Decoding Depreciation: How to Discover Hidden Treasure in Facilities Management

 

By Caroline Shelly

 

Understanding how depreciation costs relate to buildings is a crucial aspect of managing and maintaining a facility. Knowing where to look and deciphering the clues can be challenging for anyone with facilities management responsibilities. The pay-off is in accelerating depreciation deductions to bolster a company’s ability to compete, which is especially helpful in crowded markets. Here are some ideas to get you started.

 

Where to Look for Depreciation in Your Building

1. Building Structure:
   • The physical structure of the building, including walls, floors, ceilings, roof, and foundation, depreciates over time due to exposure to weather, usage, and aging materials.
2. HVAC Systems:
   • Heating, ventilation, and air conditioning (HVAC) systems depreciate as their components wear out or become outdated, especially as more energy-efficient technologies emerge.
3. Electrical Systems:
   • Wiring, panels, and other electrical components within an office building can depreciate due to usage, changes in technology, or code requirements.
4. Plumbing Systems:
   • Pipes, fixtures, and other plumbing components degrade over time due to usage, corrosion, and mineral buildup, leading to depreciation.
5. Interior Finishes:
   • Flooring, wall coverings, paint, and other interior finishes depreciate as they are subject to wear, tear, and changes in style preferences.
6. Lighting Fixtures:
   • Light fixtures and bulbs depreciate due to usage and advancements in lighting technology that may render older fixtures less efficient or desirable.
7. Furniture and Fixtures:
   • Office furniture, fixtures, and equipment (such as desks, chairs, cabinets, and partitions) depreciate over time due to wear, changes in design trends, and functional obsolescence.
8. Technology Infrastructure:
   • Computers, servers, networking equipment, and other technology infrastructure within an office building depreciate as newer, more advanced technologies emerge, and existing equipment becomes outdated or obsolete.
9. Exterior Features:
   • Exterior elements such as parking lots, landscaping, signage, and fencing can depreciate due to exposure to the elements, wear, and changes in aesthetic preferences.

These are just a few examples, and the specific depreciation factors may vary depending on factors such as building age, location, maintenance practices, and industry standards.

 

What to Know About Depreciation Costs When Managing a Facility:

1. Definition of Depreciation:
   • Depreciation refers to the decrease in the value of an asset over time due to wear and tear, obsolescence, or other factors.
2. Building Depreciation:
   • Buildings, as physical assets, undergo depreciation over time. This can be attributed to factors such as aging, deterioration, and changes in market conditions.
3. Types of Depreciation:
   • Straight-Line Depreciation: Allocates an equal amount of depreciation expense each year over the useful life of the building.
   • Accelerated Depreciation: Front-loads more depreciation expense in the early years of the building’s life.
4. Useful Life:
   • Determining the useful life of a building is essential. It is the estimated period over which the building is expected to provide value. The IRS provides guidelines for the depreciation of buildings.
5. Cost Basis
   • Facility managers need to know the original cost basis of the building. This includes the initial construction costs, improvements, and any other costs associated with acquiring and preparing the building for its intended use.
6. Tax Implications:
   • Depreciation is often considered for tax purposes. Understanding how depreciation impacts taxable income and tax liability is crucial for effective financial planning.
7. Maintenance and Renovation Impact:
   • The facility manager should assess how maintenance and renovations may affect the building’s depreciation. Regular maintenance can extend the useful life, while significant renovations may impact the depreciation schedule.
8. Compliance with Regulations:
   • Ensure compliance with relevant accounting standards, tax regulations, and reporting requirements related to building depreciation.

 

Other Facility Management & Depreciation Considerations

It’s essential to know when items were purchased to best evaluate depreciation modes. Working hand in hand with the finance team is crucial to keeping a handle on company assets.

Keep in mind that changes in the State tax code may affect the allowable depreciation methods or rates for certain types of facilities or equipment. This could influence financial planning and investment decisions, as they would need to consider the long-term implications of depreciation on their assets’ values and tax liabilities.

Another important, and often overlooked, consideration is the ongoing focus on sustainability and energy efficiency. Look for incentives to invest in green technologies or for renovations. Understanding how these investments affect depreciation schedules and tax deductions could be an even more hidden treasure for businesses operating in the state.

 

The Benefits of Understanding and Effectively Managing Depreciation Costs

Facility managers and company executives can make informed decisions about maintenance, repairs, and capital improvements, contributing to the overall efficiency and financial health of the facility.

Being aware of local regulations and tax policies optimizes financial strategies, freeing funds for key facility management objectives, such as enhancing branding, recruitment, retention, innovation, and productivity. All of this helps to build the company’s value or how it appreciates.

 

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