IRS Opposed to Classic Golf Courses?

[Doug Wright]

This arcane subject may be of interest to architects, supers and course owner/operators. In November, the IRS issued a revenue ruling that states that land preparation costs (earthmoving, grading and shaping) for "modern" greens are depreciable; land preparation costs for "push-up or natural soil" greens are not. The IRS defines "modern" greens as a "sophisticated improvement to the land carefully designed to facilitate drainage," with underground tiles and pipes. "Push-up" greens are defined as "essentially landscaping that involves some reshaping or regrading of the land." Those greens may have limited irrigation systems like hoses or adjacent sprinklers, but no subsurface drainage systems.

The IRS says that the "modern" greens are "inextricably associated " with the land, and presumes that these greens will be replaced when the underlying drainage tiles and pipes reach the end of their useful lives. The ruling applies not only to new "modern" greens but also to reconstruction of "modern" or even "push-up" greens using modern techniques.

So if you are building or reconstructing greens out there in GCAland, a "modern" green--including those old push-up greens that are reconstructed with all the tiles, pipes, bells and whistles etc.--is afforded more favourable tax treatment  than a push-up green sans such accoutrements.

Query--even without this tax disincentive, how many "push-up" greens are being built these days or restored without the modern conveniences?

Please note: The foregoing does not constitute legal advice. For details on this contact your friendly tax attorney.

Happy Holidays,

[Patrick_Mucci]

Doug,

I saw that when it was published, and wondered who was behind the ruling.

Most member clubs are 401 (c) 7 not for profit entities, so the ruling would have no effect on them, unless it could be tied in to unrelated income.

It would appear this may be tailored to, for profit courses built by developers.  The ruling never touched on tees or other unnatural land features which left me even more puzzled.

Perhaps some of our contributing architects can elaborate for us.

[A_Clay_Man]

I've recently heard 'modern greens" aren't all that! In many cases the native soil is a better choice. But this is all very recent.

[Jim_Kennedy]

Doug,
Interesting, I had read where they were looking at allowing depreciation of work done on bunkers and tees, not greens. Perhaps that ruling will follow this one.
 
Patrick,
501(c)(7) corps can derive up to 35% of their income from outside their membership. A maximum of 15% of this number can come from the use of club facilities or services. It would seem a private club would benefit from this ruling too. A club organized under the 501 section could start paying for green renovations with income instead of assessments. This ruling may have great rewards for architects who specialize in restorations and keeping costs of membership down for club members.  

[Mike_Young]

The National Golf Course Owners Association has been lobbying the IRS for this change for several years and has been a big push behind this change.  This has always been a stickler and it seems like golf courses and taxes have always been an unknown.  For instance,  many municipalities tax a course on the construction cost instead of the value of the business.
A couple of years ago I had a new project in Athens, GA. that was valued by the tax appraiser at $160,000 per hole while the Athens CC course was valued at less than $10,000 per hole.  Due to when it was built...And it is a Ross built in 1925.  And it has 1000 members and makes money.
As for tees... when they were lobbying, they were lobbying for all items that need replacing on a course.  You have always been able to depreciate irrigation....I don't know about drainage.   Also, I don't think they meant to say " the useful life of the tiles and pipes".   A modern greens starts to "wear out the day it is planted due to a build up of organic matter etc. that takes it perc rate under the recommended amount.
I would think if you have tees that are built in a similar manner ; then the same would apply.
Does anyone know what the schedule is?? Or what do you think it should be?  Here we try for a green to last 20 years.  

[Doug Wright]

Mike,

The ruling says that subsurface drainage tiles or pipes typically are replaced within 20 years, so that would be the "useful life" of the tiles and green prep costs for purposes of depreciation. My understanding is that you can depreciate drain tiles and pipes, and what the IRS was doing in the ruling was to link the land preparation work on greens with those tiles and pipes to the useful life of the underlying drainage system (again, 20 years). I believe the same approach should apply to tees--if you have some kind of drainage system under the tee all the tee preparation work would be depreciable.

Please note: The foregoing does not constitute legal advice. For details on this contact your friendly tax attorney.  

Happy Holidays,

[Peter Galea]

I think the ruling said '15 years'.

[Doug Wright]

Pete,

We're both right Here's some real technical IRS BS for you:

The subject facilities and improvements are included in asset class 00.3. Assets included in asset class 00.3 have a recovery period of 15 years for purposes of Section 168(a) of the Internal Revenue Code (the general depreciation system) and 20 years for purposes of Section 168(g) of the Internal Revenue Code (the alternative depreciation system). Why the difference? Who the hell knows  

Please note: The foregoing does not constitute legal advice. For details on this contact your friendly tax attorney.

Happy Holidays,

[TEPaul]

This is very interesting to me particularly since we're about to do tees, green expansion, bunkers and such and in one case a green redesign/addition. All our old greens are pushups and I would prefer that the green we're redoing be similar for consistency. It seems to me that there might be plenty of fudge factor in this if and when we list for depreciation.

Pat:

I could be wrong but, even if a club is "not for profit" they can certainly take advantage of depeciating assets like anyone else.

[Doug Wright]

TE,

"...there might be plenty of fudge factor in this..."

Watch out TE, one of our lurkers could be an IRS agent...

Happy Holidays,

[TEPaul]

I know, I know, but we're going to produce some of the best fudge you ever saw and I've not met an IRS agent yet who is likely to core on down into the green to see what's under there!

Can you imagine the legit depreciation that Augusta could take on what's under #12? I swear they have hot and cold everything and anything you want under there. I could probably live under there and be happy!

[Patrick_Mucci]

TEPaul,

If the club's not for profit and has little or no unrelated business income, how can depreciation help from a cash flow perspective ?

[TEPaul]

Pat:

Isn't a cash flow statement just one element in a club's financial statement?

[Kevin_Reilly]

TEPaul, not to get too technical, but depreciation doesn't generate cash flow unless you get some sort of tax deduction for it.  On a cash flow statement depreciation is always presented as a non-cash expense.

Patrick's point is correct...most private clubs that don't generate a lot of unrelated business income (taxable for nonprofits) get no tax benefit from the expense being deductible.

[TEPaul]

Kevin:

I don't really know much about accounting and stuff but my club is a not for profit and it looks to me like we depreciate our assets--not to we take a deduction but we depreciate our assets--would this particular post subject not include that method we use? Get as technical as you want--I'm interested!

[Kevin_Reilly]

TEPaul,

Your club is required to depreciate all of its assets on its GAAP (financial accounting) statements, but this expense is non-cash and is intended to simply display the degradation over time of all of the assets.

On your club's tax return you similarly record depreciation expense, but unless the club pays tax (which it would only if it had unrelated business income) then the amount of the depreciation expense really doesn't matter.  

An example of a similar concept is the fact that long term capital gains are taxed at a lower rate than short term capital gains...means a lot to you or me, but doesn't mean much to the Rockefeller Foundation for its securities investments because they don't pay ANY tax on their capital gains.

That being said, you don't know for a fact that your club will never pay tax, so it makes sense to use the most favorable depreciation rules that you are entitled to.  But recognize that rules like this are more relevant to for-profit course operators and the like.

[TEPaul]

Kevin:

Thanks! looks like that push-up green will be the thing for us afterall!

[Patrick_Mucci]

TEPaul,

RE: Your fudge factor.

Please be advised that this past Thanksgiving vacation,
I played with a fellow who visits this site, that's how I met him

Please be further advised that he works for the JUSTICE
DEPARTMENT, CRIMINAL TAX DIVISION, Washington, D.C..

I advise this because I don't want to read about you in the papers, or see you on the six o'clock news, like I did Leona Helmsley or Marc Rich.

The positive side is, look at all the free time you'll have for your research.  

[TEPaul]

Pat:

Ok, OK, I promise, we'll build a USGA spec green and I'll even call and invite the IRS over for a round of golf and invite him to watch us build it and we'll even forget about the depreciaton--particularly since Kevin tells me it doesn't really matter anyway!