Ooops! Changed My Mind! Need Faster Depreciation!


A Federal Court of Appeals has recently upheld a decision of the U.S. Tax Court that a buyer of business assets cannot unilaterally change the purchase price allocated to those assets in order to secure quicker depreciation deductions.

In the case at issue, Peco Foods, Inc. (“Peco”) bought two poultry processing plants. It signed an agreement with the seller to purchase the plants. Attached to the agreement was a schedule of the purchase price for the assets of the plants and to which both parties agreed. After the sale closed some time later, Peco hired a company to perform a study which concluded that further placing the purchased assets into different “subcomponents” resulted in faster depreciation for those assets. Such studies are referred to as “cost segregation analysis”, trying to categorize assets into components entitled to faster depreciation under U.S. tax law. Peco filed a tax return noting that it was unilaterally changing how certain of the purchased assets were being depreciated.

“No, no, no,” said the IRS: “You signed the agreement, Peco, and you allocated the purchase price for the assets on the schedules attached to the signed agreement. You can’t go back and change that now, especially since there is no fraud or mistake. You just want a faster write-off on the equipment.” And Peco said: “Look, IRS, the method we used was permitted under an accounting principle which allows us to later change how we account for the items for tax purposes. It’s called the “residual method” of allocation.”  And the Court said: “No, no, no, Peco, you are bound by the allocations you agreed to and, therefore, we agree with the U.S. Tax Court. Sorry, but no faster depreciation and larger deductions for you, after the fact of the purchase price allocation, and without any showing of mistake or fraud.”

So, if your company is buying the assets of a business, particularly if the purchase price is significant, is there a moral to this story? And the answer is…..yes…..prior to the purchase arrange for an appraisal of the assets to be purchased and for an accounting firm to perform a “cost segregation analysis”. This should identify structural elements in the purchase which can be reclassified as “personal property” or “land improvements” which may be depreciated on a faster basis than a building.

DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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