Convenience Stores – Potential 100 Percent First Year Bonus Depreciation
Convenience Stores – Potential 100 Percent First Year Bonus Depreciation. Generally single tenant, absolute net.
As always, please consult with your tax professional before making any decisions with regards to an acquisition and potential tax consequences.
For many years as a tax reduction strategy, there has been major interest in commercial real estate cost segregation studies followed by reclassification into 15 and 20 year depreciation schedules versus 39 year. This can frequently result in 15 to 20 percent of the tax basis reclassified into much shorter depreciation schedules, potentially resulting in major tax savings. Keep in mind though that depreciation applies only to the improvements, not the land. It doesn’t help as much in areas such as Southern California with high land values relative to the improvements. It is, however, a big help to Californians considering moving capital to other areas of the country for acquisition of commercial property. Accelerated depreciation can apply to newly acquired property or might apply to property you already own.
The above leads to the discussion of potential 100 percent bonus depreciation on property eligible for the modified accelerated cost recovery system (MACRS). The Tax Cuts and Jobs Act (TCJA) enacted on December 22, 2017 amends the ‘Bonus Depreciation’ provision first enacted by the Job Creation and Worker Assistance Act of 2002 and the Protecting Americans from Tax Hikes Act of 2015. The TCJA amendment allows 100 percent ‘bonus depreciation’ for qualified property acquired and placed in service after September 27, 2017, but before January 1, 2023. The 100% bonus depreciation decreases by 20 percent every year after and expires in 2026.
How does the above amended bonus depreciation provisions of the TCJA apply to c-store (convenience store) property?
The TCJA provides taxpayers the potential ability to write off 100 percent of the cost of qualified property in the first year. Internal Revenue Code section 168(k)(2)(A) as amended defines ‘qualified property’ as:
- Property eligible for the modified accelerated cost recovery system (MACRS) with a recovery period of 20 years or less,
- Off-the-shelf computer software,
- Water utility property,
- Qualified film or television property, or
- Qualified live theatrical production
The original use of the property must 1) begin with the taxpayer and 2) the property cannot have been owned by the taxpayer or related party in the past. Both new and ‘used’ property are now eligible for the bonus depreciation. The applicable bonus depreciation is determined by the date the property was placed in-service and not construction date or contract date.
Sales leasebacks also qualify under many circumstances.
A ‘retail motor fuel outlet’ is a term used by the IRS to define a specific group of real property that is eligible for depreciation over 15 years, rather than the customary 39 years for non-residential real property. Under IRC Section 168(e)(3)(E)(iii), any section 1250 property which is a retail motor fuels outlet (whether or not food or other convenience items are sold at the outlet), is “15-year property”.
IRC Section 168 does not provide a definition of a “retail motor fuels outlet”. The controlling committee report, however, provides a definition which is discussed at length in an IRS Coordinated Issue Paper for Petroleum and Retail Industries Convenience Stores, issued April 2, 1998.
According to the ISP paper, a convenience store (C-store) will qualify as a retail motor fuels outlet (15-year property) if one or more of the following tests is met:
- More than 50 percent of the gross revenues generated by the C-store are derived from gasoline sales (the committee report and other IRS guidance, including IRS Publication 946 use the phrase “petroleum sales”, so that oil sales would also be included).
- 50 percent or more of the floor space in the building (including restrooms, counters, and other areas allocable to traditional service station “services”) are devoted to the petroleum marking activity (the committee report and, other IRS guidance, including IRS Publication 946, use the phrase “petroleum marketing sales” in place of “the petroleum marketing activity”)
- The C-store building is 1,400 square feet or less.
The building may also qualify as a ‘15-year property’ whether or not the taxpayer-owner is the operator of the motor fuels business. Next is where it gets a little sticky. In applying the gross revenue tests, the owner of a building must aggregate the gross revenue of all businesses operated in the building such as a quick service restaurant, whether or not such businesses are operated by the owner. I assume the same would apply as the large convenience store operators add electric vehicle charging stations. This question is way above my paygrade, and I would highly suggest seeking a tax professional’s opinion.
In summary, if one of the three tests are met for a qualifying ‘retail motor fuels outlet’, then the c-store will be considered 15-year property making it eligible for the bonus depreciation.
Again, as I stated at the beginning of my article, please consult with your tax professional before making any decisions with regards to an acquisition and potential tax consequences.
Whether the property you are considering is in Santa Monica, Los Angeles, Columbus, Ohio or anywhere else in the country, I might be able to guide you in a beneficial direction. I’m Scott Harris, a Realtor, licensed in Ohio, BRE 2007004656 and California, DRE # 01439560, and can be reached at 310-473-4789 or 614-905-6614.