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 for the purpose of accounting, primarily to calculate depreciation or grant a tax credit. The date the asset is placed in service marks the beginning of the depreciation period. Placed-in-service also applies to property in the 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.
- Placed-in-service refers to when an asset is first placed in use for the purpose of accounting.
- The placed-in-service date determines the point when depreciation begins or when a tax credit can be granted.
- The date of purchase usually marks the placed-in-service date but is not necessarily the case.
- The Internal Revenue Service specifies specific definitions on what constitutes an asset that is placed-in-service.
- Companies prefer an earlier placed-in-service date to benefit from depreciation deductions, which lowers taxes paid.
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. A company can reduce its pretax earnings by making depreciation deductions and therefore have to pay less tax.
According to the 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 purpose 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, it 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. Because of the time value of money, companies prefer an earlier placed-in-service date while the IRS prefers a later date.
If an asset is purchased and stored in a warehouse, but still needs to be fixed before use, 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. Buildings are usually considered placed-in-service when a certificate of occupancy is issued. However, there have been numerous disputes between companies and the IRS over the exact interpretation of the placed-in-service language.