The Investment Credit and Cost Segregation, written by Donald T. Williamson, Esq., Professor of Taxation, Chair, Department of Accounting and Taxation and Director, Graduate Tax Program at Kogod School of Business, American University, analyzes in detail the statutory rules that allowed for a credit against income tax on a portion of the purchase price of machinery, equipment, and other selected types of productive assets and their utility in determining cost segregation of buildings and other assets to maximize tax benefits.
The Portfolio discusses the rules as to what property qualified for the investment credit, the computation of the amount of the credit, the various limitations on the amount of credit available in a taxable year, and the elections to allow the credit to lessees.
Although repealed, the body of law interpreting the investment credit continues to have applicability in other areas of the tax law such as depreciation computations, §179 expenses, and the rehabilitation credit.
The Investment Credit and Cost Segregation also discusses the energy tax credit, the former reforestation credit, the qualifying advance coal credit, and the qualifying gasification project credit.
In analyzing the extensive case law interpreting which property qualified for the investment credit, the Portfolio summarizes the legal authority stating which building components may qualify for recovery periods less than the recovery period of the building itself.
The Worksheets also contain draft language for an opinion letter setting out a cost segregation study that determines the appropriate recovery periods for various depreciable improvements in a building.
The Investment Credit and Cost Segregation allows you to benefit from:
This Portfolio is part of the U.S. Income Portfolios Library, a comprehensive series that includes more than 200 Portfolios, which covers every federal tax topic with expert, in-depth analysis, and offers commentary on a wide range of federal taxation topics, including Compensation Planning, Deductions and Credits, Partnerships and Corporations, Special Pass-Through Entities, Corporate Reorganizations, Real Estate, Procedure and Administration, and more.
Detailed Analysis
I. Introduction
II. Overview of Former Investment Credit
Introductory Material
A. Amount of Credit
B. Limitations Based on Tax Liability
C. Recapture
D. Qualifying Property
E. Basis of Eligible Property
F. Leasing Transactions
1. Noncorporate Lessors
2. Lessor's Election to Pass Through Investment Credit to Lessee
III. Post-1990 RRA Investment Credit
A. Other Credits
B. Rehabilitation Credit
C. Energy Credit
D. Qualifying Advanced Coal Project Credit
E. Qualifying Gasification Project Credit
F. Qualifying Advanced Energy Project Credit
G. Qualifying Therapeutic Discovery Project Credit
H. Reforestation Credit
IV. Property Eligible for Investment Credit
A. Relevance of Eligibility Rules
B. Overview of § 38 Property
C. Ownership of § 38 Property
D. Tangible Personal Property
1. Legislative History
2. Regulations
3. Cases and Administrative Rulings
a. Functional Use Test
b. Inherent Permanency Test
E. Certain Tangible Real Property (Other than Buildings and Structural Components)
1. Manufacturing, Production or Extraction
2. Trade or Business
3. Integral Part of Productive Process
a. Fruit and Nut Trees
b. Fences
c. Drain Tiles
d. Water Wells
e. Structures Used in Furnishing Energy
f. Refrigeration, Air Conditioning, and Heating Systems
g. Piers and Docks
h. Sewer Systems, Sidewalks, etc.
i. Paved Areas
j. Dams
k. Pollution Control Property
F. Research and Storage Facilities
G. Elevators and Escalators
H. Greenhouses and Livestock Structures
I. Qualified Timber Property
J. Petroleum Storage Facilities
K. Livestock
L. Movies, Tapes, and Sound Recordings
1. Movies and Tapes
2. Sound Recordings
M. Ineligible Property
1. Property Used Predominantly Outside the United States
a. General Rule
b. Exceptions
2. Property Used Predominantly for Lodging
3. Property Owned or Used by Exempt Organizations, Governmental Units, or Foreign Persons
a. General
b. Lease vs. Services Arrangement
c. Jointly-Owned Property
4. Intangible Property
5. Certain Used Property
a. Not Acquired by Purchase
b. Used by Persons Before and After Acquisition
V. Application of the Investment Credit
A. Application of Credit in Year Earned
1. Placed in Service
2. Qualified Progress Expenditures
a. Progress Expenditure Property
b. Qualified Progress Expenditures
B. Treatment for Lessors and Lessees
1. Elective Credit to Lessees
a. Persons Eligible for Election
b. New Property
c. Ineligible Lessors
d. Definition of Lease
e. Ineligible Lessees; Short-Term Leases
f. At-Risk Limitations
2. Computation of Lessee's Credit
3. Requirements for Election
VI. Utilization of Investment Credit Principles in Cost Segregation Studies
A. Nature and Advantages of Cost Segregation Studies
B. HCA Case
C. Authority to Segregate § 1245 and § 1250 Property
VII. List of Items and Authorities to Create Cost Segregation Analysis for Buildings and Structural Improvements
A. Air Conditioning & Heating Systems & Units
B. Architectural Millwork/Cabinetry
C. Assets Accessory to the Taxpayer's Business
D. Carpet/Entrance Mats
E. Ceilings
F. Doors - Interior
G. Electrical/Plumbing Systems
H. Enclosures/Structures
I. Exterior Attachments to Buildings or Land
J. Fire Protection System
K. Flooring/Bases
L. Lighting Fixtures & Systems
M. Loading Docks & Related Items
N. Partitions (Not Restroom)
O. Refrigeration
P. Restroom Accessories
Q. Revenue Rulings
R. Signs
S. Sinks
T. Wall Coverings
Working Papers
Table of Worksheets
Worksheet 1 Sample Client Letter and Prototype for Cost Segregation Study
Worksheet 2 Investment Credit Decision Flow Chart
Bibliography