Placed-In-Service

What Is Placed-In-Service?

Placed-in-service is the point in time when a property or long-term asset is first placed in use to account, basically to work out depreciation or grant a tax credit. The date the asset is placed in service denotes the beginning of the depreciation period. Placed-in-service additionally applies to property in the determination of the amount of its investment tax credit. The date of purchase normally checks when an asset is placed in service, yet a company will follow specific tax guidelines to assign that specific date.

Understanding Placed-In-Service

The placed-in-service date is important to a company for tax reporting purposes since it denotes the beginning of the recording of depreciation expense that impacts pretax earnings. A company can reduce its pretax earnings by making depreciation deductions and in this way need to pay less tax.

According to the Internal Revenue Service (IRS) Reg. Sec. 1.167(a)- (11)(e)(1), property is viewed as placed in service when it is "first placed in a condition or state of readiness and availability for a specifically assigned function." This might coincide with the purchase date of a depreciable asset, depending on how a company interprets "state of readiness and availability." IRS's Reg. Sec. 1.46-3(d)(1)(ii) applies a similar criterion as the above regulation with the end goal of an investment tax credit for the purchase of property.

Significance of the Placed-In-Service Date

Depreciation is a major tax shield for corporations. At the point when an asset is formally placed in service, it can substantially affect reported pretax earnings and hence the amount of tax that a company must pay. A company will need to place an asset in service quickly to begin recording depreciation expenses, however it must be careful not to run afoul of IRS rules. In light of the time value of money, companies lean toward a prior placed-in-service date while the IRS favors a later date.

In the event that an asset is purchased and stored in a warehouse, yet at the same time should be fixed before use, the IRS won't think of it as placed-in-service. The company in this way won't be permitted to take depreciation charges to bring down pretax income. Just when the asset is "placed in a state of readiness and availability for a specifically assigned function" will the IRS permit depreciation to begin. Buildings are typically viewed as placed-in-service when a certificate of occupancy is issued. Notwithstanding, there have been various debates among companies and the IRS over the specific interpretation of the placed-in-service language.

Features

• The Internal Revenue Service determines specific definitions on what is an asset that is placed-in-service.
• Companies favor a previous placed-in-service date to benefit from depreciation deductions, which brings down taxes paid.
• The date of purchase for the most part denotes the placed-in-service date yet isn't really the case.
• Placed-in-service alludes to when an asset is first placed in use to account.
• The placed-in-service date determines the point when depreciation begins or when a tax credit can be granted.