Only on December 23rd...

[Richcpaman]

I have a client that is about to open a restaurant.

The kitchen is ready to go, and has an operating permit.   But the building can not get its permit, due to issues in the parking lot.  And they can not get that cleaned up till Jan 2017.

The client has already lined up significant catering sales from now till the end of the year, and is using the kitchen to do these services.  (Don't need the parking lot...)

Can the client place in service the kitchen equipment in 2016, even though they can not place in service the building that it is located in?

What are your thoughts? 

Rich

[rfassett]

Are they using that equipment to prepare the catered food? And is the catering business in the same entity as the restaurant? If so and so, then yes to your question.

Merry Christmas!

[GeneInAlabama]

If the kitchen equipment is in the building, looks to me like the building is already in use.  Does he have to be serving customers in the dining room to be "in business?"

[ILLMAS]

How much of a tax saving can he get with a few days left in the year?

[Terry D EA]

On ‎12‎/‎23‎/‎2016 at 3:58 PM, ILLMAS said:

How much of a tax saving can he get with a few days left in the year?

I would tend to agree except don't forget about bonus depreciation or the fact that in 2016 there are permissible write-offs on major equipment purchases that could indeed have a tax benefit that otherwise may not be available in 2017. Just my 2 cents worth.

[Richcpaman]

A few days in Dec?

Have 600k in income that could use a little Sec 179 against it...  This is restaurant number 2.

150k in Equipment, and 1million in Building.   Only a portion of the building? 

Place in service the kitchen area, but not the dining, restrooms or parking?

 

[rfassett]

Your original post asked about the equipment which I see no problem if it is being used in the catering business.  I am not sold on the idea of separating the building into segments. How do you propose to accomplish that?

[DANRVAN]

4 hours ago, Richcpaman said:

.   Only a portion of the building? 

Place in service the kitchen area, but not the dining, restrooms or parking?

 

Clearly the equipment used for the catering and the area of the building used were placed in service as defined by the code as  "The taxable year in which the property is placed in a condition or state of readiness and availability for a specifically assigned function".

The IRS is likely to argue that the rest is not ready and available due to the permit which has not been issued.

Although specific to power plants, Rev-Rul 76-256 and PLR 14589-02 refer to the fact that all necessary permits and licenses were obtained at the time the assets were considered placed in service.

The IRS might also argue the rest of the assets were not placed in service since the business was not open by the end of the year.  A district court in Louisiana did rule otherwise in the case of Stine v the IRS (for what that is worth).

So what is it worth to depreciate a portion of the building for a few days? Say you allocate 50% of $1 million, 39 years, mid month conv. = $534 by my calculation.

 

 

[Richcpaman]

The building isn't just $534 in depreciation, because you can section 179 Restaurant improvements. And this would qualify under that section.

And then we have next years income that we would like to offset...

That is why I have the questions.  The kitchen equipment is easy, and then I have a building, that I can use the kitchen area, but not the rest of it.  So I can place a building in service over several periods.  IF I get a segment analysis done by a architect, then I have costs associated with different areas of the building, and then I can have them placed in service as the permits allow.  Some in 2016, and some in 2017. 

Rich

 

[DANRVAN]

Didn't dawn on me you are dealing with Qualified Restaurant Property.  Now it makes sense.

[SaraEA]

Will mid-month convention mess up this plan?

[jklcpa]

2 minutes ago, SaraEA said:

Will mid-month convention mess up this plan?

It wouldn't have any effect on the sec 179 that Rich is attempting to claim.