New Tax Rules Change Write-Off Methods for Warehouse, DC Improvements

Effective Jan. 1, 2014, and starting with the current tax year, new Internal Revenue Service (IRS) rules will change how owners of warehouses and distribution centers can deduct the cost of certain improvements to their property, reported DCvelocity.com. The IRS will consider the improvements tantamount to placing a new asset in service if they qualify as a “betterment” to the property, such as installing a new machine that does the same job better than the old one; a “restoration” of the asset, such as replacing a warehouse roof damaged in a hailstorm; or an “adaptation” to the facility, such as partitioning an existing warehouse to create space for a temperature-controlled section.

The change means that asset owners can no longer fully deduct those repair costs in the tax year that the work is done. Instead, they must write off the expenses over the asset’s useful life, which can range from seven to 39 years, depending on the type of asset. Stretching out the deductions over a multiyear period is a less favorable tax treatment than “expensing” the costs in the year the work is performed.

The changes could reduce the value of depreciation-related deductions by 5-10% and may spark renewed interest in leasing certain assets, rather than owning them. The changes will not apply to work performed as routine maintenance, as long as the asset owner provides a documented maintenance schedule, and the rules will effectively exempt assets with a line-item value of $5,000 or less.

In addition, asset owners will be able to deduct the original value of the component being replaced, minus the number of years of its projected useful life that it was in operation. S