The rules for Units of Property – Non-Building, the fifth topic in our series, define that a single Unit of Property, for property that is not a building, includes components that are functionally interdependent.
Functionally interdependent is defined as one component’s in-service date being dependent on other components’ in- service date. Improvements to Units of Property are NOT separate Units of Property, unless they are improvements made by a lessee. There are special rules for plant property, leased property and network assets.
Since the tests for capitalization are based on Units of Property, being able to understand and determine the Unit of Property is integral in maintaining proper fixed asset records for tax purposes. The smaller the Unit of Property, the more likely the costs incurred to the Unit of Property will be considered expenditures to be capitalized rather than repairs to be expensed.
What this means to you: To determine whether property is subject to capitalization or expense, we must look at the Unit of Property rules. For non-building property, we must determine if the components are functionally interdependent, and placing one component in service is reliant on placing other components in service.
If you would like additional information or have any questions, please contact Faith Crump at email@example.com or 502-589-6050.