Demolition of a building.

• Author: Edwards, Ray
• Position: Allocation of demolition costs

At one time, a taxpayer's intentions when he purchased a building dictated whether he was entitled to a loss on the demolition of the building or whether the undepreciated cost of the building at demolition would have to be capitalized as part of the cost of the land (Regs. Sec. 1.165-3). The determination of the taxpayer's intentions was a source of much disagreement and litigation between taxpayers and the IRS. With the addition of Sec. 280B, it is clear that the cost of demolition and undepreciated costs must be capitalized as part of the basis in workpaper, and the various components making up the three factors horizontally across the top of the workpaper. This way it can be readily seen whether the totals by factor agree in the books.

Once the information has been gathered and organized for the three factors, the information can be used to determine whether a return for a given state in required to be filed. If the property factor or the payroll factor applies, the business will most certainly have some filing obligation. If only the sales factor applies, it is possible the business may be exempt from filing a return under PL 86-272. Basically, this law states that if a business solicits sales within a state and the sales orders are filled from inventory located in another state and the business has no property, payroll or leased property, it is exempt from any income tax filing requirements.

In order to do business in most states, a company is encouraged to apply for a certificate of authority to do business. This certificate gives the right to pursue litigation within the state, such as the collection of bad debts. If the business has the certificate in a state in which it is not required to file an income tax return, it may still be liable for a license fee or a franchise tax in order to maintain an active certificate. Of course, even if the applicable factors indicate an obligation to file but the business has no Federal taxable income, there probably will still be a state tax due for a license or franchise fee.

A tax preparer should always consult the instructions to the applicable state form. In addition, there are several state tax guides, and within them are sections on the "Doing Business Requirements" within the states. It is important to realize that each state has its own law governing nexus, and by reading the state form instructions and consulting a state the land. However, there is no mention in Sec. 280B (and no...