Cost segregation is similar to a concept previously known as component depreciation. The result of cost segregation is to reduce federal taxes for owners of real estate, particularly in the first 5 years of ownership. For individuals, limited partnerships and limited liability corporations, cost segregation also tends to convert income taxed at 35% (ordinary income rates) to 15% (capital gains rate).
The basis of cost segregation is that some real estate components and personal property have a shorter life than the shell and primary components of a building and should be depreciated over a shorter period of time. Cost segregation is typically performed by appraisers (or engineers in some cases). The IRS recommends that owners who break out short life property obtain a cost segregation study from an independent third party.
Articles on cost segregation are available within this site. This paragraph and the two preceding paragraphs were prepared by O’Connor & Associates. The Audit Techniques Guide (ATG) was prepared by the IRS (Internal Revenue Service).
Chapter 7.1 - Industry Specific Guidance - Casinos
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Chapter 6.7 | Chapter 7.2 INDUSTRY SPECIFIC GUIDANCE - CHAPTER 7.1 - CASINOS
DEPARTMENT OF THE TREASURY
INTERNAL REVENUE SERVICE
WASHINGTON, D.C.20224
Large and Mid-Size
Business Division
March 7, 2003
MEMORANDUM FOR
INDUSTRY DIRECTORS, LMSB
DIRECTOR, FIELD SPECIALISTS, LMSB
DIRECTOR, PREFILING AND TECHNICAL GUIDANCE, LMSB
DIVISION COUNSEL, LMSB
DIRECTOR, COMPLIANCE, SBSE
FROM: Thomas W. Wilson, Jr. /s/ Thomas W. Wilson, Jr.
Industry Director, Communications, Technology & Media
SUBJECT: Field Directive on Asset Class and Depreciation for Casino Construction Costs
INTRODUCTION
This memorandum is intended to provide direction to effectively utilize resources in the classification and examination of a taxpayer who is recovering construction costs through depreciation of tangible property used in connection with a land-based hotel/casino complex. Special rules may apply to floating casinos.
For depreciation purposes, a casino’s exterior facades are I.R.C. § 1250 property and wall coverings, millwork, lighting fixtures, kitchen equipment hookups and emergency power generators are I.R.C. § 1245 property. However, if it can be determined that the emergency power generators’ output is attributable to building operations, a functional allocation is appropriate for these assets. Hotel/casino complex site utilities are depreciable as I.R.C. § 1250 property. A casino’s outdoor pylon sign is a land improvement, and part of the sign may qualify as I.R.C. § 1245 property.
It is also important to determine the activity in which an asset is primarily used to determine whether it is includible in Class Life 57, Distributive Trades and Services, or Class Life 79, Recreation.
RECOMMENDATIONS
The matrix shown below contains recommendations for the categorization and lives of various land-based hotel/casino assets. If the taxpayer’s tax return position for these assets is consistent with these recommendations, no adjustments should be made to categorizations and lives. If the taxpayer reports assets differently, then adjustments should be considered.
|
ASSET |
PROPERTY TYPE |
RECOVERY PERIOD |
|
Decorative Facades (Decorative exterior wall covering of the hotel/casino complex) |
§ 1250 |
39 years (40 years for purposes of § 168 (g)) |
|
Ceilings (Dropped or lowered ceilings with decorative finishes) |
§ 1250 |
39 years (40 years for purposes of § 168 (g)) |
|
Wall Coverings (Strippable wall paper and vinyl) |
§ 1245 |
5-7 years (10 years for purposes of § 168 (g)) |
|
Millwork (Includes decorative molding, trim, paneling and finish carpentry. Does not include door and window trim and other items that are integral parts of finished building components.) |
§ 1245 |
5-7 years (10 years for purposes of
§ 168 (g)) |
|
Lighting (Chandeliers, wall sconces, down lighting, neon lighting, column lights, theater lighting plus cost of the wiring and electrical connections associated with these fixtures. Does not include lighting relating to operation or maintenance of building.) |
§ 1245 |
5-7 years (10 years for purposes of § 168 (g)) |
|
Kitchen equipment hookups (Electrical outlets providing localized power sources for kitchen equipment. Does not include outlets relating to operation or maintenance of building.) |
§ 1245 |
5-7 years (10 years for purposes of § 168 (g)) |
|
Guest room electrical outlets (Outlets providing general access to electrical power) |
§ 1250 |
39 years (40 years for purposes of § 168 (g)) |
|
Generators (Emergency power generators for emergency/safety systems and casino operations. If some of the generators’ output is for building then allocation is appropriate) |
§ 1245 |
5-7 years (10 years for purposes of § 168 (g)) |
|
Door locks (Hotel guest room computerized door locks) |
§ 1250 |
39 years (40 years for purposes of § 168 (g)) |
|
Site utilities (Systems that are used to distribute city-furnished utility services from the property line to the casino complex) |
§ 1250 |
39 years (40 years for purposes of § 168 (g)) |
|
Outdoor pylon sign (Consists of a superstructure and television-like message screen) |
§ 1250 Land Improvement. |
15 years |
EFFECT ON OTHER GUIDANCE
This directive should be applied in the context of other applicable depreciation principles. For example, normal examination procedures should be followed to determine whether all appropriate costs, including IRC § 263A expenses, have been associated with a particular asset. Examiners are encouraged to exercise their professional judgement when developing and resolving factual issues.
This memorandum is not an official pronouncement of the law or the Service’s position and cannot be used, cited, or relied upon as such.
CONTACTS
If you have any questions, please contact Eric Lacher, Gaming Industry Technical Advisor, at (702) 455-1123 (Eric.A.Lacher2@irs.gov).
cc: Commissioner and Deputy Commissioner, LMSB
Director, Performance
Chapter 6.7 | Chapter 7.2
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