Commercial Real Estate Blog by Madison

Off-the-Wall Savings – How Businesses with Demountable Walls are Saving on Taxes

The traditional office workspace has come a long way since the classic mahogany desk in a corner office. Thanks to technological advances, many employees can and do work from anywhere, which makes creating a vibrant and thriving office a new challenge. Today’s leading companies are creating office space that encourages collaboration with an interactive atmosphere. The modern office environment focuses on the employee experience within the company culture.

Many times, this environment is created with moveable office space made from demountable walls. Demountable or moveable walls are partitions that are pre-engineered and manufactured. Demountable walls offer businesses a simple way to build out and customize their work space.

Companies opt for walls that can be configured with customizable panels and different options for desk and storage spaces. These flexible interiors allow organizations to change the aesthetics, functionality and size of various office spaces in order to suit changing needs. Demountable walls also come with technological add-ins, such as plug-and-play power and data, so there is no need to rewire cables every time there is a change.

This trend in demountable walls has spread to corporations, educational institutions, health care and government organizations. While the initial project costs for demountable walls are higher than standard construction, this cost difference can be offset by major tax savings. Demountable walls are not considered a structural component of the building and therefore qualify for accelerated tax depreciation. Under Revenue Procedure 87-56, demountable walls fall under Asset Class 00.11: office furniture, fixtures and equipment, which allow it to be depreciated over a five or seven year life-span for tax purposes, rather than 27.5 or 39 years.

For example, XYZ Corporation is a full-service accounting firm with employees that perform tax functions and others that perform audit functions. The audit employees tend to be out at client locations for a large part of every week. XYZ wants to reconfigure its 10,000 SF office to include flexible work environments. Based on several quotes XYZ received from local contractors, they are considering two options:

A) Build permanent workspaces, using drywall. This would cost the company approximately $500,000.

B) Build temporary, flexible spaces using a combination of demountable partitions and accessories that include flexible and moveable/sliding cabinets. This would cost the company approximately $850,000.

In reviewing both options, XYZ needs to take into account the fact that on their own corporate tax return, the $500,000 would be capitalized and depreciated over a 39-year life-span, giving the company a deduction for depreciation of about $12,500 per year. On the other hand, if XYZ were to invest into the demountable option, XYZ would be able to depreciate the entire $850,000 over a five or seven year life-span if they did a cost segregation study. This would give the company a tax deduction of approximately either $170,000 or $120,000 (over five or seven years). The after-tax benefits of Option B, combined with the flexibility of the workspace, would provide a very suitable and worthwhile investment for XYZ.

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