Section 1245 and 1250 Property Overview
What is Section 1245 Property?
Generally, 1245 property is known as “tangible” or “personal” property. 1245 tangible property assets are depreciated over shorter depreciable lives mandated by the Internal Revenue Service (IRS). In 1986, the IRS established the Modified Accelerated Cost Recovery System (MACRS) depreciation system after the Investment Tax Credit depreciation method under the Accelerated Cost Recovery System (ACRS) was repealed in 1986. Personal property does not include a building or any of the structural components of a building.
A few examples of 1245 property are: furniture, fixtures & equipment, carpet, decorative light fixtures, electrical costs that serve telephones and data outlets. The IRS also allows taxpayers to accelerate the depreciable lives of certain equipment and their related components that are “integral part of the manufacturing, production…, furnishing transportation, communications, electricity, gas, water or sewage disposal services.” “It is important to note that a building or its structural components is specifically excluded from the definition of 1245 property.” 1245 property is often compared with 1250 property.
What is Section 1250 Property?
1250 Property is generally described as “real property,” and it has further been defined as “all depreciable property that is not 1245 property”. When the term real property is used, it generally means the structural components of a building including the exterior walls, windows, floors, stairs, elevators, doors, roof, fire protection systems, plumbing, electrical, heating, ventilating and air conditioning systems as well as other assets in the building that are permanent in nature.
The Difference between 1245 Property and 1250 Property
However, there are instances where you could argue that a portion of the HVAC is not for the creature comfort of the occupants but is necessary for the operation of the taxpayers business. An example of this can often be found in manufacturing facilities. What if a humidifier was put into a building for the sole purpose of maintaining a certain humidity level which is needed for the production of goods relating to the taxpayers business? In this instance, the humidifier could be classified as 1245 property instead of real property. The humidifier may incidentally provide some level of comfort to the occupants of the building, but the purpose of its installation was primarily for the production of goods related to the taxpayers business. It comes down to what assets are related to the operation of a building versus what assets are related to the taxpayers business.
There are numerous occasions that could justify an item being categorized as personal property as opposed to real property. There have been several court cases that have provided guidance for taxpayers establishing the differences between 1245 and 1250 property. Because of this, it is important to have assistance in segregating out the costs of your building for depreciation purposes.
Ernst & Morris Consulting Group, Inc. is here to help
E&M has been providing cost segregation studies for our clients for over 24 years. We possess over 150 years of CS experience, solely with E&M. You can count on us to know the latest court cases and tax law, and if you are ever audited, we will be ready to defend the work we produce on your behalf at no additional cost. Contact us today @ 1 800 COST-SEG (267-8734) or visit our website @ www.costseg.com.
According to a recent article in the AICPA’s Journal of Accountancy,
“Selecting a firm that uses qualified professionals with years of significant, relevant experience can be an important differentiator in the quality of a cost segregation study.”
Journal of Accountancy
© From the AICPA