In this post, we will take a careful look at some of the tax law surrounding cabinets, counters and shelving. The important part is to determine when these items can be broken out separately from the building structure itself. Make sure that you understand the rules. It is even more important today under tax reform.
Cabinets, counters, and shelving are easily removable. Accordingly, they qualify as tangible personal property. Cabinets, counters, and shelving provided and used directly in the primary course of business qualify as 5-year property. These items installed for general administrative and office use will qualify as 7-year property.
So what do IRS tax court cases say?
These items will qualify specifically as tangible personal property because they fall under the specific definition in Reg. Sec. 1.48-1(c). In addition, the Senate Finance Committee Report based on the Revenue Act of 1978 identified items that were similar in nature.
The report included items such as beverage bars and seating booths and classified them as tangible personal property. In tax court case Metro National Corp. v. Commissioner, No. 33279-84, TCM 1987-38, cabinets were determined to be tangible personal property as well. In this case, the cabinets were movable with no damage to the cabinets themselves or to any part of the building structure itself.
Another court case highlights cabinets and counters. In Morrison Inc. v. Commissioner, No. 34300-83, TCM 1986-129, March 31, 1986, the court did disallow vanity cabinets and counters that were placed in service in public restrooms. But situation is a little different. These costs were disallowed because the court considered them a necessary part of the public restrooms and, accordingly, they were deemed necessary to the operation of the building.
In addition, the court noted that the cabinets and counters were structurally attached so that removal would have damaged the underlying walls and building structure.
Degree of permanence
In any cost segregation, it is critical to make sure that the cabinets, shelving and counters are not permanently attached to the walls and are not required for the operation and upkeep of the property. Rev. Rul. 75-178, 1975-1 C.B. 9 concludes tangible personal property based on (1) the manner of attachment and (2) the degree of permanence.
As cited in Hospital Corporation of America v. Commissioner, 109 T.C. No. 2 (1997) and Rev. Rul. 67-349, 1967- 2 C.B. 48, floor and wall coverings were installed in a such a manner that it was NOT deemed to be a permanent covering of the floor or wall in order to qualify as tangible personal property.
These rulings highlight that if the wall coverings or floor are not an integral part of the wall or floor, they were not deemed a structural component of the building. Using the same guidance, any cost segregation report should consider whether the cabinets, counters, and shelving are integral parts, or permanently affixed to the building structure. Accordingly, all of these components should be able to be easily removed without incurring damage or harm and without compromising the structural integrity of the building.
These ruling underscore why it is critical to take pictures and examine the structural nature of the components.