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Tiredoftaxes

TaxAlmanac

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Depreciation of HVAC

See original discussion at http://www.taxalmanac.org/index.php/Discussion:Depreciation_of_HVAC


I have a client who owns a s-corp and they have a warehouse like building which they use for their offices. They made two separate purchases during the year. First they bought a furnace and later on they bought an airconditioner unit, not a window unit. My question is what depreciable life have you used for a furnace and for an airconditioner?

( Asked 04/09/08 10:34 PM in TaxAlmanacViews by community 238 )

Answers (31)  Comments (5)  

JR1

TaxAlmanac

Were the old ones broken?

( Answered 04/09/08 10:46 PM in TaxAlmanac ,Views by community 238 )

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Tiredoftaxes

TaxAlmanac

The furnace was replaced but there never was any airconditioning.

( Answered 04/09/08 11:33 PM in TaxAlmanac ,Views by community 238 )

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TABjeter

TaxAlmanac

The furnace and A/C are considered part of the building and will be depreciable over the appropriate life (27.5 or 39 yrs), unless it is special equipment to regulate a small environment within the building (such as a/c installed only to keep computer equipment in a consistent environment). You can try to get away with calling the furnace a repair, but to me that would depend on the cost of the furnace.

( Answered 04/09/08 11:43 PM in TaxAlmanac ,Views by community 238 )

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Tiredoftaxes

TaxAlmanac

That is what I thought but it seemed silly that an a/c unit which probably only lasts 10-15 years would be part of the building.

( Answered 04/09/08 11:48 PM in TaxAlmanac ,Views by community 238 )

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JR1

TaxAlmanac

You never answered the question about the furnace. Was it broken? Makes a big diff. Broken means the new one is a repair.

( Answered 04/10/08 12:13 AM in TaxAlmanac ,Views by community 238 )

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TABjeter

TaxAlmanac

Doesn't matter what the useful life of the asset is or would be. It's only what Congress and the courts say that matters.

( Answered 04/10/08 12:31 AM in TaxAlmanac ,Views by community 238 )

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Dnc0716

TaxAlmanac

7 year asset no sec. 179 allowed though.

( Answered 04/10/08 01:31 AM in TaxAlmanac ,Views by community 238 )

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JR1

TaxAlmanac

If it's a repair, you don't care. Immediate deduction.

( Answered 04/10/08 01:43 AM in TaxAlmanac ,Views by community 238 )

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Dnc0716

TaxAlmanac

You repair the original unit. If a new unit is purchased, then it is a capital asset with a 7 year life.

( Answered 04/10/08 01:51 AM in TaxAlmanac ,Views by community 238 )

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Foxttron

TaxAlmanac

Not to split hair, but I saw many times as a 5 year asset. Why 7 years Dnc?

( Answered 04/10/08 02:23 AM in TaxAlmanac ,Views by community 238 )

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TABjeter

TaxAlmanac

Nate,

Where in the world is any guidance for an a/c unit being 7yr property?

( Answered 04/10/08 02:54 AM in TaxAlmanac ,Views by community 238 )

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TABjeter

TaxAlmanac

Here, I'll help out a little. This is Reg §1.48-1(e)(2):

The term "structural components" includes such parts of a building as walls, partitions, floors, and ceilings, as well as any permanent coverings therefor such as paneling or tiling; windows and doors; 'all components (whether in, on, or adjacent to the building) of a central air conditioning or heating system, including motors, compressors, pipes and ducts'; plumbing and plumbing fixtures, such as sinks and bathtubs; electric wiring and lighting fixtures; chimneys; stairs, escalators, and elevators, including all components thereof; sprinkler systems; fire escapes; and other components relating to the operation or maintenance of a building. However, the term "structural components" does not include 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. Machinery may meet the "sole justification" test provided by the preceding sentence 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. For example, an air conditioning and humidification system installed in a textile plant in order to maintain the temperature or humidity within a narrow optimum range which is critical in processing particular types of yarn or cloth is not included within the term "structural components". For special rules with respect to an elevator or escalator, the construction, reconstruction, or erection of which is completed by the taxpayer after June 30, 1963, or which is acquired after June 30, 1963, and the original use of which commences with the taxpayer and commences after such date, see section 48(a)(1)(C) and paragraph (m) of this section.

By definition HVAC equipment is a structural component of the building like plumbing and electrical systems. Therefore, it's always either 27.5 or 39yr property. To take it as 7 yr property is just plain incorrect.

( Answered 04/10/08 03:16 AM in TaxAlmanac ,Views by community 238 )

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RoyDaleOne

TaxAlmanac

Well, I suggest you see the HCA court case, etc., component depreciation is back, Reg 1.48.1 has been shredded, in my opinion.

Where is Section 179 not allowed for rental property which is not residential?

( Answered 04/10/08 05:47 AM in TaxAlmanac ,Views by community 238 )

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RoyDaleOne

TaxAlmanac

( Answered 04/10/08 05:52 AM in TaxAlmanac ,Views by community 238 )

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RoyDaleOne

TaxAlmanac

( Answered 04/10/08 05:53 AM in TaxAlmanac ,Views by community 238 )

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Death_Taxes

TaxAlmanac

And maybe JR is tooting the right horn about the furnace: see Thomas J. Northen, Jr. et ux vs Comm, TC Summary Opinion 2003-113 where a leaking roof led to a 52,000 repair deduction.

Cost segregationists make a living doing what Roy suggests.

( Answered 04/10/08 11:28 AM in TaxAlmanac ,Views by community 238 )

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Southparkcpa

TaxAlmanac

One of the important ;essons here is that 4 or 5 CPA's gave different answers. the guys who just throw out "5 years", "7 Years" with no cite sometimes make me shake my head. My quick research brought me to Bjeters conclusion. Now apparantly there is other evidence? What a business. the most basic thing.... DEPRECIATION.......and qualified professionals can reasonably disagree.

( Answered 04/10/08 12:28 PM in TaxAlmanac ,Views by community 238 )

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Southparkcpa

TaxAlmanac

I just looked at the 2 posts from Roy and see nothing authoritative that tells us HVAC is anything but 1250 property. I am still in agreement with Bjeter. Roy, what is your position, difficult to determine what you are trying to say.

( Answered 04/10/08 12:39 PM in TaxAlmanac ,Views by community 238 )

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Dnc0716

TaxAlmanac

Wow, I must recant my advice. We have always taken 7 years on HVAC at my firm, 4 CPAs with over 31 years exp. each. DUH? I agree with Bjeter, a structual component, 27.5 or 39 years. But, how many hvac units have you ever seen last 10 years or more, not many.

( Answered 04/10/08 12:45 PM in TaxAlmanac ,Views by community 238 )

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RoyDaleOne

TaxAlmanac

Under the second link I posted is a recap, by what I think is AIA Contract divisions, of various Court Cases. Under HVAC, you will note the split is almost 50% betwixt and between.

I am suggesting, note this, that you must use your professional judgement.

If the facts in this case are 1. adding a HVAC unit to a metal building, 2. the unit is made up of three main components (one on a slab outside the building, an air handling unit inside the building, and duct work), 3. the building existed and was used before the installation of the HVAC, 4. minor modifications ,if any, were made to the actual existing building, then I would lean toward a 5 year life. This is because 1. the HVAC units will not last as long as the building, 2. the HVAC was not part of the building at the time it was constructed, 3. I have a hard time seeing, with these facts, that the HVAC is part of the structure of the building, (the Service's position is everything is a structural part of the building, which, the Courts have called into question).

Now, if the HVAC was part of the original construction of the building and the building was sticks and bricks that would be a different fact pattern.

I would suggest you read the referenced Court cases until you develope a feel for the issues. You may find one exactly on point.

( Answered 04/10/08 01:25 PM in TaxAlmanac ,Views by community 238 )

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I would agree with Bjeter that HVAC when installed is 27.5 or 39 years. The poster says the furnace was replaced, and gives no indication it was not working at that time, so 39 years. I've always used the 27.5 or 39 year.

( Commented 04/10/08 01:28 PM in TaxAlmanac ,Views by community 238)

TABjeter

TaxAlmanac

Doesn't matter about the useful life, that's what is so crazy about all of this. I did cost segregation studies in my Big 4 life. It's basically all smoke and mirrors. We got to charge a lot to basically give clients the time value of money. In most cases, our fees cut a significant chunk out of any savings actually realized. I'll give JR the furnace repair, that's what I would do, but the new stuff is clearly 39 or 27.5 yr property.

RoyDale, the link you provided is consistent with 1.48-1, it doesn't supercede it, it says exactly what §1.48-1 says. §179 is only allowable for trade or business assets. Unless your trade or business is renting property, you can't take §179 on rental property.

( Answered 04/10/08 01:44 PM in TaxAlmanac ,Views by community 238 )

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RoyDaleOne

TaxAlmanac

Bjeter, I am sorry, but are you saying rental expenses are not deductible under Section 162?

Are you also saying, renting real property even one can not be a trade or business?

( Answered 04/10/08 02:12 PM in TaxAlmanac ,Views by community 238 )

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Thank you all for your input on this matter. I really had never used this site before. Now I know where to go when I need some input on questions. It is amazing that there are so many different answers, but I had to go with what I thought in the first place, 27.5 or 39, even though it seems way too long.

( Commented 04/10/08 02:26 PM in TaxAlmanac ,Views by community 238)

RoyDaleOne

TaxAlmanac

Actually, I would also go with the 27.5 or 39 classification, because, in my way of thinking it goes against the IRS Regulations for this item (HVAC).

( Answered 04/10/08 02:35 PM in TaxAlmanac ,Views by community 238 )

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  • RJM
  • TaxAlmanac
  • commented

RD1- Thanks for the links... am adding to my cost seg folder.

( Commented 04/10/08 02:48 PM in TaxAlmanac ,Views by community 238)

Seaside CPA

TaxAlmanac

Just a thought. If the repair or replacement increases the value of the property or lengthens it's life, you must treat it as an improvement and depreciate it. If it does neither, you can expense it.

Appears those issues could be debateable!

( Answered 04/10/08 03:37 PM in TaxAlmanac ,Views by community 238 )

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Taxstudent

TaxAlmanac

Roy,

The facts you described above would result in a building classification. I see that you agree with the 39-year classification, but Reg. 1.48-1(e)(2) is quite explicit that HVAC is a structural component whether mounted in, on, or next to the building. The sole exception is the sole justification test, which the 11th Circuit in the Piggly Wiggly case modified into a primary use test. Outside of that circuit, that kind of allocation did not fare so well.

The IRS chart you linked is part of the problem. Cost segregation is a facts and circumstances industry, but the consultants, for the most part, use a checklist approach even if the determinative facts that led to a favorable ruling are clearly absent. The chart encourages that approach.

( Answered 04/10/08 06:38 PM in TaxAlmanac ,Views by community 238 )

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WPCPA

TaxAlmanac

See Reg. 1-263A(f) in this data base found at Reg.1-263A-9 - It will state all structural elements of a Building (Residential or Commercial) must use the applicable Class Life - MACRS - not to do that constitutes an informal Change in Accounting Method - without Notice to the Commissioner and is ineffective.

You may not simple choose a shorter class life (39 or 27.5 year) as was suggested because you feel its a "repair". Two major errors in that conclusion (1) the undepreciated basis (unkonwn) is never recovered, (2) no authority to elect a class life other than "structural component".

This is the very rational essence of having and maintaining "Cost Pools" (3,5,7,15,39 year lives)from an Independent Third (3rd) Party Engineering Firm - a Real Cost Segregation Fimr - one with Licensed CPAs and Professional Engineers PEs on staff - no the charlaton Cost Seg firms that are all to prevelent.

( Answered 04/10/08 07:59 PM in TaxAlmanac ,Views by community 238 )

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JR1

TaxAlmanac

Seaside, that's the IRS' opinion and definition, which has roundly and consistently been trashed by every court. Courts say that is something is busted, whatever you spend and no matter how long it lasts, it's repair.

( Answered 04/10/08 09:40 PM in TaxAlmanac ,Views by community 238 )

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Wiles

TaxAlmanac

Let's resurrect this sucker.

How can an A/C unit that is installed on a cement slab in the backyard be a 27.5 year asset, while a dishwasher or refrigerator be a 5 year asset?

My rule of thumb has always been, if you can remove it and it does not affect the basic function of the structure, then it is not part of the structure. Of course, this is my rule not the IRS', but mine makes more sense.

( Answered 04/04/09 01:01 PM in TaxAlmanac ,Views by community 238 )

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Harry Boscoe

TaxAlmanac

There should be a rule against "resurrecting" suckers like this.

The AC serves a building function, the Treasury regs define it as a structural component, the property *isn't* residential, and the MACRS life for building and components, such as this AC system, is 39 years.

( Answered 04/04/09 01:23 PM in TaxAlmanac ,Views by community 238 )

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Etyodada

TaxAlmanac

Have a client that spent $2,800.00 for "A/C repairs" on a rental house on 13 Sep. My understanding is that it it to be depreciated under MACRS S/L as a 27.5-yrs life asset, MM convention.

The question posed is what hapens if it breaks (as it most likely will) before this time? Am I correct in the answer that the entire remaining basis be taken on the year this happened? Thanks

( Answered 02/17/10 07:09 PM in TaxAlmanac ,Views by community 238 )

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Badkruser

TaxAlmanac

Anytime you dispose of a depreciable asset, you have an asset 'sale'. Your basis is your adjusted basis conisdering, among other things, how much depreciation was taken to the point of disposition. You Amount Received, assuming it was scrapped for nothing, is $0.

Therefore, if you had an asset you purchased for $5,000, depreciated down to $2,000, and then scrapped. You'd have a capital loss of $2,000 in the year of disposition. The sale would be reported on form 4797.

( Answered 05/13/11 04:05 PM in TaxAlmanac ,Views by community 238 )

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I hope Etyodada hasn't been working on this for the past 15 months...

( Commented 05/13/11 08:00 PM in TaxAlmanac ,Views by community 238)

So is there a consensus on this that IF the furnace was replaced because it was not working that it WOULD be a straight expense? (I have just this case to consider as a property manager and want to enter it into the books correctly.) Thanks!

( Commented 03/14/14 12:17 PM ,Views by community 63)

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