Discussion:Off-site improvements vs. Impact fees
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Discussion Forum Index --> Advanced Tax Questions --> Off-site improvements vs. Impact fees
Discussion Forum Index --> Tax Questions --> Off-site improvements vs. Impact fees
| 24 March 2008 | |
| In a PLR (1999) IRS took position that infrastructure items constructed by developer and later dedicated to government entity were "intangible assets" with indefinite useful lives and thus not depreciable. Rev Ruling 2002-9 seems to indicate that impact fees paid by a developer to a govermental entity can be added to basis and therefore depreciated. What is the difference? Does anyone know if the IRS is currently allowing developers who construct roads etc that are later dedicated to the municipality (vs. paying a fee) to add these costs to basis and depreciate?
Thanks, | |
| 24 March 2008 | |
| There are two distinct elements. Infrastructure elements such as roads and sewer lines are not intangible assests and are depreciated. Intangibles are also depreciated under section 197(max 15 years). | |
RoyDaleOne (talk|edits) said: | 24 March 2008 |
| Can you explain how you are depreciating roads in a development?
Rentals? | |
| 25 March 2008 | |
| Yes, shopping center. Seems to me that the issue must come up frequently. Developers are routinely asked anymore to fund infrastructure improvements like roads, traffic signals, even schools and parks, not to mention water and sewer upgrades. These costs are either paid through impact fees or by having the developer construct the improvements and then dedicate them to the local government which then takes on the maintenace and repair functions. The question is how are those costs treated for tax purposes. Can a developer allocate the infrastructure costs to basis (263(a),263A) and recover through sales (less gain) or in the case of a shopping center or other rental sitaution, depreciate? In the 99 PLR IRS stated that if developer built roads that were later dedicated to local government, the "costs" were an intangible asset with no determinable useful life (because government maintained) and were therefore non-depreciable. In Rev Ruling 2002-9 the IRS says impact fees are capitalized costs allocable to the buildings under 263(a) and 263A and in the case of rental property, depreciable.
How do people treat these costs in practice? | |
RoyDaleOne (talk|edits) said: | 25 March 2008 |
| I allocate off site costs to on site construction. | |
| 25 March 2008 | |
| Thanks. Seems like the right result. You do this even when developer constructs and dedicates, notwithstanding the 99 PLR? | |
RoyDaleOne (talk|edits) said: | 25 March 2008 |
| Private letter rulings are non-binding, and I could (am not - to busy) to cite other directives requiring the allocation. As, I am sure you can.
A determinable life is no longer a requirement for depreciation when there is a class life. And, any discussion of determinable life relative to 263A in my way of thinking is well I'll be nice. The Service in 99 PLR IRS knows roads are depreciable so what are they doing? It makes no difference who maintains the road. | |
| 25 March 2008 | |
| Thanks, I'll let ou get back to work. I appreciate your help and insight. | |
Taxstudent (talk|edits) said: | 25 March 2008 |
| Reg. 1.263(a)-4(d)(8) addresses off-site improvements, though you still have to refer back to Rev. Rul. 2002-9 and other authorities. Offsite improvements dedicated to a government have generally been intangible costs in the case law since the 1940s I think. The reason they're intangible is not because they are not tangible property, but because the taxpayer transfers tax ownership to the government and no longer has a depreciable interest in the property. Without the depreciable interest, you're out of luck as far as depreciating them under MACRS, though they might come in as an indirect under section 263A, which may amount to the same thing. | |
RoyDaleOne (talk|edits) said: | 26 March 2008 |
| The point is that they have to be capitalized into the remaining project.
How can you depreciate something you don't own? You can't. | |
| 26 March 2008 | |
| Thank you Tax Student for the citation and insight; it's helpful. Thank you RoyDaleOne for the insight. IRS in 2002-9 relys upon 263A for the proposition that impact fees should be capiatlized into the remaining project. I guess, if you can qualify off-site improvements as indirect costs like impact fees and therefore add to the basis of some other part of the project that would be depreciable you get where you want to be - depreciating these costs. My clients costs exceed 15 million dollars. Would you suggest disclosing that you are taking this position on the return so as to avoid underpayment penalties? | |
Taxstudent (talk|edits) said: | 26 March 2008 |
| In Rev Rul 2002-9, the determinative fact was that the impact fee was assessed because the taxpayer constructed the new building, not because they merely improved the land in a way subject to section 263A. Thus, under the F&C, the indirect is allocated wholly to the building. If they have $15 million in offsite costs, I'm surprised they haven't hired a cost segregation firm to handle these issues.
Given the right facts, I wouldn't disclose. | |
RoyDaleOne (talk|edits) said: | 26 March 2008 |
| In my way of thinking a cost segregation firm in this situation is not needed, actually, worthless. | |
RoyDaleOne (talk|edits) said: | 26 March 2008 |
| Well, I final read 2002-9 it just states the current correct handling of the impact fees. There is nothing new or improved about the position taken by the Service, that was (before the ruling) and still is the correct handling of the impact fees. Actually, I find it funny, you can now depreciate labor, material, and impact fees. Those are just costs that make up the cost of the construction of the building and the cost of the building is (was) depreciable. | |
Taxstudent (talk|edits) said: | 26 March 2008 |
| Well, Roy, it depends on which cost segregation firm handles it. If there are $15 million in offsite costs, chances are good that there are a lot of on-site costs too. So a cost segregation firm would typically be involved in the project and would resolve this type of issue. If they are worthless in resolving this issue, they shouldn't be offering the service.
The noteworthy aspect of Rev. Rul. 2002-9 was that none of the impact fees were allocated to the land. That arose from the unique facts in the revenue ruling, though I'm sure tons of people ignore the factual basis for the ruling in formulating positions. If you ignore the facts, it is noteworthy. If you don't, it is unremarkable. Or maybe the noteworthy part was that the Service actually came to the correct conclusion on the issue. LOL. | |
RoyDaleOne (talk|edits) said: | 27 March 2008 |
| Well, a cost segregation firm is not need to determined what the breakdown is on a schedule of values.
Actually the use of a cost segregation study that would reallocate the contracted price to build an item per the schedule of values could be seriously questioned in my way way of thinking. For example, if in the schedule of values the price for parking lot lighting is $20,000, is some cost segregation study going to change the amount assigned to that item? Remember that is the "actual" cost I am paying for the parking lot lightning. There is nothing noteworthy about 2002-9. Impact fees that directly relate to the building must be capitalized into the building costs, that is elementary accounting, absolutely nothing new. By the way the facts in 2009-9 were not unique in anyway, in my way of thinking, I have seen hundreds of similar factual situations where building(s) incur impact fees. At least in Florida I believe most impact fees are incurred at the time a building permit is obtained for construction of the building. The Service was not formulating a new position in 2002-9, it was simply stating the then current correct position. | |
| 1 April 2008 | |
| Gentlemen: I beg to differ, 2002-9 is a change of position from the 1999 PLR and 2 2000 TAM's in which the IRS took the position that dedicated improvement costs and impact fees were "intangible assets" with no determinable life and therefore not depreciable. That being said, I checked with the IRS author of 2002-9 who informed me that dedicated improvement costs are "indirect costs" like impact fees and therefore TP is required to capitalize them under 263A. The question remains to what do they capitalize? Buildings, land or some combination.
Thanks again. | |
RoyDaleOne (talk|edits) said: | 1 April 2008 |
| See:
Regs. Sec 1.263A-10 (b)(6) Example 3. Let me know what you think. | |
| 1 April 2008 | |
| Well, are you suggesting that this is the method of allocating the indirect costs to the remaining project? I think it factually different then my case. The dedicated improvements are not a common feature to the shopping center as they benefit the public generally and in addition will not be owned by developer after dedication. | |
| 1 April 2008 | |
| If the Improvements are to be "capitalized" are you not requied by the Election of Method of Accounting to continue to Capitalize the item.
It is my understanding, that you may not elect to "Expense" or otherwise reduce the Asset Life of items clearly required to be Capitalized. The only way out is to rely on an Independent 3rd Party - a Cost Seg guy preferrably a CPA - who will add an amendment to the Cost Seg Study - and reclassify it into 5 or 7 Cost Pool. Otherwise you are required to classify it as 39-Year or 27.5 Class Life Property. | |
| 1 April 2008 | |
| The long list of cases named by the Tax Court as the "developer line of cases" indicate the determining factor in allocating these costs is whether the developer retained the rights to these assets. Here they do not as Matt indicated in the original post. I still say allocate the costs and depreciate. | |
Taxstudent (talk|edits) said: | 1 April 2008 |
| Matt, I know the Service reversed itself in RR 02-09. That is because their prior position was suspect, IIRC. You get that a lot in this area, where decades of case law (and rulings) have been superseded by new regulations, but the Service has not yet caught on. It works the other way too: the Service knows all too well what happened but the practitioner community is largely oblivious. In your situation, you end up with the facts and circumstances test of Reg. 1.263A-1(f)(4). Local codes, city council meeting minutes, and other similar documents may help in resolving that test. We probably can't help that much. | |
