Dredging Costs-Depreciate or Expense

[Sabre]

A client of mine has a marina and is going to pay about 2 million over the next four months ( $500,000) each month to do maintenance dredging which should last about 5 years- what kind of tax deduction am I looking at- any code references would also be helpful.

We do have the ability to speed up the two payments due in 2014.

Thanks for your help!

[buzzardbreath]

Capitalize

Sabre, I will admit to not having a cite, but regardless of any express designation in the Code/Regs of dredging costs, I believe it should be capitalized.

There is some evidence that the IRS prefers a limit to how much advance "prepaid" expense can be deducted, and this is normally one year. You tell us that this will have to be done again in five years, so I don't believe this is a capital expenditure under any means, i.e. not depreciable.

If not a capital expenditure, then it is an expense item. I believe the current year's expense plus one additional year can be deducted, i.e. $200,000 as a repair. $300,000 should be amortized at $100,000/yr beginning the next year removed.

My opinion.

[Nashville]

Solicit More Opinions

Would like to hear from some more opinions on this other than BuzzardBreath.

This is a classic capitalize versus expense question. Interested also how you handle this under GAAP, and
whether a book-to-tax timing adjustment would be created.

[TaxGuyBill]

Depreciate It

Try Rev Rule 1968-483:

The original costs of dredging a slip during the construction of a pier
facility are not depreciable; however, periodic redredgings are depreciable
intangible assets with useful lives measurable by the frequency of
redredging if the period of usefulness exceeds one year.

Rev Rule 1975-137:

Depreciation; dredging and excavation costs. Costs of excavating water
canals and dredging channels in harbors and slips are investments in
tangible property and are depreciable if the asset is actually exhausting
and the exhaustion is susceptible to measurement; Rev. Ruls. 66-71, 68-280,
68-483, 69-78 modified, and 69-606 clarified.

[buzzardbreath]

Excellent Response

Great response with cites, TaxGuyBill, whoever you are.

I notice this is your first post. Welcome to our forum, and hope you will post answers to tough questions again...

[Sabre]

Thanks TaxGuy Bill

I will review those rulings.