceilings, see Ceiling. |
1245 |
57.0 Distributive Trades and Services -- 5 Years |
|
Restroom Accessories |
Includes paper towel dispensers, electric hand dryers,
towel racks or holders, cup dispensers, purse shelves, toilet paper holders,
soap dispensers or holders, lotion dispensers, sanitary napkin dispensers and
waste receptacles, coat hooks, grab bars, mirrors, shelves, vanity cabinets,
counters and ashtrays and other items generally found in public restrooms
that are built into or mounted on walls or partitions. |
1250 |
Building or Building Component – 39 Years |
|
Restroom Partitions |
Includes shop made and standard manufacture toilet
partitions; typically metal, but may be plastic or other materials. |
1250 |
Building or Building Component – 39 Years |
|
Roof |
All elements of the roof including but not limited to
joists, rafters, deck, shingles, vapor barrier, skylights, trusses, girders
and gutters. Determination of whether decorative elements of a roof (e.g.
false dormers, mansard) constitute structural building components depends on
their integration with the overall roof not their load bearing capacity. If
removal of the decorative element results in the direct exposure of building
components to water, snow, wind, or moisture damage, or if the decorative
element houses lighting fixtures, wiring, or other structural components,
then the decorative elements are part of the overall roof system and are
structural components of the building. |
1250 |
Building or Building Component – 39 Years |
|
Security Systems |
Includes security equipment for the protection of the
building (and its contents) from theft or vandalism and protection of
employees from assault. Examples include window and door locks, card key
access systems, keyless entry systems, motion detection and alarm systems,
etc. |
1250 |
Building or Building Component – 39 Years |
LMSB DIRECTIVE ON COST SEGREGATION IN THE RESTAURANT
INDUSTRY
EXHIBIT A
|
Asset
|
Description |
Property Type |
Recovery Period |
|
Signs |
Interior and Exterior Signs used for menu display, theme
identity, and any signage not pertinent to the operation of the building.
Does not include exit signs; see Fire Protection Systems for exit signs. |
1245 |
57.0 Distributive Trades and Services -- 5 Years |
|
Site Grading
and Excavation |
In general, land preparation costs are not considered to
be tangible property subject to depreciation. The grading of land involves
moving soil for the purpose of changing the ground surface. It produces a
more level surface and generally provides an improvement that adds value to the
land. Includes one time cost of demolition, clearing, fill or excavation to
allow development of land. |
|
Land |
|
Clearing, grading, excavating and removal costs directly
associated with the construction of buildings and building components are
part of the cost of construction of the building. |
1250 |
Building or Building Component – 39 Years |
|
|
Clearing, grading, excavating and removal costs directly
associated with the construction of sidewalks, parking areas, roadways and
other depreciable land improvements are part of the cost of construction of
the improvements. |
1250 |
00.3 Land Improvements – 15 Years |
|
|
Site Utilities |
Site utilities are the systems that are used to distribute
utility services from the property line to the restaurant building. Water and
gas services are connected to the building by underground piping. Overhead or
underground lines connect electric service. Not all restaurants will have
such costs. For example, mall food court restaurants would not incur costs
for site utilities since the lessor already has provided them. |
1250 |
Building or Building Component – 39 Years |
|
Site Work |
Site work includes site drainage, sewers, roads,
sidewalks, paving, curbing, general site improvements, landscaping not
adjacent to the building, site fencing and enclosures, playground fencing,
and all other site improvements not directly related to the building. |
1250 |
00.3 Land Improvements – 15 Years |
|
Stonework |
This category includes exterior decorative stonework
embedded in exterior half walls, such as patio half walls, that are an
integral part of a building’s structural shell. In the context of the
restaurant industry, such half walls are related to the operation or
maintenance of the building. |
1250 |
Building or Building Component – 39 Years |
|
Includes patio stonework imbedded in the ground and
applied to exterior half walls that are not an integral part of the
building’s structural shell. |
1250 |
00.3 Land Improvements – 15 Years |
LMSB DIRECTIVE ON COST SEGREGATION IN THE RESTAURANT
INDUSTRY
EXHIBIT A
|
Asset
|
Description |
Property Type |
Recovery Period |
|
Trash Enclosure |
Enclosures for waste receptacles that are attached to the
building. Typically constructed of the same materials as the building shell
with either interior or exterior access. These trash enclosures are an
integral part of the building shell and cannot be moved without damage to the
underlying building |
1250 |
Building or Building Component – 39 Years |
|
Upholstery |
Any material used in the coverage and protection of
furnishings. |
1245 |
57.0 Distributive Trades and Services -- 5 Years |
|
Wall Coverings- Permanent |
Includes interior and exterior paint; ceramic or quarry
tile, stone, brick and other finishes affixed with mortar, cement or grout;
paneling, wainscoting and other wood finishes affixed with nails, screws or
permanent adhesives; and sanitary kitchen wall panels such as fiberglass,
stainless steel and plastic wall panels. |
1250 |
Building or Building Component – 39 Years |
|
Wall Coverings - Removable |
Includes strippable wallpaper that causes no damage to the
underlying wall or wall surface. |
1245 |
57.0 Distributive Trades and Services -- 5 Years |
|
Walls –
Exterior |
Includes all exterior walls and building support
regardless of construction materials. Exterior walls may include columns,
posts, beams, girders, curtain walls, tilt up panels, studs, framing,
sheetrock, insulation, windows, doors, exterior façade, brick, masonry, etc.
Also includes drive-through bay, windows, and doors. |
1250 |
Building or Building Component – 39 Years |
|
Walls –
Interior Partitions |
Includes all load bearing interior partitions regardless
of construction. Also includes non-load bearing partitions regardless of
height (typically constructed of studs and sheetrock or other materials) that
divide or create rooms or provide traffic control where the partition cannot
be 1) readily removed and remain in substantially the same condition after
removal as before, or 2) moved and reused, stored or sold in its entirety.
Includes rough carpentry and plaster, dry wall or gypsum board, and other
finishes. |
1250 |
Building or Building Component – 39 Years |
[1] I.R.C. Section 1245 can apply to certain qualified recovery nonresidential real estate placed in service after 1980 and before 1987. See I.R.C. Section 1245 (a)(5).