Buildings May Be Depreciated Prior to Being Open for Business

A recent district court case in Louisiana (Stine, LLC v. USA) addressed whether a building can be considered “placed in service” before it is even open for business. Retailers and restaurants should pay attention to this case, as depreciation can be considerably impacted by the placed in service date. Generally, a building is “placed in service” when it’s substantially complete and in a state of readiness and availability to carry out its specified function. Although the definition of “placed in service” can be relatively ambiguous, the IRS’s Audit Technique Guide for Rehabilitation Tax Credits indicates that receiving a certificate of occupancy serves as evidence that a building is, in fact, available for its intended use.

In this particular case, the taxpayer built two retail stores but did not open them for business by the end of the tax year. The stores were substantially complete and in a condition of being able to perform the functions for which they were built. A limited certificate of occupancy had been issued, allowing the buildings to receive equipment, shelving, racks, and merchandise; however, customers were not allowed to enter the stores.

The IRS argued that because the buildings were not open for business, the taxpayer did not place the buildings in service during the year and, therefore, did not qualify for the depreciation deduction in question. But the court did not agree, ruling there is no “open for business” requirement. For instance, in a prior ruling, Williams v. Commissioner, the taxpayer’s business was not considered placed in service even though it was open for business, until the building’s required refurbishments were complete. For Stine, the court viewed the certificate of occupancy as the key factor in determining when the building should be considered placed in service.

Note that the court did not address when machinery or equipment is placed in service but stated there is a marked difference in how the tax courts determine when a building as opposed to equipment and assets are placed in service.”

As you open new stores, consider this ruling – along with your specific fact pattern – as you determine the placed-in-service dates for your buildings. It may significantly affect when you may claim depreciation.