How can taxpayers prove, through documentation, that a metal steel building is not a structural component for depreciation or Section 179 purposes?
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To prove that a metal steel building is not a "structural component" for depreciation or Section 179 purposes, taxpayers must provide documentation and evidence that the building (or portions of it) functions as tangible personal property rather than as a building or its structural component. The distinction is critical because tangible personal property is eligible for accelerated depreciation and Section 179 expensing, while buildings and their structural components generally are not, except for certain qualified improvements or specific property types.
Legal Framework
1. Definition of Structural Component and Tangible Personal Property
- Tangible personal property is defined as any tangible property except land and improvements thereto, such as buildings or other inherently permanent structures (including items which are structural components of such buildings or structures). However, property in the nature of machinery or equipment, even if affixed to land, may be considered tangible personal property if it is not an inherently permanent structure or a structural component of a building.
- Structural components include parts of a building such as walls, partitions, floors, ceilings, windows, doors, central air conditioning or heating systems, plumbing, wiring, and other components relating to the operation or maintenance of a building.
2. Key Factors from Case Law
In Whiteco Industries, Inc. v. Commissioner, the Tax Court provided a framework for determining whether property is tangible personal property or a structural component/inherently permanent structure. The court considered several factors, including:- Whether the property is capable of being moved and has in fact been moved.- Whether the property is designed or constructed to remain permanently in place.- The expected or intended length of affixation.- The difficulty and time required for removal.- The amount of damage sustained upon removal.- The manner of affixation to the land.
The court emphasized that the determination does not depend on state law or whether the property is a "fixture" under local law, but rather on the property's physical characteristics and intended use.
3. IRS Guidance
IRS regulations and rulings (e.g., Rev. Rul. 79-181, Rev. Rul. 79-183) recognize that certain items, even if affixed to a building, may be considered tangible personal property if their function as part of machinery or equipment is primary, and any function as a building component is incidental.
Documentation and Evidence
To substantiate that a metal steel building (or a portion thereof) is not a structural component, taxpayers should assemble documentation and evidence addressing the following:
1. Design and Intended Use
- Engineering and architectural plans showing that the building is designed to house specific machinery or equipment, and that its design is dictated by the operational requirements of that equipment.
- Manufacturer’s specifications indicating that the building is prefabricated, modular, or otherwise designed for assembly and disassembly.
2. Permanence and Affixation
- Installation contracts and invoices showing the method of installation, such as bolting rather than permanent foundations, and the absence of integration with other building systems (e.g., HVAC, plumbing).
- Photographs or videos documenting the building’s assembly, showing that it is not permanently affixed and can be disassembled and relocated with relative ease.
3. Mobility and Actual Movement
- Records of prior relocations (if any), such as bills of lading, moving contracts, or internal memos, demonstrating that the building has been or can be moved without substantial damage.
- Statements from contractors or engineers attesting to the feasibility and process of disassembly and reassembly.
4. Functionality
- Documentation of the building’s function as an integral part of a manufacturing, production, or other qualifying activity, rather than as a general-purpose shelter or workspace.
- Evidence that the building is not used for general occupancy, storage, or office space, but rather is essential to the operation of specific equipment or processes.
5. Economic Use
- Cost analysis showing that the building would not be economically useful for other purposes if the equipment it houses were removed, supporting the argument that it is not a general-purpose building.
6. Comparison to IRS and Court Examples
- Comparative analysis referencing IRS rulings and court cases (such as Whiteco and Rev. Rul. 79-181) to show that the building’s characteristics are more similar to those found to be tangible personal property than to buildings or structural components.
Application to Section 179
Section 179 allows expensing of tangible personal property, but not buildings or their structural components. If the documentation supports that the metal steel building is not a structural component, it may qualify for Section 179 expensing, provided all other requirements are met (e.g., business use, acquisition by purchase, not used for lodging, etc.).
Summary of Key Documentation
- Engineering/architectural plans and manufacturer’s specs.
- Installation and moving records.
- Photographs/videos of assembly/disassembly.
- Statements from contractors/engineers.
- Evidence of function as machinery/equipment housing.
- Cost analysis and economic use studies.
- Comparative legal analysis to IRS/court precedents.
Conclusion
By assembling and presenting this documentation, a taxpayer can demonstrate that a metal steel building is not a structural component, but rather tangible personal property eligible for accelerated depreciation and Section 179 expensing. The focus should be on the building’s design, function, permanence, and actual use, as well as its similarity to property previously recognized as tangible personal property by the IRS and courts.
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