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The practice
of utilizing cost segregation in order to maximize tax
benefits associated with placing new assets in service
has become an increasingly popular tactic in the restaurant
industry. The primary objective is to identify assets
typically classified as Section 1250 Property (with longer
cost recovery periods of between 15 and 39 years), and
determine whether any components of such property could
be recharacterized as Section 1245 Property (with a shorter
cost recovery period of five or seven years). An Internal
Revenue Service (IRS) Field Directive dated December
8, 2003, provides guidance on the proper depreciation
classification for various restaurant assets.
The IRS
indicated that a disproportionate amount of effort
is being spent on the appropriate classification of various
assets in restaurant industry examinations. The IRS
released the Field Directive as a means of providing
guidance to their examiners on this issue. The pronouncement
also indicates the IRS is well aware that Taxpayers have
been taking aggressive cost segregation analysis positions
and felt the need to provide guidance to Taxpayers.
The
Field Directive is not an official pronouncement of
the law and cannot be relied upon as authority. Nevertheless,
the IRS has stated that any taxpayer who performs a
cost segregation analysis, and reports on its applicable
tax return a position consistent with the IRS recommendations
contained in the Field Directive, should not be subject
to adjustment if audited. Conversely, if a taxpayer’s
tax return position with regard to a specific asset is
different from that recommended in the Field Directive,
the IRS recommends that examiners make appropriate adjustments.
This Field Directive should generally be viewed as a
positive planning opportunity for restaurant businesses.
The IRS has essentially provided a “safe harbor” for
assets classified according to the guidelines contained
in the Field Directive. Restaurant businesses still have
the option to classify asset components on a more aggressive
basis than that approved by the Field Directive, but
such a position will have to be supported if challenged
on audit. If you have any questions or would like further
information, please contact Scott Husaby shusaby@krassmonroe.com
or John Berg jberg@krassmonroe.com
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