Unit of Property (UOP) Definition For Tax Purposes
Below, discover how the IRS defines a unit of property (UOP) for tax purposes. This information is useful to all taxpayers who own both buildings and other, non-structural assets.
At the beginning of any discussion related to the tangible property capitalization and repair regulations, one must have an understanding of a unit of property (UOP). The determination of a unit of property is based on the functional interdependence standard.
UOP Defined
For purposes of the tangible property capitalization rules:
UOP for assets other than buildings - Generally a UOP consists of all the components that are functionally interdependent (i.e., where placing in service of one component is dependent on the placing in service of other component(s)). (Reg. Sec. 1.263(a)-3(e)(3)(i))
UOP for a building - Generally is the building and its structural components. (Reg § 1.263(a)3(e)(2)(i))
In general, amounts paid for new buildings or for permanent improvements or betterments made to increase the value of any property or the cost of restoring the property must be capitalized. A unit of property is improved if the amounts paid for activities performed after the property is placed in service by the taxpayer result in betterment to the unit of property (UOP), restore the UOP, or adapt the UOP to a new or different use.
UOP for Assets Other Than Buildings
In general, for real or personal property that isn't classified as a building, all the components that are functionally interdependent comprise a single UOP. Components of property are functionally interdependent if the placing in service of one component by the taxpayer is dependent on the placing in service of the other component by the taxpayer. (Reg. § 1.263(a)-3(e)(3)(i))
“ Example – Not Functionally Interdependent: Xavier is a self-employed accountant who purchased a laptop computer and a printer for use in his business. The computer and printer are separate units of property because they are not functionally interdependent since placing the computer in service is not dependent on placing the printer in service.Example – Functionally Interdependent: Lorna is the proprietor of a nursery and landscaping business. She purchased a battery-powered golf cart to use getting around the nursery grounds. She purchased the cart chassis from one vendor and the battery from another and assembled the two components. Because the cart can’t operate without the battery, the electric golf cart is a single unit of property. ”
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UOP for Buildings
In general, each building and its structural components are one UOP - "the building." Amounts are treated as paid for an improvement to a building, and thus capitalized, if they improve:
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the building structure; or
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any designated building system.
A building structure consists of a building and its structural components (Reg. Sec 1.48-1(e)) (unless the component is a building system). (Reg. § 1.263(a)-3(e)(2)(ii)) Under Reg. § 1.48-1(e)(2), the term "structural components" includes such parts of a building as walls, partitions, floors, and ceilings, as well as any permanent coverings therefor such as paneling or tiling; windows and doors; and other components relating to the operation or maintenance of a building.
“ Example - If a business restores a building structure, such as replacing the entire roof down to the rafters, the expense generally is treated as an improvement to the single UOP consisting of the building. Similarly, if it improves a building system, such as an improvement to the heating, ventilation, and air conditioning (HVAC) system, then the expense constitutes an improvement to the building UOP. ”
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A building system consists of the following nine structural components. Each of them (including their subcomponents) is a building system that is separate from the building structure, and to which the improvement rules must be separately applied (Reg. § 1.263(a)-3(e)(2)(ii)(B)):
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Heating, ventilation, and air conditioning (HVAC) systems, including motors, compressors, boiler, furnace, chillers, pipes, ducts, and radiators;
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Plumbing systems – including pipes, drains, valves, sinks, bathtubs, toilets, water and sanitary sewer collection equipment, and site utility equipment used to distribute water and waste to and from the property lines and between buildings and other permanent structures;
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Electrical systems – including wiring, outlets, junction boxes, lighting fixtures and associated connectors, and site utility equipment used to distribute electricity from property line to and between buildings and other permanent structures;
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Escalators;
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Elevators;
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Fire-protection and alarm systems – including sensing devices, computer controls, sprinkler heads, sprinkler mains, associated piping or plumbing, pumps, visual and audible alarms, alarm control panels, heat and smoke detection devices, fire escapes, fire doors, emergency exit lighting and signage, and fire fighting equipment, such as extinguishers and hoses;
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Security systems for the protection of the building and its occupants – including window and door locks, security cameras, recorders, monitors, motion detectors, security lighting, alarm systems, entry and access systems, related junction boxes, associated wiring and conduit;
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Gas distribution system – including associated pipes and equipment used to distribute gas to and from property line and between buildings or permanent structures; and
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Other structural components identified by IRS in published guidance.
“ Example 3 (Reg. Sec. 1.263(a)-3) - Building structure and systems; condominium - C owns a condominium unit in a condominium office building and uses the condominium unit in its business of providing medical services. The condominium unit contains two restrooms, each of which contains a sink, a toilet, water and drainage pipes and other bathroom fixtures. C pays an amount for labor and materials to perform work on the pipes, sinks, toilets, and plumbing fixtures that are part of the condominium. If an amount paid by C for work on pipes, sinks, toilets, and plumbing fixtures is an improvement (for example, a betterment) to the portion of the plumbing system that is part of C's condominium, C must treat this amount as an improvement to the condominium. ”
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Depreciation
The UOP definitions apply only for purposes of the capitalization rules, but not for depreciation purposes. For example, treating an asset as part of a larger unit of property for capitalization purposes doesn't affect how that asset is treated for depreciation purposes. Thus, the characterization of an asset for depreciation purposes overrides UOP rules.
Notwithstanding the UOP rules, a component (or a group of components) of a UOP must be treated as a separate UOP for depreciation purposes if, when the taxpayer initially placed the UOP in service, the taxpayer:
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Properly treated the component as being within a different class (see page 3.27.06) of property under Code Sec. 168(e) for MACRS depreciation purposes than the class of the UOP of which the component is a part; OR
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Properly depreciated the component using a different depreciation method than the depreciation method of the UOP of which the component is a part. (Reg. § 1.263(a)-3(e)(5)(i))
“ Example – Tires used on transport industry trucks are often depreciated as a separate asset over five years rather than over the three-year period that applies to the remaining portion of the truck. The tires are a separate unit of property in the year the truck is placed in service (Reg. §1.263(a)-3(e)(6), ex. 16). ”
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Special rules are included in the regulations for leased property, condominiums and cooperatives (not discussed here).