Source: http://www.commercialcostcontrol.com/cost_segregation_study/irs_audit_techniques_guide/retail_industries.html
Timestamp: 2019-04-19 22:32:16+00:00

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Note: Each chapter in this Audit Techniques Guide can be printed individually. Please follow the links at the beginning or end of this chapter to return to either the previous chapter or the Table of Contents or to proceed to the next chapter.
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 retail business. This 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 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.
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 retail industry. The group produced the attached matrix and related definitions as a tool to reduce unnecessary disputes and foster consistent audit treatment.
Attached Retail Exhibit A is a matrix recommending the categorization and general depreciation system recovery period of various retail 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 Retail 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 Retail Exhibit A regularly.
See also the Cost Segregation Audit Techniques Guide.
If you have any questions, please contact either David Moser, Technical Advisor, Retail at 636-940-6226, Bernie Crinigan, Engineering & Valuation Group Manager at 415-522-6188, Milton Pagan, SBSE Senior Program Analyst at 619-615-9583, or Ardell Mueller, Senior Program Analyst, Retailers Food, Pharmaceuticals and Healthcare Industry at 630-493-5946.
This matrix, which is part of the Cost Segregation Audit Techniques Guide, is intended to provide direction to effectively utilize resources in the classification and examination of property used in the operation of a retail business such as a department or grocery store. General fact patterns specific to this industry have been considered in the classification of these assets and may not be applicable to other industries. Similarly, asset classification guidance issued for other industries is based on the general fact pattern for that industry and may not be applicable to a retail business situation. For example, for asset classification of restaurants located within a retail store, refer to the industry directive for restaurants. For examination techniques and historical background related to this issue, refer to the Cost Segregation Audit Techniques Guide.
NOTE: In the case of certain leasehold improvement 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)) placed in service by the taxpayer after 10/22/04 and before 01/01/06.
 I.R.C. §1245 can apply to certain qualified recovery nonresidential real estate placed in service after 1980 and before 1987. See I.R.C. §1245 (a) (5).
Readily removable overhang or covering, often of canvas or plastic, used to provide shade or cover over a storefront, window, or door; or used inside a structure to identify a particular department or selling area. Examples include applications over an exterior door or window, or attached to interior walls or suspended from ceilings for bakery, deli, floral, meat, or produce departments. Also includes canopies designed to protect customers and gasoline fueling equipment from weather conditions and to act as advertising displays that are anchored with bolts and are not attached to buildings or other structures. Does not include canopies that are an integral part of a building’s structural shell, such as in the casino industry, or over docks. See also Concrete Foundations & Footings and Loading Docks.
Equipment for storage and preparation of beverages and beverage delivery systems. Beverage equipment includes the refrigerators, coolers, dispensing systems, and the dedicated electrical, tubing or piping for such equipment. The dispensing system may be gravity, pump or gas driven. See also Refrigerated Structures.
Includes all interior ceilings regardless of finish or décor; e.g. drywall or plaster ceilings, acoustic ceilings, suspended ceilings (including hangers, frames, grids and tiles or panels), decorative metal or tin finishes, plastic panels, decorative panels, etc. See also Awnings & Canopies, Millwork - Decorative and Millwork - General Building or Structural.
Processors (CPU), direct access storage device (DASD), tape drives, desktop and laptop computers, CRT, terminals, monitors, printers, and other peripheral equipment. Excludes Point of Sale (POS) systems and computers that are an integral part of other equipment (e.g. fire detection, heating, cooling, or energy management systems, etc.).
Foundations or footings for signs, light poles, and other land improvements (except buildings).
The supporting concrete footings used to anchor gasoline pump canopies are inherently permanent structures and are classified as land improvements.
Includes adding and accounting machines, calculators, copiers, and duplicating machines. Excludes computers and computer peripheral equipment, see Computers.
Special lightweight, double action doors installed to prevent accidents in a heavily trafficked area. For example, flexible doors, or clear or strip curtains used between stock and selling areas.
Drive-through equipment includes order taking, merchandise delivery, and payment processing systems whether mechanical or electronic. Excludes building elements such as doors, bays, or windows. See also Walls – Exterior, and Windows for drive-through bays and windows.
Includes all components of the building electrical system used in the operation or maintenance of the building or necessary to provide general building services such as electrical outlets of general applicability and accessibility, lighting, heating, ventilation, air conditioning, and electrical wiring.
Energy management systems control all energy-using systems in a building, automatically checking occupancy schedules, reading temperatures, and re-circuiting light levels, causing all heating, cooling and lighting equipment to operate so as to minimize energy costs. Includes, for example, detection devices such as smoke, motion and infrared devices, photocells, foil and contact switches, pressure switches, proximity alarms, sensors, alarm transmitting controls, data gathering panels, demand controllers, thermostats, computer controls, outside air economizers, occupancy sensors, electronic ballasts, and all related wiring and conduit. May also provide for fire and burglary protection.
Floor covering that is installed by means of strippable adhesives. For the retail industry, all vinyl composition tile (VCT), sheet vinyl, and carpeting will be treated as not permanently attached and not intended to be permanent. Also includes flooring that is frequently moved and reused to create a department theme or seasonal display.
Only separate HVAC units that meet the sole justification test are included (i.e., machinery the sole justification for the installation of which is the fact that such machinery is required to meet temperature or humidity requirements which are essential for the operation of other machinery or the processing of materials or foodstuffs.) HVAC may meet the sole justification test even though it incidentally provides for the comfort of employees, or serves, to an insubstantial degree, areas where such temperature or humidity requirements are not essential. Includes refrigeration units, condensers, compressors, accumulators, coolers, pumps, connecting pipes, and wiring for the mechanical equipment for climate controlled rooms, walk-in freezers, coolers, humidors and ripening rooms. Allocation of HVAC is not appropriate. See also Refrigerated Structures, Refrigeration Equipment, and Ripening Rooms.
A small retail outlet, often prefabricated, which acts like a fixed retail outlet yet is not permanent. Kiosks may be used to retail merchandise such as newspapers and magazines, film and digital images, and food and beverages. Kiosks are also present in shopping centers or malls where they function as temporary or portable retail outlets for a variety of merchandise.
Exterior lighting whether decorative or not is considered section 1250 property to the extent that the lighting relates to the maintenance or operation of the building. This category includes building mounted lighting to illuminate walkways, entrances, parking, etc.
Includes items such as compactors, conveyors, hoists and balers.
Decorative millwork is the decorative finish carpentry in a retail selling area. Examples include detailed crown moldings, lattice work placed over finished walls or ceilings, cabinets, cashwraps, counters and toppers. The decorative millwork serves to enhance the overall décor of the retail store and is not related to the operation of the building. Cabinets and counters in a restroom are excluded from this category; see Restroom Accessories.
Includes desk, chair, credenza, file cabinet, table or other furniture such as workstations. Also includes telephone equipment, fax machines, and other communications equipment. Does not include communications equipment included in other asset classes in Rev. Proc. 87-56.
Any structure or edifice the purpose of which is to provide parking space. Includes, for example, garages, parking ramps, or other parking structures.
All piping, drains, sprinkler mains, valves, sprinkler heads, water flow switches, restroom plumbing fixtures (e.g. toilets) and piping, kitchen hand sinks, electric water coolers, and all other components of a building plumbing system (water or gas) not specifically identified elsewhere.
Includes water, gas, or refrigerant hook-ups directly connected to appliances or equipment, eyewash stations, kitchen drainage, and kitchen hot water heater. For example, a hair salon in a retail outlet would require special hair washing sinks and water hook-up for the sinks.
A register or terminal based data collection system used to control and record all sales (cash, charge, COD, gift cards, layaway, etc.) at the point of sale. Includes cash registers, computerized sales systems and related peripheral equipment, satellite systems, scanners, and wands. See also Electrical for hook-ups.
Light poles for parking areas and other poles poured in concrete footings or bolt-mounted for signage, flags, etc. Note* asset class 00.3 Land improvements includes both section 1245 and 1250 property per Rev. Proc. 87-56. See also Signs and Light Fixtures – Exterior.
Includes refrigeration units, condensers, compressors, accumulators, coolers, pumps, connecting pipes, and associated wiring. Refrigeration equipment is commonly found in climate controlled rooms, walk-in freezers, coolers, humidors, and ripening rooms.
Includes structural components such as walls, floors, ceilings, and insulation to construct a climate controlled structure, room or facility such as a cold storage warehouse, walk-in freezer, cooler, garbage room, or humidor. See also Refrigeration Equipment.
A portable structure installed inside the building, consisting of prefabricated panels mounted on a movable framework. Portable structures are designed to be able to be disassembled and moved. See also Refrigeration Equipment.
See Restaurant Industry Directive. For retail situations that include a restaurant or other food preparation property within a store, such as a deli or snack bar, the facts are similar to those considered in the industry directive on restaurants and that directive may be relied upon for asset classification.
Includes paper towel dispensers, electric hand dryers, towel racks or holders, cup dispensers, purse shelves, toilet paper holders, soap dispensers or holders, lotion dispensers, sanitary napkin dispensers and waste receptacles, coat hooks, handrails, grab bars, mirrors, shelves, vanity cabinets, counters, ashtrays, baby changing stations, and other items generally found in public restrooms that are built into or mounted on walls or partitions.
Accessories used to better display merchandise that are not held for sale. Includes assets such as audio/video display devices, artwork (if depreciable), holiday decorations, lamps, mirrors, pictures, plaques, potted plants, and decorative mobile props (such as coat of arms, sporting equipment or memorabilia, etc., excluding non-depreciable art, antiques or collectibles).
Includes assets such as belt or roller conveyors and pneumatic tube systems used to distribute retail merchandise.
Includes assets such as sewing machines, tackers, ironing equipment, pressing tables, steam presses, pinning machines, price mark guns, marking machines, work benches, power tools, check writers, endorsing machines, paper cutters, perforators, postage meters, money sorters, coin counting and dispensing equipment, and shopping carts.
Includes assets such as back cases or islands, cabinets, cubes, deli cases, end caps, floor stands, garment racks, gondolas, grid systems, mannequins, refrigerator/freezer cases, shelving, sign holders or stands, show cases, wall display units and other retail fixtures (such as dressing or fitting room partitions) needed in the business operation that are not a building component.
Includes furniture unique to retail stores and distinguishable from office furniture. For example, a high stool in a cosmetic department, a shoe department footstool, a hair salon barber chair, or a bench outside a dressing room. See also Office Furnishings.
Special enclosed equipment boxes used to ripen produce by circulating special gases. The rooms are large boxes with special doors and large airplane-type propellers, which circulate the gases used to ripen the produce. The boxes are housed within a distribution center warehouse. These specialized facilities are considered to be part of the retail distribution equipment because they have a special retail purpose and can not be used for any other purpose. The boxes are not a part of the building structure.
All elements of the roof including but not limited to joists, rafters, deck, shingles, vapor barrier, skylights, trusses, girders, and gutters. Determination of whether decorative elements of a roof (e.g. false dormers, mansard) constitute structural building components depends on their integration with the overall roof, not their load bearing capacity. If removal of the decorative element results in the direct exposure of building components to water, snow, wind, or moisture damage, or if the decorative element houses lighting fixtures, wiring, or other structural components, then the decorative elements are part of the overall roof system and are structural components of the building.
Electronic article surveillance systems including electronic gates, surveillance cameras, recorders, monitors and related equipment, the primary purpose of which is to minimize merchandise shrinkage due to theft. Also includes teller-style pass-through windows, security booths, and bulletproof enclosures generally located in the cash office and customer service areas.
Exit signs, restroom identifiers, room numbers, and other signs relating to the operation or maintenance of a building.
Interior and exterior signs used for display or theme identity. For example, interior signs to identify departments or exterior signs to display trade names or trade symbols.
In general, land preparation costs include the one time cost of clearing and grubbing, site stripping, fill or excavation, and grading to allow development of land. Clearing and grubbing is the removal of debris, brush, trees, etc. from the site. Stripping is the removal of the topsoil to provide a stable surface for site and building improvements. The grading of land involves moving soil for the purpose of producing a more level surface to allow development of the land.
Clearing, grading, excavating and removal costs directly associated with the construction of sidewalks, parking areas, roadways and other depreciable land improvements are part of the cost of construction of the improvements and depreciated over the life of the associated asset.
Site utilities are the systems that are used to distribute utility services from the property line to the retail building. Includes water, sanitary sewer, gas and electrical services.
Equipment and apparatus, including wiring, used to provide amplified sound or music. For example, public address by way of paging a customer or background music. Excludes applications linked to fire protection and alarm systems.
Interior walls for merchandise display where the partition can be 1) readily removed and remain in substantially the same condition after removal as before, or 2) moved and reused, stored, or sold in their entirety.
Window treatments such as drapes, curtains, louver, blinds, post construction tinting and interior decorative theme décor which are readily removable.

References: §1245
 §1250
 §1245
 §1250
 §1245
 §1245
 §1250
 §168
 §1245
 §1245