Commercial buildings are usually depreciated on a straight-line basis over 39 years. Rev. Proc. 87-56 enabled taxpayers to depreciate the Section 1250 real property (structure) of a gas station using the 150% declining balance method over 15 years. However, many taxpayers are unaware of another rule affecting convenience stores associated with many gas stations. In 1995 & 1997, the IRS released Coordinated Issue Papers (CIP) on Convenience Stores. This IRS guidance allows a taxpayer to also depreciate the convenience store structure at a gas station over 15 years if it qualifies as a “Retail Motor Fuels Outlet”.
This Issue Paper provided that a structure qualified if any of the three following tests were met:
- 50% or more of its gross revenues are generated from petroleum sales; or
- 50% or more of its floor space is devoted to petroleum marketing sales; or
- it is a motor fuels outlet of 1400 square feet or less (regardless of whether it meets either 50% test).
In addition, through the use of a cost segregation study, the taxpayer can allocate a substantial portion of the property to 5-year assets under Asset Class 57.0 of Rev. Proc. 87-56.
Taxpayers should take some care in evaluating the second test. In 2005, the Eight Circuit ruled that a truck stop facility (Iowa 80 Group, inc. & Subs, (CA 5/24/2005), 95 AFTR 2d 2005-901) did not meet the “50% or more of its floor space devoted to petroleum marketing sales” test. The truck stop included a movie theater, arcade, restaurant, showers, laundromat, and TV lounge. The taxpayer argued that the facility was designed to attract professional truck drivers to fuel at their service station and therefore met the “devoted to petroleum marketing sales” definition. The court found that the 1997 CIP viewed a traditional service station (which would include service bays, diagnostic centers, and repair facilities) as a reference for what qualified.
The 2004 case involves only the Eight Circuit and is a very extreme example of what does not qualify. However, both the 1995 and 1997 CIP leave room for interpretation of the “devoted to petroleum marketing sales” standard.
Luis A. Guerrero, CPA, MBT is vice president of KBKG, Inc. a cost segregation consulting firm and KROST CPAs & Consultants, an accountancy corporation. As the Tax Practice Department leader, he is responsible for leading a team of engineers and accountants with addressing issues in cost segregation and other tax-related matters.
Author: Luis A. Guerrero, CPA, MBT | Publication: KBKG Cost Segregation Updates