The Whiteco factors help identify which components of a building qualify for accelerated depreciation in a cost segregation analysis by distinguishing personal property from real property. Originating from the 1975 Whiteco Industries, Inc. v. Commissioner Tax Court case, these factors provide a straightforward set of criteria for determining asset classification. Therefore, applying these factors to modular buildings, which contain movable and often temporary components, allows owners to maximize tax savings by leveraging modular construction’s unique characteristics.
Understanding the Whiteco Factors for Modular Building Components
Each of the six Whiteco factors assesses an asset’s physical characteristics and functional intent. When applied to modular construction, these criteria become powerful tools for a cost segregation study. Here’s a breakdown of the Whiteco factors and how they apply to modular buildings:
1. Movability
- What It Assesses: Can the component be easily moved?
- Application: Building modules are inherently designed to be moved. They have to be moved from the factory to the project before they are set and they can be designed to be easily deconstructed to be moved later on down the road provided they are Reversible Buildings. In contrast, permanent structural elements generally fall under real property.
2. Manner of Attachment
- What It Assesses: How firmly is the asset attached to the building?
- Application: Building modules can be designed with reversible connections. Thereby allowing removal without damaging the modules or any other portion of the main structure.
3. Intended Use
- What It Assesses: Was the component designed to be permanent, or is it temporary?
- Application: Modular buildings often have life cycles that can require changes to the building form or size. EVstudio’s Certified Reversible Buildings, for example, contemplate deconstruction and re-use in other locations, or optional configuration changes for the project. Consequently, these adaptable components align with personal property standards and may qualify for shorter depreciation lives.
4. Relocation Costs
- What It Assesses: How costly and challenging is it to relocate the asset?
- Application: Modules that are reversibly designed to be moved efficiently can fall under personal property. For example, EVstudio’s proprietary Reversible Buildings feature low relocation costs and may qualify for accelerated depreciation.
5. Damage upon Removal
- What It Assesses: Can the asset be removed without harming the main structure?
- Application: Modular buildings excel in creating components that can be removed without structural damage. Modules can be designed specifically to minimize damage for re-use and re-location of the modules. As a result, this characteristic generally can classify the asset as personal property.
6. Custom Design
- What It Assesses: Can the asset be reused elsewhere, or is it custom-designed for the building?
- Application: Modules that have a purpose and function in a variety of different contexts and locations can qualify as personal property. Conversely, highly customized elements like load-bearing walls in traditional construction are considered real property.
A crane lifts a modular box off of a semi truck.
Impact of Whiteco on Modular Construction Cost Segregation
Using the Whiteco factors for modular buildings allows owners to classify movable components as personal property. Therefore, this approach accelerates depreciation and generates tax benefits, especially in early ownership years. Properly documenting modular elements in alignment with Whiteco criteria helps ensure compliance with IRS standards, as building codes and classifications can vary widely. EVstudio’s proprietary Reversible Design (TM) process provides the necessary design documentation to support your Cost Segregation analysis.
Example: Modular Hotel with Relocatable Components
Consider a modular hotel featuring fully volumetric modular design. Under the Whiteco factors, a cost segregation analysis might classify the modules and everything in them as personal property, enabling shorter depreciation periods. By differentiating components this way, the hotel can achieve significant tax savings and reduce up-front costs, making modular construction particularly appealing.
Conclusion: Using Whiteco Factors for Modular Construction Benefits
Cost segregation for modular buildings relies on a careful Whiteco analysis to maximize tax benefits while meeting IRS standards. Applying these factors to a project can help streamline classification, creating opportunities for accelerated depreciation and significant financial benefits.
For detailed guidance, consult the IRS Cost Segregation Audit Techniques Guide and your CPA or Cost Segregation professional to ensure assets qualify as personal property based on the Whiteco framework. While EVstudio can provide the design documentation to support your Cost Segregation analysis, we do not provide any tax or legal advice. Connect with our experts today to learn more!
