Depreciation

Depreciation Background and Definition
Depreciation is a “non-cash” tax deductible expense that is used to recover the cost of an asset over the asset’s estimated useful life.

When dealing with buildings, there are two types of property that are depreciated- real property and personal property. The determination of whether something is real or personal property is subject to interpretation and is not an exact science. Structural components of buildings (i.e. drywall) are treated as real property. While assets that are not inherently permanent and whose appearance and function are not structural in nature should be treated as personal property. Assets that have been determined to be personal property in court rulings include movable walls, specialized raised access floors, carpet tile, modular cabling systems, lighting, sound masking.

It is likely that KI’s movable wall products are personal property. However, the IRS has ruled, “The determination of whether an asset is real property or personal property is a facts and circumstances assessment…no bright line test exists.” KI’s customers should consult with their tax advisors before making any decisions surrounding the tax depreciation of KI’s movable wall products.

If a customer treats KI’s moveable walls as personal property, then for federal tax purposes, they could depreciate them over a shorter tax life than drywall. Companies are required to use the modified accelerated cost recovery system (MACRS) for federal tax depreciation purposes. Nonresidential real property (i.e. drywall) is depreciated over 39 years, or 2.56% per year. Depending on the taxpayer’s industry classification, personal property could have a 5, 7, 10, 15 or 20 year life. For example purposes let’s assume KI’s customer uses a 7 year life for moveable walls. Then the depreciation schedule would be as follows:

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