Depreciation of office furniture and fixtures - recoverable over five years?

• Author: Hager, Mark

Sec. 167(a) allows as a depreciation deduction a reasonable allowance for the wear and tear of property used in a trade or business. Sec. 168(a) generally provides that the depreciation deduction under Sec. 167 for any tangible property shall be determined by using the applicable depreciation method, recovery period and convention for such property. Sec. 168(a) provides that the applicable recovery period for modified accelerated cost recovery system property is five years for "5-year property" and seven years for "7-year property." Property with a class life of more than four years but less than 10 years is treated as five-year property, property with a class life of 10 years or more but less than 16 years is treated as seven-year property (Sec. 168(e)(1)). The "class life" for a given asset is prescribed by the Treasury and "reasonably reflects the anticipated useful life of that class of property to the industry or other group" (Sec. 167(m)).

The Treasury has set forth the class lives for various assets in a long line of revenue procedures, most recently Rev. Proc. 87-56. Of particular interest to many taxpayers are asset classes dealing with office furniture and fixtures: Asset Class 00.11, Office Furniture, Fixtures, and Equipment, which includes furniture and fixtures that are not a structural component of a building (such as desks, files, safes and communications equipment (other than communications equipment included in other classes)), and Asset Class 57.0 Distributive Trades and Services, which includes assets used in wholesale and retail trade, and personal and professional services. Proper classification among the various asset classes is important in determining the appropriate recovery period for a particular asset. This can be seen, for example, in the difference between Asset Class 00.11, which has a class life of 10 years (and therefore a seven-year recovery period) and Asset Class 57.0, which has a class life of nine years and a five-year recovery period).

Proper asset classification has become more of an issue as of late, as evidenced by the number of cases addressing this matter - e.g., Walgreen Co. & Subsidiaries, 68 F3d 1006 (7th Cir. 1995) rev'g and rem'g 103 TC 582 (1994); JFM, Inc. & Subsidiaries, TC Memo 1994-239; and ABC Rentals of San Antonio, Inc., TC Memo 1994-601, appeals docketed, 10th Cir., 5/16/95. The issue was addressed most recently in Norwest Corporation and Subsidiaries, TC Memo 1995-390, in which the...