building signage depreciation

[capristar]

How do I categorize a building sign for depreciation on Turbo Tax?  It is on a commercial rental building and I am filing a 1065 form.  None of the choices in the interview seem to fit.

[KathrynG3]

It depends on how much the signage costs.

2019 IRS Publication 946: How to Depreciate Property:

• Page 7: "Property contained in or attached to a building (other than structural components), such as refrigerators, grocery store counters, office equipment, printing presses, testing equipment, and signs."
• Page 103 This tangible property when attached to the building is considered an Improvement. The class life is 30 years and the Modified Accelerated Depreciation Life is 20 years. 

Safe Harbor Election - do not depreciate items that cost less than $2,500 each.

To learn more about the different depreciation treatment options, click this link: Depreciation of Business Assets

[capristar]

Thank you for your response Kathryn.  I'm having trouble finding the quotes on the pages you noted for the link.  Maybe it's since been revised?  We paid $5,618 for the sign 1/21/19.  If I choose rental real estate then non residential real estate in the interview it is depreciating it over 39 years.  I'm assuming it's not a qualified improvement since that refers to improvements made inside the building?  Which option would I select to depreciate over 30 years or less if possible?

[Carl]

I'm assuming it's not a qualified improvement since that refers to improvements made inside the building?

The reason that's an incorrect assumption is because the sign is an improvement to "the property" which is not restricted to just being inside or a part of the structure on that property.

Which option would I select to depreciate over 30 years or less if possible?

Bottom line is, since that sign is not something utilized in the production of income on a recurring basis, it's a property improvement. So it gets depreciated over 39 years via GDS. If you're already using ADS on your other "like kind" assets (the building) then it's 31.5 years. For ADS you have to select the option for other asset type in the program and enter it that way in order to get 31.5 years.

But for ADS this won't work at all in the program because in the processing of checking this out in the program for you, ADS is incorrectly giving me 40 years to depreciate when it should be 31.5.

@GabiU flagging you on this.

[capristar]

Thank you Carl.  Was trying to find a way to deduct more - seems like we should be able to take the 179 deduction since it is definitely business income (self storage business) but since it's reported on 8825 for rentals TT won't consider it to qualify the deduction.  Sigh....

[jttolliver]

What if the sign is attached to a leased building with lease term of 3 years?  What about an unattached sign ( i.e. a pole sign)?

[HopeS]

Generally, you cannot depreciate leased property because you do not own it. You can, however, depreciate any capital improvements you make to the property.

See excerpts from IRS guidance below:

Leased property.

You can depreciate leased property only if you retain the incidents of ownership in the property (explained below). This means you bear the burden of exhaustion of the capital investment in the property. Therefore, if you lease property from someone to use in your trade or business or for the production of income, generally you cannot depreciate its cost because you do not retain the incidents of ownership. You can, however, depreciate any capital improvements you make to the property. See How Do You Treat Repairs and Improvements, later in this chapter, and Additions and Improvements under Which Recovery Period Applies? in chapter 4.

If you lease property to someone, you can generally depreciate its cost even if the lessee (the person leasing from you) has agreed to preserve, replace, renew, and maintain the property. However, if the lease provides that the lessee is to maintain the property and return to you the same property or its equivalent in value at the expiration of the lease in as good condition and value as when leased, you cannot depreciate the cost of the property.

IRS Publication 946

@jttolliver 

[jttolliver]

As a leasee what is the useful life of an attached sign?  Of an unattached pole sign?  Is it for the life of the lease?

[DianeW777]

The sign would be considered 7 year property because that category is for anything that is not in another category. Review the publication beginning on page 28.

• IRS Publication 946

Please update here if you have more questions and one of our tax experts can help.

@jttolliver 

[jttolliver]

Thanks.

We lease space for our retail locations.  We routinely make the following improvements to our leased spaces:  replace the ceiling system, add interior walls, replace carpet.  Our lease terms are usually no longer than 3 years.  Would these be considered 3-year properties?

[PattiF]

These are considered leasehold improvements and you would deduct those expenses over a three year period. The expenses are really amortized but will be treated as depreciation for your business. 

Technically, you are amortizing leasehold improvements rather than depreciating them. The reason is that the landlord owns the improvements, so you are only exercising an intangible right to use the improvements during the term of the lease - and intangible assets are amortized, not depreciated.

How to account for leasehold improvements — AccountingTools

@jttolliver 

[jttolliver]

Can depreciation method be MACRS  MF200, or should it be a strait-line amortization?

[jttolliver]

I thought I saw somewhere that a sign attached to a building was considered a leasehold improvement and could be depreciated over 3 years.  Or is that for the building owner and not a leasee?

[PatriciaV]

Yes, in general, leasehold improvements are amortized by the leaseholder over the shorter of the remaining term of the lease or the useful life.

However, if the improvements cost less than $2,500, you may choose to take the De Minimis Safe Harbor Election. This allows you to expense the cost in the first year.

@jttolliver