(800) 257-8962 info@bedfordteam.com

Retail Industries

Cost Segregation Audit Techniques Guide

Appendix – Chapter 7.3 – Industry Specific Guidance: Retail Industries

Chapter 7.2 | Table of Contents Chapter 7.4

December 16, 2004

Department of the Treasury
Internal Revenue Service
Washington, D.C. 20224

MEMORANDUM FOR
INDUSTRY DIRECTORS, LMSB
DIRECTORS, FIELD OPERATIONS
DIRECTOR, FIELD SPECIALISTS
DIRECTOR, PREFILING AND TECHNICAL GUIDANCE
AREA DIRECTORS, SBSE  

FROM: /s/ Henry V. Singleton
Industry Director Retailers, Food, Pharmaceuticals & Healthcare

/s/ Steve Burgess
Director, Examination, SBSE

SUBJECT: Field Directive on the Planning and Examination of Cost Segregation Issues in the Retail 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 retail 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. §1245 property (shorter cost recovery period property, 5 or 7 years) or §1250 property (longer cost recovery period property, 39, 31.5 or 15 years).  The most common example of §1245 property is depreciable personal property, such as equipment.  The most common examples of §1250 property are buildings and building components, which generally are not §1245 property.[1]

The difference in recovery periods has placed the Internal Revenue Service and taxpayers in adversarial positions in determining whether an asset is §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 retail industry.   The group produced the attached matrix and related definitions as a tool to reduce unnecessary disputes and foster consistent audit treatment.

-back to the top-

PLANNING AND EXAMINATION GUIDANCE
Attached Retail Exhibit A is a matrix recommending the categorization and general depreciation system recovery period of various retail assets.  (For recovery periods under IRC §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 Retail 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 Retail Exhibit A regularly.

See also the Cost Segregation Audit Techniques Guide.

If you have any questions, please contact either David Moser, Technical Advisor, Retail at 636-940-6226, Bernie Crinigan, Engineering & Valuation Group Manager at 415-522-6188, Milton Pagan, SBSE Senior Program Analyst at 619-615-9583, or Ardell Mueller, Senior Program Analyst, Retailers Food, Pharmaceuticals and Healthcare Industry at 630-493-5946.

Attachments: Exhibit A

This matrix, which is part of the Cost Segregation Audit Techniques Guide, is intended to provide direction to effectively utilize resources in the classification and examination of property used in the operation of a retail business such as a department or grocery store.  General fact patterns specific to this industry have been considered in the classification of these assets and may not be applicable to other industries.  Similarly, asset classification guidance issued for other industries is based on the general fact pattern for that industry and may not be applicable to a retail business situation.  For example, for asset classification of restaurants located within a retail store, refer to the industry directive for restaurants.  For examination techniques and historical background related to this issue, refer to the Cost Segregation Audit Techniques Guide.

NOTE: In the case of certain leasehold improvement property, the classifications in this directive are superseded to the extent that the American Jobs Creation Act of 2004 modifies IRC Section 168.  Thus, a  15-year straight line recovery period should replace the recovery period shown in the following matrix if the asset is “qualified leasehold improvement property” (as defined in IRC Section 168(e)(6)) placed in service by the taxpayer after 10/22/04 and before 01/01/06.

[1]I.R.C. §1245 can apply to certain qualified recovery nonresidential real estate placed in service after 1980 and before 1987.  See I.R.C. §1245 (a) (5).

-back to the top-

 

Asset Description Property Type Recovery Period
Awnings & Canopies Readily removable overhang or covering, often of canvas or plastic, used to provide shade or cover over a storefront, window, or door; or used inside a structure to identify a particular department or selling area.  Examples include applications over an exterior door or window, or attached to interior walls or suspended from ceilings for bakery, deli, floral, meat, or produce departments.  Also includes canopies designed to protect customers and gasoline fueling equipment from weather conditions and to act as advertising displays that are anchored with bolts and are not attached to buildings or other structures.  Does not include canopies that are an integral part of a building’s structural shell, such as in the casino industry, or over docks.  See also Concrete Foundations & Footings and Loading Docks. 1245 57.0 Distributive Trades and Services — 5 Years
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 such equipment.  The dispensing system may be gravity, pump or gas driven.  See also Refrigerated Structures. 1245 57.0 Distributive Trades and Services — 5 Years
Ceilings Includes all interior ceilings regardless of finish or décor; e.g. drywall or plaster ceilings, acoustic ceilings, suspended ceilings (including hangers, frames, grids and tiles or panels), decorative metal or tin finishes, plastic panels, decorative panels, etc.  See also Awnings & Canopies, Millwork – Decorative andMillwork – General Building or Structural. 1250 Building or Building Component –39 Years
Computers Processors (CPU), direct access storage device (DASD), tape drives, desktop and laptop computers, CRT, terminals, 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, heating, cooling, or energy management systems, etc.). 1245 00.12 Information Systems –5 Years
Concrete Foundations & Footings Includes formwork, reinforcement, concrete block, and pre-cast 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, and other land improvements (except buildings). 1250 00.3 Land Improvements –15 Years
The supporting concrete footings used to anchor gasoline pump canopies are inherently permanent structures and are classified as land improvements. 1250 57.1 Distributive Trades and Services –15 years
Data Handling Equipment Includes adding and accounting machines, calculators, copiers, and duplicating machines.   Excludes computers and computer peripheral equipment, see Computers. 1245 00.13 Data Handling Equipment, except Computers –5 Years
Interior and exterior doors, regardless of decoration, including but not limited to, double opening doors, overhead doors, revolving doors, mall entrance security gates, roll-up or sliding wire mesh or steel grills and gates, and door hardware (such as doorknobs, closers, kick plates, hinges, locks, automatic openers, etc.). 1250 Building or Building Component –39 Years
Doors Special lightweight, double action doors installed to prevent accidents in a heavily trafficked area.  For example, flexible doors, or clear or strip curtains used between stock and selling areas. 1245 57.0 Distributive Trades and Services –5 Years
Doors – Air Curtains Air doors or curtains are air systems located above doors and windows that circulate air to stabilize environments and save energy by minimizing the heated/air conditioned air loss through open doorways and windows. They also effectively repel flying insects, dust, and pollutants. 1250 Building or Building Component –39 Years
Drive-Through Equipment Drive-through equipment includes order taking, merchandise delivery, and payment processing systems whether mechanical or electronic.  Excludes building elements such as doors, bays, or windows.  See alsoWalls – Exterior, 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 used in the operation or maintenance of the building or necessary to provide general building services such as electrical outlets of general applicability and accessibility, lighting, heating, ventilation, air conditioning, and electrical wiring. 1250 Building or Building Component –39 Years
Special electrical connections which are necessary to and used directly with a specific item of machinery or equipment or connections between specific items of individual machinery or equipment; such as dedicated electrical outlets, wiring, conduit, and circuit breakers by which machinery and equipment is connected to the electrical distribution system.  Does not include electrical outlets of general applicability and accessibility.  See Chapter 5 of the Cost Segregation Audit Techniques Guide for allocation examples. 1245 57.0 Distributive Trades and Services — 5 Years
Elevators and Escalators Elevators and escalators, which include handrails and smoke baffles, are permanently affixed to the building and intended to remain in place.  They relate to the operation or maintenance of the building and are structural components. 1250 Building or Building Component –39 Years
Energy Management Systems Energy management systems control all energy-using systems in a building, automatically checking occupancy schedules, reading temperatures, and re-circuiting light levels, causing all heating, cooling and lighting equipment to operate so as to minimize energy costs.  Includes, for example, detection devices such as smoke, motion and infrared devices, photocells, foil and contact switches, pressure switches, proximity alarms, sensors, alarm transmitting controls, data gathering panels, demand controllers, thermostats, computer controls, outside air economizers, occupancy sensors, electronic ballasts, and all related wiring and conduit.  May also provide for fire and burglary protection. 1250 Building or Building Component –39 Years
Exit Signs Signs posted along exit routes that indicate the direction of travel to the nearest exit.  These signs typically read “EXIT” and may have distinctive colors, illumination, or arrows indicating the direction to the exit. 1250 Building or Building Component – 39 Years
Fire Protection & Alarm Systems Includes sensing devices, computer controls, 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
Fire Protection Equipment Includes special fire detection or suppression systems directly associated with a piece of equipment. For example a fire extinguisher designed and used for protection against a particular hazard created by the business activity. 1245 57.0 Distributive Trades and Services — 5 Years
Floor Coverings Floor covering affixed with permanent adhesive, nailed, or screwed in place.  Examples include ceramic or quarry tile, marble, paving brick, and other coverings cemented, mudded, or grouted to the floor; epoxy or sealers; and wood flooring. 1250 Building or Building Component –39 Years
Floor covering that is installed by means of strippable adhesives.  For the retail industry, all vinyl composition tile (VCT), sheet vinyl, and carpeting will be treated as not permanently attached and not intended to be permanent.  Also includes flooring that is frequently moved and reused to create a department theme or seasonal display. 1245 57.0 Distributive Trades and Services — 5 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 “super flat” finish, sloped drainage basins, raised perimeter, serving line curb, or cooler, freezer and garbage room floors. 1250 Building or Building Component –39 Years
Heating, Ventilating & Air Conditioning (HVAC) Includes all components of a central heating, ventilating and air conditioning system not specifically identified elsewhere. HVAC systems that are installed not only to meet the temperature and humidity requirements of machinery, but are also installed for additional significant purposes, such as customer comfort and ventilation, are building components. 1250 Building or Building Component –39 Years
Only separate 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.)  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.  Includes refrigeration units, condensers, compressors, accumulators, coolers, pumps, connecting pipes, and wiring for the mechanical equipment for climate controlled rooms, walk-in freezers, coolers, humidors and ripening rooms.  Allocation of HVAC is not appropriate.  See also Refrigerated Structures, Refrigeration Equipment,and Ripening Rooms. 1245 57.0 Distributive Trades and Services — 5 Years
Kiosks A small retail outlet, often prefabricated, which acts like a fixed retail outlet yet is not permanent.  Kiosks may be used to retail merchandise such as newspapers and magazines, film and digital images, and food and beverages.  Kiosks are also present in shopping centers or malls where they function as temporary or portable retail outlets for a variety of merchandise. 1245 57.0 Distributive Trades and Services – 5 Years
Light Fixtures – Interior Includes lighting such as recessed and lay-in lighting, night lighting, and exit lighting, as well as decorative lighting fixtures that provide substantially all the artificial illumination in the building or along building walkways.  For emergency and exit lighting, see Fire Protection & Alarm Systems. 1250 Building or Building Component –39 Years
Decorative light fixtures are light fixtures, such as neon lights or track lighting, which are decorative in nature and not necessary for the operation of the building.  In other words, if the decorative lighting were turned off, the other sources of lighting would provide sufficient light for operation of the building.  If the decorative lighting is the primarysource of lighting, then it is section 1250 property. 1245 57.0 Distributive Trades and Services – 5 Years
Light Fixtures – Exterior Exterior lighting whether decorative or not is considered section 1250 property to the extent that the lighting relates to the maintenance or operation of the building.  This category includes building mounted lighting to illuminate walkways, entrances, parking, etc. 1250 Building or Building Component –39 Years
Pole mounted or freestanding outdoor lighting system to illuminate sidewalks, parking or recreation areas. See also Poles & Pylons.  Note* asset class 00.3 Land improvements includes both section 1245 and 1250 property per Rev. Proc. 87-56. See Note* 00.3 Land Improvements –15 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 maintenance or operation of the building. 1245 57.0 Distributive Trades and Services — 5 Years
Loading Docks Includes bumpers, permanently installed dock levelers, plates, seals, lights, canopies, and overhead doors used in the receiving and shipping of merchandise. 1250 Building or Building Component –39 Years
Includes items such as compactors, conveyors, hoists and balers. 1245 57.0 Distributive Trades and Services — 5 Years
Millwork – Decorative Decorative millwork is the decorative finish carpentry in a retail selling area.  Examples include detailed crown moldings, lattice work placed over finished walls or ceilings, cabinets, cashwraps, counters and toppers.  The decorative millwork serves to enhance the overall décor of the retail store and is not related to the operation of the building.   Cabinets and counters in a restroom are excluded from this category; seeRestroom Accessories. 1245 57.0 Distributive Trades and Services — 5 Years
Millwork – General Building or Structural General millwork is all building materials made of finished wood (e.g., 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
Office Furnishings Includes desk, chair, credenza, file cabinet, table or other furniture such as workstations.  Also includes telephone equipment, fax machines, and other communications equipment.  Does not include communications equipment included in other asset classes in Rev. Proc. 87-56. 1245 00.11 Office Furniture, Fixtures, and Equipment –7 Years
Parking Lots Grade level surface parking area usually constructed of asphalt, brick, concrete, stone or similar material.  Category includes bumper blocks, curb cuts, curb work, striping, landscape islands, perimeter fences, and sidewalks. 1250 00.3 Land Improvements –15 Years
Parking Structures Any structure or edifice the purpose of which is to provide parking space.  Includes, for example, garages, parking ramps, or other parking structures. 1250 Building or Building Component –39 Years
Plumbing All piping, drains, sprinkler mains, valves, sprinkler heads, water flow switches, restroom plumbing fixtures (e.g. toilets) and piping, kitchen hand sinks, electric water coolers, and all other components of a building plumbing system (water or gas) not specifically identified elsewhere. 1250 Building or Building Component –39 Years
Includes water, gas, or refrigerant hook-ups directly connected to appliances or equipment, eyewash stations, kitchen drainage, and kitchen hot water heater.  For example, a hair salon in a retail outlet would require special hair washing sinks and water hook-up for the sinks. 1245 57.0 Distributive Trades and Services — 5 Years
Point of Sale (POS) Systems A register or terminal based data collection system used to control and record all sales (cash, charge, COD, gift cards, layaway, etc.) at the point of sale.  Includes cash registers, computerized sales systems and related peripheral equipment, satellite systems, scanners, and wands.  See also Electrical for hook-ups. 1245 57.0 Distributive Trades and Services — 5 Years
Poles & Pylons Light poles for parking areas and other poles poured in concrete footings or bolt-mounted for signage, flags, etc.  Note* asset class 00.3 Land improvements includes both section 1245 and 1250 property per Rev. Proc. 87-56.  See also Signs andLight Fixtures – Exterior. See Note* 00.3 Land Improvements –15 Years
Refrigeration Equipment Includes refrigeration units, condensers, compressors, accumulators, coolers, pumps, connecting pipes, and associated wiring.  Refrigeration equipment is commonly found in climate controlled rooms, walk-in freezers, coolers, humidors, and ripening rooms.