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IRS Rules on Depreciation of Outdoor Advertising Displays Reclassified as Real Property

PLR 201450001

 

In a private letter ruling, IRS has concluded that where a builder of outdoor advertising displays makes an election under Code Sec. 1033(g) to change its treatment of those displays from personal property to real property, 1) the displays are to be depreciated under a rule that applies when there is a change in use of property, and 2) there is not an accounting method change that requires IRS’s consent.

Background. Code Sec. 1033(g)(3)(A) provides that a taxpayer may elect to treat property that constitutes an outdoor advertising display as real property for income tax purposes.

The depreciation deduction is generally determined under Code Sec. 168. A taxpayer computes the depreciation deduction by using a prescribed depreciation method, recovery period, and convention. The applicable recovery period is determined by reference to class life or by statute.

Per Rev Proc 87-56, 1987-2 CB 674, billboards are in asset class 57.1 As such, their applicable recovery period under Code Sec. 168(c) is 15 years, and their applicable depreciation method under Code Sec. 168(b)(2) is the 150% declining balance method of depreciation (switching to the straight-line method of depreciation in the tax year in which that method provides a larger deduction).

Code Sec. 168(i)(5) provides that IRS must, by regs, provide for the method of determining the depreciation deduction with respect to any tangible property for any tax year (and the succeeding tax years) during which such property changes status under Code Sec. 168 but continues to be held by the same person.

Reg. § 1.168(i)-4 provides the rules under Code Sec. 168(i)(5). Reg. § 1.168(i)-4(d)(1) provides that Reg. § 1.168(i)-4(d) applies to a change in the use of MACRS property during a tax year subsequent to the placed-in-service year if the property (i) continues to be MACRS property owned by the same taxpayer, and (ii) as a result of the change in the use, has a different recovery period, a different depreciation method, or both. Reg. § 1.168(i)-4(d)(2)(i) provides that a change in the use of MACRS property occurs when the primary use of the MACRS property in the tax year is different from its primary use in the immediately preceding tax year.

Under Reg. § 1.168(i)-4(f), a change in computing the depreciation allowance in the year of change for property subject toReg. § 1.168(i)-4 is not a change in method of accounting under Code Sec. 446(e).

Under Reg. § 1.446-1(e)(2)(i), except as otherwise expressly provided, a taxpayer who changes a method of accounting must, before computing the taxpayer’s income using such new method, secure IRS’s consent.

Reg. § 1.446-1(e)(2)(ii)(d)(2)(i) specifies that a change in the depreciation or amortization method, period of recovery, or convention of a depreciable or amortizable asset is a change in method of accounting. However, Reg. § 1.446-1(e)(2)(ii)(d)(3)(ii) provides that a change in computing depreciation or amortization allowances in the tax year in which the use of an asset changes in the hands of the same taxpayer is not a change in method of accounting.

Facts. Taxpayer is in the business of building and maintaining outdoor advertising displays and making available space on such displays to advertisers.

Taxpayer intends to file an election, that will meet the requirements under Code Sec. 1033(g)(3), to treat its permanently affixed outdoor advertising displays as real property for income tax purposes. Taxpayer has classified some of those displays, i.e., its LED displays, as 5-year property and depreciated such displays using a 5-year recovery period and the 200% declining balance method of depreciation, switching to the straight-line method of depreciation.

Following the election under Code Sec. 1033(g)(3), all of Taxpayer’s outdoor advertising displays (including the outdoor LED displays) will be classified as 15-year property and will be depreciated using a 15-year recovery period and the 150% declining balance method of depreciation, switching to the straight-line method of depreciation.

Depreciation should be computed under Reg. § 1.168(i)-4; no IRS consent needed. IRS noted that, prior to the Code Sec. 1033(g)(3) election, Taxpayer determined that the outdoor LED advertising displays were tangible personal property for depreciation purposes. As a result of its election under Code Sec. 1033(g)(3), Taxpayer’s outdoor LED advertising displays will cease to be tangible personal property and will begin to be real property for income tax purposes. This change from tangible personal property to real property will result in its LED advertising displays being reclassified from 5-year property to 15-year property. Accordingly, the change of Taxpayer’s outdoor LED advertising displays to real property, as a result of the Code Sec. 1033(g)(3) election, constitutes a change in the use of such property.

Therefore, IRS concluded that:

  • The depreciation allowance for any of Taxpayer’s outdoor LED advertising displays whose applicable recovery period or applicable depreciation method changes as a result of Taxpayer making an election under Code Sec. 1033(g)(3) is to be determined under Reg. § 1.168(i)-4(d) for the tax year in which the election is effective and any subsequent tax year; and
  • The required changes in the determination of the depreciation allowance for any of Taxpayer’s outdoor LED advertising displays as a result of the election under Code Sec. 1033(g)(3) are not a change in method of accounting that requires IRS consent.

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Meet Paul Raymond

Meet Paul Raymond

Mr. Raymond is a sought after speaker in tax controversy law by many attorney, accountant, and business groups and at the request of the Internal Revenue Service, has presented programs at the IRS Nationwide Tax Forum, attended by tax professionals throughout the United States.

Additionally, he continues to be an active member in the Section of Taxation, American Bar Association, where he was the Past Chair of the Employment Taxes Committee.

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