Discussion:Depreciation of HVAC

From TaxAlmanac, A Free Online Resource for Tax Professionals
Note: You are using this website at your own risk, subject to our Disclaimer and Website Use and Contribution Terms.

From TaxAlmanac

Jump to: navigation, search

Discussion Forum Index --> Tax Questions --> Depreciation of HVAC


Tiredoftaxes (talk|edits) said:

9 April 2008

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?

JR1 (talk|edits) said:

April 9, 2008
Were the old ones broken?

Tiredoftaxes (talk|edits) said:

9 April 2008
The furnace was replaced but there never was any airconditioning.

Bjeter (talk|edits) said:

9 April 2008
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.

Tiredoftaxes (talk|edits) said:

9 April 2008
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.

JR1 (talk|edits) said:

April 10, 2008
You never answered the question about the furnace. Was it broken? Makes a big diff. Broken means the new one is a repair.

Bjeter (talk|edits) said:

10 April 2008
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.

Dnc0716 (talk|edits) said:

10 April 2008
7 year asset no sec. 179 allowed though.

JR1 (talk|edits) said:

April 10, 2008
If it's a repair, you don't care. Immediate deduction.

Dnc0716 (talk|edits) said:

10 April 2008
You repair the original unit. If a new unit is purchased, then it is a capital asset with a 7 year life.

Foxttron (talk|edits) said:

10 April 2008
Not to split hair, but I saw many times as a 5 year asset. Why 7 years Dnc?

Bjeter (talk|edits) said:

10 April 2008
Nate,

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

Bjeter (talk|edits) said:

10 April 2008
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.

RoyDaleOne (talk|edits) said:

10 April 2008
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?

RoyDaleOne (talk|edits) said:

10 April 2008
http://www.irs.gov/Businesses/Cost-Segregation-ATG---Chapter-6.4-Relevant-Court-Cases

Death&Taxes (talk|edits) said:

10 April 2008
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.

Southparkcpa (talk|edits) said:

10 April 2008
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.

Southparkcpa (talk|edits) said:

10 April 2008
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.

Dnc0716 (talk|edits) said:

10 April 2008
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.

RoyDaleOne (talk|edits) said:

10 April 2008
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.

Death&Taxes (talk|edits) said:

10 April 2008
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.

Bjeter (talk|edits) said:

10 April 2008
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.

RoyDaleOne (talk|edits) said:

10 April 2008
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?

Tiredoftaxes (talk|edits) said:

10 April 2008
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.

RoyDaleOne (talk|edits) said:

10 April 2008
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).

RJM (talk|edits) said:

10 April 2008
RD1- Thanks for the links... am adding to my cost seg folder.

Seaside CPA (talk|edits) said:

10 April 2008
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!

Taxstudent (talk|edits) said:

10 April 2008
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.

WPCPA (talk|edits) said:

10 April 2008
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.

JR1 (talk|edits) said:

April 10, 2008
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.

Wiles (talk|edits) said:

4 April 2009
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.

Harry Boscoe (talk|edits) said:

4 April 2009
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.

Etyodada (talk|edits) said:

17 February 2010
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

Badkruser (talk|edits) said:

13 May 2011
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.

PirateCPA (talk|edits) said:

13 May 2011
I hope Etyodada hasn't been working on this for the past 15 months...

Cnichols (talk|edits) said:

7 July 2011
What are people's thoughts if the prior tax preparer lumped the entire asset into Residentail Real Estate? Without a cost segregation study, is there any foundation for allocating a portion of the basis to the old boiler and disposing of the undepreciated portion?

RoyDaleOne (talk|edits) said:

7 July 2011
Even with cost segregation there is very little if any authority for separating a boiler or HVAC.

To join in on this discussion, you must first log in.
Personal tools