What Does Placed-In-Service Mean?
Placed-in-service is the point in time when property or long-term assets that can be depreciated or granted a tax credit are first placed in use for the purposes of accounting. The date the asset is placed in service marks the beginning of the depreciation period. Placed-in-service also applies to property in determination of the amount of its investment tax credit. The date of purchase usually marks when an asset is placed in service, but a company will follow specific tax guidelines to designate that particular date.
The placed-in-service date is important to a company for tax reporting purposes because it marks the beginning of the recording of depreciation expense that impacts pretax earnings. According to Internal Revenue Service (IRS) Reg. Sec. 1.167(a)-(11)(e)(1), property is considered to be placed in service when it is "first placed in a condition or state of readiness and availability for a specifically assigned function." This may or may not 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 the same criterion as the above regulation for the purposes of an investment tax credit for the purchase of property.
Importance of the Placed-In-Service Date
Depreciation is a major tax shield for corporations. When an asset is officially placed in service can have a material impact on reported pretax earnings and therefore the amount of tax that a company must pay. A company will want to place an asset in service as soon as possible to start recording depreciation expenses, but it must be careful not to run afoul of IRS rules. If an asset is purchased and stored in a warehouse, the IRS will not consider it placed-in-service. The company thus will not be allowed to take depreciation charges to lower pretax income. Only when the asset is "placed in a state of readiness and availability for a specifically assigned function" will the IRS allow depreciation to commence. However, there have been numerous disputes between companies and the IRS over the exact interpretation of the language.