IRS Ruling Will Allow Courses to Depreciate Greens, Tees, and Fairways

The IRS issued Revenue Ruling 2001-60 on November 29, 2001. The ruling made new distinctions between push-up and modern greens. Push-up greens remain nondepreciable land improvements. But, the IRS agreed that modern greens-whether constructed with USGA, modified USGA, California or most other modern specifications-include substantial integrated drainage systems. Therefore, the costs of modern greens that are retired, abandoned or replaced along with the drainage system are now depreciable as 15-year land improvements. Costs of general earthmoving, grading and initial shaping of the area surrounding and underneath the modern green remain nondepreciable. However, the cost to construct the green-including drainage, multiple sand and gravel layers, turf, soil and the greens mix-are depreciable.

Although the ruling specifically addresses greens, the same tax benefits are expected to be applied to bunkers and tees that are built with integrated drainage systems when the IRS publicly finalizes its Industry Director Guidance guidelines in early March, according to IRS spokesman Rick Fleer. (KPMG and the NGCOA are working with the IRS to have the guidelines-which the IRS has already issued internally-made public prior to March, according to Bill Ellis partner and national director of golf tax services for KPMG, LLP.)

The ruling applies to newly built or purchased courses and allows owners to change their accounting method beginning with the 2001 tax year. That means course owners can immediately begin catching up for the costs of modern greens, tees and bunkers not depreciated, or under-depreciated, in past years.

Consider, for example, an owner with $1 million in depreciable costs from eligible construction projects that first came on-line in January 1991. Using the statutory 15-year, accelerated depreciation method, the owner could have depreciated $675,000 through 2000. If the owner had not already depreciated those costs, he or she can now deduct 25 percent of this total, under-depreciated amount ($168,750) per year in 2001, 2002, 2003 and 2004. The remaining depreciable costs ($325,000) can be depreciated normally, roughly $65,000 per year for five years beginning in 2001. This scenario results in approximately $233,750 ($168,750 and $65,000) in additional depreciation expense for 2001 and each of the next three years. That's almost $100,000 a year in actual cash savings for an owner in the highest tax brackets.

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