Business owners like gas station proprietors may not be aware of a tax reporting alternative called the “retail motor fuel outlet” exception.
For qualifying businesses, the usual depreciation period for Sec. 1250 property (e.g., inherently permanent, such as buildings) can be reduced from 39 years to 15 years. Additionally, due to the Tax Cuts and Jobs Act (TCJA) and the Coronavirus Aid, Relief, and Economic Security (CARES) Act, a 15-year property (asset class 57.1) that is considered “qualified improvement property” (QIP), the same property could be eligible for bonus depreciation.
Generally, QIP is an improvement that is Sec. 1250 property made by the taxpayer to an interior portion of a nonresidential building placed in service after the date the building was placed in service (however, enlargement of the building, elevators or escalators, or the internal structural framework of the building are excluded).
Through these strategies, an eligible business with higher net profit may be able to mitigate their tax exposure by frontloading offsetting costs earlier on.
With the “retail motor fuel outlet” exception, property that will otherwise fall under Sec. 1250 can qualify for special treatment if it meets the “1,400 square feet test” or the “50% test”.
The 1,400 square feet test could be met if:
- The building in question was 1,400 square feet or less, and
- Was used primarily for petroleum marketing (plus, with the added presumption that there would be at least some fuel sale transactions).
The 50% test is met if:
- 50% or more of the gross revenues generated from the property are derived from petroleum sales, or
- 50% or more of the floor space in the property is devoted to petroleum marketing sales.
For purposes of the 50% floor space test, only the space devoted to services that are comparable to services traditionally provided at a service station is qualifying space. Thus, space devoted to restaurants, laundromats, movie theaters, TV lounges, showers, or game rooms, even if aimed at attracting professional truck drivers to truck stops, does not qualify. Also, when applying the 50%-of-gross-revenue test on a building-by-building basis, the main building of a truck stop occupied by nonpetroleum related lessees (restaurants, shops, etc.) would fail to meet the 50%-of-gross-revenue test.
At this time, there is no expiration date for purposes of the retail motor fuel outlet exception, but if choosing to elect bonus depreciation, the percentage allowed each year after 2022 is reduced where it is completely phased out by 2027 (2022 = 100%, 2023 = 80%, 2024 = 60%, 2025 = 40%, 2026 = 20%, 2027 = 0%). In addition, please note that Congress could modify or eliminate the exception and/or bonus depreciation application in the future and the client may need to recheck periodically for changes.
NOTE: Since bonus depreciation is actually the default treatment and taxpayers need to affirmatively elect out of it, the IRS technically requires a taxpayer that failed to claim bonus depreciation for eligible property to apply for automatic consent through Form 3115 to fix the “impermissible method of depreciation” to a permissible one.
Similarly, Form 3115 is also used to claim the retail motor fuels outlet exception, where the taxpayer attaches a written statement detailing how they meet the requirements under one of the two tests. Please contact us to discuss specifics of what the written statement must include.
Other References
Sec. 168(e)(3)(E)
Sec. 168(e)(6)
Treas. Regs. 1.168(b)-1(a)(5)
Sec. 1120(c), PL 104-188, 8/20/96
