Cost Segregation Update: Street Light Depreciation
The Tax Court recently ruled that street lights may be depreciated over seven years for federal tax depreciation purposes. In PPL Corp. v. Commissioner, 135 T.C. No. 8 (July 28, 2010), the Tax Court found that typical street light assets, which include poles, light fixtures, mounting hardware, and bases that can be relocated, met the six criteria set forth in Whiteco Industries, Inc. v. Commissioner, 65 T.C. 664 (1975), and are not inherently permanent. It went on to state that these assets were not Asset Class 00.3 land improvement assets (15-year recovery period), but “property without a class life” which may be depreciated over seven years.
In addition, because the subsidiary of the taxpayer in the case was an electric utility, the Service had argued alternatively that the street lights should be classified under Asset Class 49.14 as assets primarily used in the distribution of electricity. The court rejected that argument.
Opportunities for Taxpayers
Taxpayers will commonly depreciate street lights (site lighting) over 15 years as Asset Class 00.3 land improvements. Inasmuch as the Tax Court specifically stated that these assets are not Asset Class 00.3 property and may be depreciated over a seven-year recovery period, taxpayers can recover the cost of all newly-installed street light assets more quickly than if they were classified as land improvements. Furthermore, Form 3115, Application for Change in Accounting Method, may be filed under Rev. Proc. 2008-52 (as an automatic change that does not require the prior consent of the Service) to reclassify street light assets placed in service in prior years from a 15-year to a seven-year recovery period. The costs associated with these site lighting assets may be significant for certain properties, including large retail centers, automobile and truck dealerships, and large corporate campus developments.