The Investment Credit and Cost Segregation (Portfolio 583)

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Donald T. Williamson

Donald T. Williamson, Esq., Professor of Taxation; Chair, Department of Accounting and Taxation; Director, Graduate Tax Program, Kogod School of Business, American University; B.A. (Phi Beta Kappa), Hamilton College (1973); M.B.A., Johnson Graduate School of Business Administration, Cornell University (1976); J.D., Cornell Law School (1977); LL.M., Georgetown University Law Center (1983); Associate Editor, The Tax Lawyer, 1982–1983; Certified Public Accountant (Virginia, 1979); principal, LaMonaca & Williamson, CPAs, Falls Church, Virginia.

Table of Contents

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

Introductory Material

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

a. General Rule

b. Exceptions

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

Introductory Material

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

Introductory Material

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

Working Papers

Table of Worksheets

Worksheet 1 Sample Client Letter and Prototype for Cost Segregation Study

Worksheet 2 Investment Credit Decision Flow Chart