The strange trip from a fixture to a tax deduction.
Q: How many light switches does it take to accelerate a tax deduction?
A: As few as 1, depending on what it’s connected to and how it’s wired.
While this is almost certainly the least amusing “How many light bulbs” riddle ever, the answer may still bring a smile to commercial property owners. Most of us look at light switches, outlets and fixtures with a mix of gratitude for their existence and a little bit of fear about what would happen if they didn’t work. A construction professional with a background in designing and installing this equipment looks at these things and sees distinctions that may accelerate depreciation deductions.
What Does It Control?
If your client rents an office with one switch on the wall that controls a fixture with fluorescent tubes in it, things are pretty basic. Generally, that’s what the Tax Code expects you to put in an office as part of the building, and it gets deducted as part of the building.
But what about the conference room? This room may have recessed lights. Those lights may be connected individually or in small groups to switches that may allow the user to dim them. Secondary or decorative lighting may depreciate faster than generic building lighting. In order to host presentations in the conference room, it may be equipped with specialized electronics that could be depreciated separately from the building over a much shorter lifespan.
Even if your client’s commercial office spaces include kitchens, things like garbage disposals and icemakers could require separate electric and water lines and switches. These can often be depreciated more quickly than the 39-year life of the building.
Where Does It Get Power?
The accelerated costs may not be limited to the additional hardware installed on the wall. Garbage disposals often require a separate fuse all the way back at the fuse box. Recessed lighting and dimmer controls may call for different wiring and specialized labor at installation. The costs associated with the installation may qualify to be segregated out and expensed more quickly. A review of the electric panel to determine how many circuits relate to specialized fixtures can also generate faster deductions for the cost of the panel.
How Do You Figure It Out?
In short, you don’t. You bring in a construction professional with knowledge of building codes and tax law to help you and your clients figure out what items may qualify for accelerated depreciation. That professional should be part of a firm that performs studies for your commercial property clients and stands behind the report in the event the IRS decides to examine it.
A typical accountant may see the switches in a commercial property for years without stopping to consider how they are deducted. Whenever cost segregation professionals see a switch, they often react as if a light bulb has just gone off in their heads.