Tony Cox" <tc[at]coxrt.com> wrote:
- quote -

There is no reason to attach an explanation. Such
statements get filed with the physical return and are never
read by anyone.

In addition, IRS does not routinely make year-to-year
comparisons on individual returns. So, when a screener
looks at your return he/she does not know what your
deduction was for the previous year. Thus, they would not
be aware of any fluctuation.

Lanny K. Williams, CPA
Nawarat, Williams & Co., Ltd.
Income Tax Services for Expatriate Americans

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Seth Breidbart wrote:
- quote -

Another quick question. Does that final write-off appear on
the line for depreciation (going, say, from $2K one year to
$10K the next) or does one write it off as a casualty loss?
If the former, is it wise to attach a note to explain it, or
is the IRS used to wild fluctuations in depreciation?

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"Seth Breidbart" <sethb[at]panix.com> wrote:
- quote -

Thanks Seth! Pub. 946 doesn't tell you this, of course.

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Tony Cox <tc[at]coxrt.com> wrote:
- quote -

If you abandon the property, that's like selling it for $0.

Suppose at the end of the lease the book (depreciated) value
is $10,000. You have an immediate writeoff of $10,000.

- quote -

It gets the correct result, it just isn't necessary.

Seth

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"KJ Nichols, CPA" <knichols[at]rfoods.com> wrote:

- quote -

Publication 946 says that abandoned property just stops
depreciating, even if the cost hasn't been fully recovered.
So presumably you're saying we just loose the deduction. If
so, it seems very odd to me. Don't you find it odd? You may
well be right that we ought to depreciate it over 39 years,
but I can't find anything in the code saying the lease term
is irrelevant. Or is this just your inference drawn from
treating the properly as a non-residential building?

To get the full deduction, say we create a dummy entity.
Sell it the lease for $1 on the day before its termination.
Take the depreciated basis as a capital loss. Finally,
dissolve the dummy entity the day after with no tax
liability as it has no assets. Sounds like a lot of fuss.
Perhaps there are businesses that specialize in purchasing
expiring leases for the tax benefits they'd realize?

- quote -

Well that's not the case here. They'd find (assuming you're
correct) that we've should have been reporting *less* in
depreciation each year. However, as I mentioned before, this
doesn't change our tax liability one jot, at least for the
last 3 years. It just affects the NOL carryover.

- quote -

Since we've been over-appreciating, we now have an over
lowered basis and the Feds would make *more* money
on a sale.

- quote -

I think the instructions to 3115 are clear. "Do not file
form 3115: ....

6. To change a useful life under section 167 (except
for a change to or from a useful life, recovery period,
or amortization period that is specifically assigned by
the Code, the regulations, or other published guidance). "

Presumably, "167" covers this case. Or does it? If it
does, it looks as if I'm to read the *entire* code and all
the published guidelines right back to 1776 just to see
if this particular situation has been "specifically assigned".

It seems that even finding this out authoratively would
cost more than the minor differences in tax liability that
would stem from finding out which damn form to file!

- quote -

So lets see. If we have already deducted (say) $10K so far,
but because of a "change of useful life" we should only have
deducted $8K, we reduce our total depreciation this year by
$2K. What happens if the "deduction" turns out to be
negative? Wouldn't an IRS computer throw out a 1120 filed
with a negative depreciation expense?

- quote -

No need to file amended returns for as far back as
we are supposed to go (3 years?) to correct the NOL
carryover? 3115 doesn't let you change NOL.

- quote -

I'm really having a hard time understanding why, since the
tax consequences are so insignificant. Whatever happens
doesn't change our tax liability for the last 3 years and
when we sell the hangar the Feds will "recapture" an extra
$500 or so that they are technically not entitled to.
Besides, I've already paid for this advice once, and this is
where its got us! In addition, filing amended returns can
only increase the chance of an audit. This would cost us
time and therefore money too.

If the matter is as complicated as you seem to be
indicating, then clearly the best approach is to do nothing.
If we are ever audited, the IRS would see that the they'd
have to spend lots of $$$'s on expertise to even tell us
which forms we should have filed! And after that, the net
change in tax liability could go either way, but would be a
few $100 at most.

But is there some draconian sanction that we've unwittingly
exposed ourselves to? A hidden $50/day penalty for denying
that a 30-year lease has a useful life of 39 years perhaps,
the secular equivalent of blasphemy?

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I would recommend you sit down with a local accountant to
make sure all of the details of this arrangement are taken
into account and you have all of your questions answered.
There is only so much comfort you can get from advice
received from the internet.

You are correct in taking depreciation on the building.
Your company has all of the burdens and benefits of
ownership.

The code specifically states that it does not matter what
the lease term is, a non-residential building is to be
depreciated over 39 years. If the structure is turned over
to the lessee at the end of the lease, then any remaining
basis should be taken as a loss as if the property were
abandoned. The code also states that taxpayers are to
deduct all allowable depreciation. If the IRS audits your
company and determines that you should have been reporting
$380.00 more in depreciation each year, they can reduce the
basis in the property by that amount even though you never
deducted it. Meaning it will be treated as part of the
depreciation add back upon any sale of the building.

As for the recapture at 25%, that is the maximum rate, not
the absolute rate. The company may qualify for a lower
rate.

Correcting the error depends on whether this is considered
an "accounting method change" or not. If not, then simply
recalculate the deduction using the new life and deduct the
cumulative change in the current year. If it is a method
change, then you will need to file Form 3115 with your
return to automatically change to the correct life and
deduct the accumulated change in the current year.

As I stated earlier, sit down face to face with someone who
has handled this type of transaction in the past to ensure
that you are getting the best advice possible.

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Bruce Raskin, CPA wrote:

- quote -

Thanks. I'd be happy to hear your comments on my
follow-up to KJ who seems to agree with you.

BTW, what happened to depreciation of copyrights that were
extended by the Copyright Extension act of 1998? It seems
that here is an example of an asset which had a change of
"useful life". How did it affect their depreciation
schedules, if at all?

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"KJ Nichols, CPA" <knichols[at]rfoods.com> wrote:

- quote -

I'm sorry if I wasn't clear. The property is owned
"leasehold", and the "lessee" is the City. The existing
terms of the lease are for 30 years, after which the hangar
(and all improvements) revert to the City.

The City is proposing to increase the term of the lease by
another 10 years or so in exchange for altering the CC&Rs to
prohibit certain practices (non-aviation uses, for example)
which either weren't included in existing leases or which
they believe cannot currently be enforced.

- quote -

Publication 946 says you can depreciate leased property if
you retain "incidents of ownership", which means we have
legal title, paid for it, are responsible for maintenance,
pay taxes on it and risk a loss if it is destroyed. We meet
all these tests. Further, we can sell our leasehold
ownership without restriction at any time during the lease.

So yes, it is a lease and (as far as I read the regulations)
yes we *can* depreciate it. Do you not agree? Have we been
screwing up all these years? Our eccentric and sadly
departed accountant set this up years back and we've just
been following his original plan. If you don't agree, don't
bother to read further(!) since my comments assume the damn
thing is depreciable!

- quote -

Both building and the land upon which it sits are covered by
the lease. We cannot, for example, remove the building and
sell it. It reverts to the City upon termination of the
lease, as does our current right to use the land. I should
add, having researched this, that this sort of arrangement
is quite typical for hangar leasehold property at
government-entity owned airports, although some leases will
allow the building to be removed at the end.

Now the hangar -- and from here on by this I mean the
building, pad, and land -- has an "absolute" life (not just
an "estimated" one, perhaps similar to a patent?) -- and
after 30 years it has no salvage value at all. So we've
been depreciating it SL for 8 years so far, with 22
remaining. Seems like you're suggesting we treat it as
"Nonresidential real property"?

Well, that would actually be better for us, anyway, so I'm
happy to play along! Since the hangar is worth much more
than we paid for it & we plan to sell & the fact that
there's no distinction between tax rates for capital gains &
income for corps, depreciation is just a way of giving us an
allowance at the 15% rate which'll eventually be recaptured
at the 25% rate (as a small corp, we've never earned more
than $50K/year & a sale would give us a windfall which would
certainly push us over that.).

But lets see how this is supposed to work. Clearly, if we
sell the property before the lease expiration, we've a
capital gain/loss which is easy to establish. The IRS gets
to "recapture" the depreciation.

But what happens when the lease expires in 2028? We would
have deducted only 30/39 of the original basis. What happens
to the rest? Does it just disappear, or are we supposed to
treat it as some form of casualty loss? This doesn't seem
right to me.

Anyway, lets assume that you're on the money here. How are
we to fix the problem? The original basis is $50K, give or
take a bit, so the difference in depreciation is $380/year.
We've never been taxed at anything other than the 15% rate,
so this means we've been "cheating" the feds out of
$57/year, max. We've not filed yet for '06, so this year is
easy to fix. Years '05, '04 and '03 we had a loss so the
only effect is upon the NOL carry-over amounts. We're
carrying a loss into '06 to give us no tax liability this
year either. Its been a tough couple of years, but I dimly
remember making a profit in '02. How far need we go back?
The full eight years? Seems as if refiling 1120's for 3 tax
years is an exercise in futility. Going back before that
would give the fed's some $$'s, but reduce their income when
we eventually sell it, which'd be pretty much a wash.

As for this year, what do you recommend? Take the
depreciated basis for '05 and then start depreciating that
at 1/39'th the original basis? That seems the simplest way
of doing things, short of carrying on the way we are now and
arguing the toss if we're ever audited. To me, the way we're
depreciating it seems much more logical, justifiable and
inherently fairer than what you're proposing.

But then no doubt I'm a fool to expect logic and equity from
the tax code.

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"Tony Cox" <tc[at]coxrt.com> wrote:

- quote -

You are depreciating the hanger incorrectly. Non residential
real property is depreciated over a 39 year period. I don't
think the special use rules apply to hangers as they do
agricultural property. Once started, you cannot change the
useful life of an asset.

--
Bruce Raskin, CPA, P.C.
Braskincpa[at]wbhsi.net
Tax and accounting Services
Chandler, AZ

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Do you own the building or lease it from the city?

If it's a lease, then you shouldn't be depreciating it at
all, you should be expensing the payments as rent.

If you own the building and lease the land, then any change
to the lease terms on the land will have no effect on the
depreciation of the building. If your company has owned it
for the last 8 years, then it should be depreciated over 39
years, not 30.

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Our corporation has owned a leasehold aircraft hangar for
several years now which is rented out. We are depreciating
it, straight-line, for the life of the lease (30 years
originally, 22 years left).

The leaseholder (a city) is proposing to modify the lease
provisions, including an extension in life for another 40
years. How do we depreciate after the extension? Instead of
depreciating over 22 years, we'll now be doing it over 40
years, right? Will we have to appraise it to establish a new
basis, or can we just use the remaining depriciation amount
(22/30 * purchase price, approx) as the new basis??

Thanks in advance for any help...

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