#Cost Segregation Guide - Chapter 7. 2 Industry Specific Guidance

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DIRECTORS, FIELD OPERATIONS

DIRECTOR, PREFILING AND TECHNICAL GUIDANCE

DIRECTOR OF COMPLIANCE, SBSE

FROM: /s/ Henry V. Singleton

Industry Director

/s/ Steve Burgess

Director, Examination, SBSE

SUBJECT: Field Directive on the Planning and Examination of Cost Segregation Issues in the Restaurant Industry

Introduction

This memorandum is intended to provide direction to effectively utilize resources in the classification and examination of a taxpayer who is recovering costs through depreciation of tangible property used in the operation of a restaurant business. This LMSB Directive is not an official pronouncement of the law or the position of the Service and cannot be used, cited or relied upon as such.

The American Jobs Creation Act of 2004, enacted October 22, 2004, modifies I.R.C. §168. This development has been incorporated into the guidelines through the note to Exhibit A. In addition, this directive has been modified in content and format to conform to the Field Directive issued for the retail industry on December 16, 2004.

The crux of cost segregation is determining whether an asset is I.R.C. §1245 property (shorter cost recovery period property, 5 or 7 years) or §1250 property (longer cost recovery period property, 39, 31.5 or 15 years). The most common example of §1245 property is depreciable personal property, such as equipment. The most common examples of §1250 property are buildings and building components, which generally are not §1245 property. 1

The difference in recovery periods has placed the Internal Revenue Service and taxpayers in adversarial positions in determining whether an asset is §1245 or §1250 property. Frequently, this causes the excessive expenditure of examination resources. The Director for the Retailers, Food, Pharmaceuticals and Healthcare Industry chartered a working group to address the most efficient way to approach cost segregation issues specific to the restaurant industry. The group produced the attached matrix and related definitions as a tool to reduce unnecessary disputes and foster consistent audit treatment.

Planning and Examination Guidance

Attached Exhibit A is a matrix recommending the categorization and general depreciation system recovery period of various restaurant assets. (For recovery periods under IRC §168(g) alternative depreciation system see Revenue Procedure 87-56, 1987-2 CB 674.) If the taxpayer’s tax return position for these assets is consistent with the recommendations in Exhibit A, examiners should not make adjustments to categorization and lives. If the taxpayer reports assets differently, then adjustments should be considered. The Industry intends to update Exhibit A regularly.

See the Cost Segregation Audit Techniques Guide for additional guidance. See also Revenue Procedure 2002-12, I.R.B. 2002-3, 374 (Jan. 07, 2002), for the proper treatment of smallwares.

If you have any questions, please contact Philip J. Hofmann Technical Advisor, Food at (316) 352-7434, or Ardell Mueller, Senior Program Analyst, Retailers Food, Pharmaceuticals and Healthcare Industry at (630) 493-5946.

Attachments: Exhibit A

LMSB DIRECTIVE ON COST SEGREGATION IN THE RESTAURANT INDUSTRY

EXHIBIT A

NOTE: In the case of certain leasehold improvements and restaurant property, the classifications in this directive are superseded to the extent that the American Jobs Creation Act of 2004 modifies IRC Section 168. Thus, a 15-year straight line recovery period should replace the recovery period shown in the following matrix if the asset is “qualified leasehold improvement property" (as defined in IRC Section 168(e)(6)) or “qualified restaurant property” (as defined in IRC Section 168(e)(7)) placed in service by the taxpayer after October 22, 2004 and before January 1, 2008.

1 I.R.C. Section 1245 can apply to certain qualified recovery nonresidential real estate placed in service after 1980 and before 1987. See I.R.C. Section 1245(a)(5).