Eligibility for Bonus Depreciation Applies to Individual Properties in Construction Complex. (Parker Tax Publishing February 2014)

The determination of whether properties being developed in a construction complex are qualified properties eligible for bonus depreciation applies separately to each property; properties don't qualify simply because the overall project meets the definition for "qualified property." CCM 20140202F.

Under the facts in CCM 20140202F, a taxpayer owns and operates a hotel complex that consists of several adjacent buildings including a casino, a hotel, a restaurant and convention center building, and above-ground parking structures. Before opening the casino complex, the taxpayer acquired a building located on the site and entirely renovated the building to construct restaurant and food service areas for the casino complex. In the following years, the taxpayer completed four separate construction projects involving four existing buildings at the Hotel complex. One of these projects was the renovation and expansion of a particular building called the "C Building."

The C Building project included the complete renovation of existing restaurant and food service areas in the original square foot portion of the building. Also included in the project was the construction of a new, two-level, addition along one side of the existing structure to provide space for additional uses, including offices, lounges, bars, conference/convention rooms, ballroom, and a theater. After completion of the project, a cost segregation study was performed to classify the various items of property constructed within the project for depreciation purposes.

The taxpayer argued that the project at issue constituted a "turnkey project" and as such, under PLR 201210004, final acceptance did not occur until the contractor completed all the work for the project. Based on this assumption, the taxpayer said it did not incur costs for the construction projects and underlying properties until the year when final acceptance of the project occurred. And because that year was a year in which bonus depreciation applied, the taxpayer argued that the costs incurred were eligible for bonus depreciation.

The Chief Counsel's Office disagreed and concluded that underlying properties do not become qualified properties for purposes of the bonus depreciation rules of Code Sec. 168(k)(2)(A) simply because the overall project meets the definitions for "qualified property" under those rules. According to the Chief Counsel's Office, the taxpayer was required to separately identify the properties associated with the project to determine which assets constitute "qualified property." Thus, a taxpayer cannot argue that a property qualifies for bonus depreciation simply because the project to which that property relates qualifies (based on contract date, acquisition date and placed in service date of the "project"). Rather, a taxpayer is required to separately identify the properties associated with a project to determine which assets constitute "qualified property" for purposes of eligibility for bonus depreciation. The guidance also discusses the difference between turnkey projects and design, bid, build (DBB) projects for purposes of determining whether property qualifies for bonus depreciation.

For a discussion of property that qualifies for bonus depreciation, see Parker Tax ¶94,120. (Staff Contributor Parker Tax Publishing)

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