Many promoters of investments in gas station and C-store properties have highlighted that under the right circumstances these properties can qualify for a 15-yr recovery period, either as service station buildings under Rev. Proc. 87-56, Asset Class 57.1, or as a retail motor fuels outlet under §168(e)(3)(E)(iii), rather than as 39-yr nonresidential real property. A classification as 15-yr property is all the more beneficial since the reenactment of 100% bonus depreciation for property with a recovery period of 20 years or less.

Given the significant difference between full expensing in the first year vs. ratable deductions over 39 years, it’s important for anyone contemplating such an investment to be very clear as to what the “right circumstances” are to stay in compliance with the law:

According to Section 6662(b) there could be a 20% accuracy-related penalty on underpayments related to negligence or disregard of rules or regulations or under Section 6663 a 75% fraud penalty could be enforced.

Generally, property shall be included in the asset class for the activity in which the property is primarily used. (1) Property subject to a lease is included in the asset class for such property determined as if the property were owned by the lessee. (2)

Some of the features typically associated with traditional service station buildings are service bays, tire changing and repair facilities, and car lifts. Sales of gasoline/fuel and automobile supplies such as oil, anti-freeze, and window-washer fluid are typical. (3)

However, even a building that possesses the traditional attributes of a service station can’t qualify as a “service station building” under Asset Class 57.1 unless fuel (gasoline and/or diesel fuel) is sold at the building. (4)  A brightline test for fuel sales has not been established, but the sale of any fuel may be enough for a building primarily used in an activity that has features and/or sales typical of a service station. (5)

Section 1250 property will qualify as a retail motor fuels outlet if it meets a 50% test. The 50% test is met if: (a) 50% or more of the gross revenues generated from the property are derived from petroleum sales or (b) 50% or more of the floor space in the property is devoted to petroleum marketing sales. (6)

In addition, property which is 1,400 square feet or less also will qualify as a retail motor fuels outlet if at least some sales of fuel are transacted in the property. (7)

The determination of whether property meets the 50% test generally will be made in the year the property is placed in service. However, the test may be applied in the next tax year if the property is placed in service near the end of the tax year and the use of the property during the short period is not representative of the subsequent use of the property.

There is no distinction between an owner of a retail motor fuels outlet that also operates the motor fuels business and an owner that does not operate the motor fuels business. Thus, section 1250 property, the use of which meets the definition of a retail motor fuels outlet, is treated as 15-year property for depreciation purposes whether or not the owner is the operator.

Gross revenues should be analyzed on a building-by-building basis. (8)

In applying the 50%-of-gross-revenue test to determine if the property qualifies as a retail motor fuels outlet, the owner of an outlet building must aggregate the gross revenues of all businesses (e.g., a restaurant or video arcade) operated in the outlet business, whether or not the businesses are operated by the owner. (9)

Gross revenue derived from petroleum sales does not include gross revenue from related services, such as the labor cost of oil changes and gross revenue from the sale of nonpetroleum products such as tires and oil filters. (10)

The floor-space test must be guided by the 1995 Coordinated Issue Paper (the “95 CIP”). (11)  For purposes of the 50%-of-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, doesn’t qualify.

Additionally, the IRS may attempt to exclude space devoted to services that are comparable to services traditionally provided at a service station such as oil changes, and floor space devoted to nonpetroleum products such as tires and oil filters. (12)

Finally, the 95 CIP explains that “[a]djacent carwash buildings are accepted as Asset Class 57.1 property, as are associated land improvements used for the marketing of petroleum products such as pump islands and canopies.” The 95 CIP takes the position that structures “primarily used to sell convenience items and not to market petroleum products” are “fully adaptable retail building[s] that compete with other convenience stores and small grocery stores, [and, t]herefore, [are] not includible in Asset Class 57.1.” Accordingly, the pump island and canopy areas are not included in the floor-space test for the other structures/buildings.

It’s important to remember that the Supreme Court has stated: “Whether and to what extent deductions shall be allowed depends upon legislative grace; and only as there is clear provision therefor can any particular deduction be allowed.” (13) Thus, in order to establish a right to a deduction, a taxpayer must be able to point to some provision in the law and show that he comes within its terms.

If the tax attributes of your investment are material to your analysis, make sure that you understand exactly what it qualifies for, and if you’re unsure, or need a second opinion, don’t hesitate to contact us.