Getting a move on.
Typically, these expenses include legal and consulting fees for feasibility studies, architectural planning, engineering services, contract negotiations and computer installations, as well as the cost of physically moving machinery, equipment and office furniture. They also may also include expenses for travel to proposed sites and meetings with economic development groups to negotiate tax and other financial incentive packages if these are being used as inducements for the business's move. These costs may involve the investigation of multiple possible sites, even though only one site (or even no new site) ultimately is chosen.
Treatment. For financial statement purposes, these relocation costs generally are expensed when incurred. For tax purposes, they either are deducted currently as an ordinary and necessary business expense or added to the cost basis of the assets involved (to be taken over the assets' lives); the origin of the expense (that is, the asset to which the expense is attributable) determines which treatment applies.
In addition, to be currently deductible, the specific cost must meet two other tests: the allevents test and the economic performance test. In general, under the first test, an amount can be deducted only when all the events determining the liability's existence have occurred and the liability amount can be determined with reasonable accuracy. Under the second test, a taxpayer may take a deduction only after economic performance with respect to the item has occurred; for services, this occurs as they are provided.
Types of relocation costs. Since these costs may involve many different types of services, the key is the asset to which they apply. If these expenses are incurred as part of an effort that creates or obtains a capital asset, such as a lease, real property or a building, the costs must be capitalized and cannot be currently deducted. However, if the costs, at least in part, are related to some other deductible purpose, that related portion should be deductible currently. For example, amounts paid by a business to a CPA for developing a tax savings plan and analyzing the tax consequences of a relocation effort should be deductible. In addition, the costs attributable to unsuccessful relocation or expansion attempts or, if several possible sites are being considered, the expenses incurred with respect to the sites that ultimately are not selected should be deductible currently.
Costs to move property. In general, the costs of physically moving machinery and property from an existing site to a new location are deductible currently. As long as the relocation does not result in a material change in the equipment's physical or mechanical characteristics or in an extension of its useful life, and the move is not part of a general plan for improvement, the labor and transportation costs are deductible.
If business relocation costs are subject to reimbursement (as may be the case when a business is forced to relocate because of government agency actions), the expenses will be nondeductible to the extent of the reimbursement. However, if the right to reimbursement is not fixed or determinable (as when a claim for reimbursement that has been submitted has not been resolved), a deduction for the relocation expenses will be allowed.
For a discussion of these costs and other current developments, see the Tax Clinic, edited by Thomas Ochsenschlager, in the February 1995 issue of The Tax Adviser.
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|Title Annotation:||tax treatment of moving expenses|
|Publication:||Journal of Accountancy|
|Date:||Feb 1, 1995|
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