IRS to allow depreciation

Golf Course News, Jan 2002 by Overbeck, A

WASHINGTON -- After two years of negotiations, the National Golf Course Owners Association and consultant KPMG have emerged victorious in their depreciation battle with the Internal Revenue Service. The IRS, which had been considering the matter under its Industry Issue Resolution pilot program, issued revenue ruling 2001-60 in late November that will allow golf courses to depreciate the costs of modern green construction.

Accordingto KPMG's Bill Ellis, the ruling is an "economic stimulus tax package" that could save individual golf courses hundreds of thousands of dollars.

"The ruling allows course owners to deduct any cumulative 'undepreciated' amount as of Dec. 31, 2000, over four years beginning in 2001. This may be a boon for course owners that are hurting right now," he said.

However, Ellis also pointed out that this change is factual in nature and that a majority of owners were already claiming the depreciation.

"The ruling brings the IRS into agreement with course owners over depreciation, and it protects those who have been depreciating greens from being audited," he said.

The IRS's previous ruling regarding greens was issued in 1955 when "push-- up" greens were the norm. While push-- up greens will remain nondepreciable, the new ruling recognizes the complexity of modern greens construction.

The new ruling states: "Unlike push-up or natural soil greens, the modern green is a sophisticated improvement to the land carefully designed to facilitate drainage. Essential components of the modern green are underground drainage tiles or interconnected pipes. Because these tiles or pipes deteriorate over time, they have a determinable useful life and, therefore, are depreciable."

The items will be depreciable under current law and regulations as 15-year land improvements. However, Ellis cautioned that costs of general earthmoving, grading and initial shaping of the area surrounding and underneath the modern green will remain nondepreciable.

BUNKERS AND TEES TO BE ADDED

While the ruling only specifically addressed modern greens construction, Ellis said the IRS will soon issue internal guidance on bunkers and tees.

"We were aware they were only going to address greens in this ruling because the 1955 ruling only addressed greens," he said. "But the basis of their conclusions is the factual existence of integrated drainage systems in modern greens. It is our understanding that they will apply the principles of this ruling to other golf course items such as bunkers and tees, but only if similar integrated drainage facts exist."

COST SAVINGS

The ruling provides automatic approval for a change in accounting method. Modern greens and other qualifying improvements not depreciated, or under-depreciated in prior years, could be eligible for a cumulative depreciation adjustment.

For example, an owner with $1 million in depreciable costs placed in service in January 1991 should have been cumulatively allowed $675,000 in depreciation through 2000. With the change, 25 percent ($163,750) will be deductible per year for 2001, 2002, 2003 and 2004. In addition, the balance of the greens cost ($325,000) would be available for the normal depreciation of approximately $60,000 per year for five years beginning in 2001. This results in approximately $224,000 in additional depreciation expense for 2001 and each of the next three years.

Ellis stressed that documentation will be critical to determining the amount eligible for depreciation and that owners that over-- depreciated improvements could be subject to recapture in the year of audit.