New tax rules change write-off methods for warehouse, DC improvements

Some owners of warehouses and distribution centers will find 2014, and the years to follow, a little more taxing than usual.

Effective this past Jan. 1 and starting with the current tax year, new Internal Revenue Service (IRS) rules will change how owners of such industrial assets can deduct the cost of certain improvements to their property. The IRS will consider the improvements tantamount to placing a new asset in service if they qualify as a "betterment" to the property, such as installing a new machine that does the same job better than the old one; a "restoration" of the asset, such as replacing a warehouse roof damaged in a hailstorm; or an "adaptation" to the facility, an example of which would be partitioning an existing warehouse to create space for a temperature-controlled section.

The change means that asset owners can no longer fully deduct those repair costs in the tax year that the work was done. Instead, they will be required to write off the expenses over the asset's useful life, which can range from seven to 39 years, depending on the type of asset. Stretching out the deductions over a multiyear period represents less favorable tax treatment than "expensing" the costs in the year the work was performed.

"The changes could reduce the value of depreciation-related deductions by between 5 and 10 percent," said Dean Sonderegger, senior product management executive for the software segment of Bloomberg BNA, a unit of Bloomberg L.P. that provides legal, tax, regulatory, and business information. The rules may also spark renewed interest in leasing certain assets rather than owning them, he added in an interview.

As is often the case with the tax code, there will be exemptions. The changes will not apply to work performed as routine maintenance as long as the asset owner provides a documented maintenance schedule, Sonderegger said. Also, the rules will effectively exempt assets with a line-item value of $5,000 or less, he added.

In addition, asset owners will be allowed to deduct the original value of the component being replaced, minus the number of years of the asset's projected useful life that it was in operation, Sonderegger said. For example, an asset owner could write off $25,000 if the asset being replaced originally cost $50,000 and was removed from service five years into its estimated 10-year useful life.

Sonderegger said most warehouse and DC owners would likely be aware of the new rules if they have sharp accountants that keep up with changes in the tax code.