Placed-in-service decision requires careful planning.

• Author: Seetharaman, Ananth

Sec. 167(a) allows a depreciation deduction for assets used in the taxpayer's trade or business or held for the production of income (e.g., rental income). Regs. Sec. 1.167(a)-10(b) provides that the period for depreciation of such an asset begins when it is placed in service and ends when the asset is retired from service. The placed-in-service date is important for tax planning purposes because optimally chosen placed-in-service dates can accelerate depreciation deductions and make available any additional deductions or tax credits. A delay in the placed-in-service date should not, per se, affect the total amount of the depreciation deduction over the asset's life; that amount is limited by the asset's tax basis. However, an earlier placed-in-service date is, as a general rule, preferred by taxpayers and opposed by the Service due to time value of money considerations. Not surprisingly, therefore, the placed-in-service date is contentious in many situations. For example:

* When should depreciation begin for a building under construction?

* If a factory building is intended to house machinery, can the building be placed in service before the machinery is installed?

* Is operational use of a machine or a manufacturing facility a prerequisite for it being deemed placed in service, or is it sufficient that the property is ready for use?

* If equipment is acquired during the tax year but it is not practicable to use the equipment in the business until the following year, when was the equipment placed in service?

* If a production facility is moved or relocated, does the placed-in-service date change?

This item analyzes the various tax law sources to provide a framework for answering these types of questions. In some instances, the IRS and the courts have narrowly interpreted the placed-in-service requirement only to reverse course and apply a broader interpretation in other instances. Until the issuance of further guidance, taxpayers would be well advised to exercise caution in determining when an asset is placed in service.

Treasury's Interpretation

Regs. Sec. 1.167(a)-(11)(e)(1)(i) provides that property is considered to be placed in service when it is "first placed in a condition or state of readiness and availability for a specifically assigned function" (emphasis added). If a building is specifically constructed to house machinery and equipment, as a general rule, the building will be deemed placed in service on the date it is ready and available to house the machinery and equipment. Note that, per the regulations, the building's state of readiness and availability should be assessed without regard to whether the machinery or equipment that the building is intended to house have been placed in service. However, the regulations also state that in an appropriate case (for example, when the building's use is so inextricably related to the machinery or equipment it is...