The Fire Sprinkler Incentive Act and Tax Deductions

Legislative efforts have long sought to encourage property owners to install fire safety equipment. The Fire Sprinkler Incentive Act was a proposed piece of legislation designed to make these installations more affordable for building owners through federal tax incentives. The goal of this initiative was to reclassify fire sprinkler systems within the tax code, allowing for a faster recovery of the significant upfront cost associated with retrofitting or installing these systems. By making the installation financially more manageable, the act aimed to increase the number of buildings protected by automatic sprinkler systems, which helps reduce the economic and human losses caused by fires.

Tax Treatment of Fire Sprinkler Systems

While the Fire Sprinkler Incentive Act itself did not become law, its objectives were largely realized through tax code revisions. The Tax Cuts and Jobs Act of 2017 (TCJA) and the subsequent Coronavirus Aid, Relief, and Economic Security (CARES) Act brought about these changes. These laws altered how the costs of installing fire sprinkler systems are treated for tax purposes, moving them from a lengthy depreciation schedule to one that allows for immediate or accelerated deductions.

The mechanism for this change is the concept of Qualified Improvement Property (QIP). QIP is defined as any improvement made to the interior portion of a nonresidential building that occurs after the building has already been placed in service. A technical correction in the CARES Act clarified that QIP has a 15-year recovery period for depreciation purposes. Previously, under the TCJA, these improvements were inadvertently assigned the same 39-year recovery period as the commercial building structure itself.

This reclassification of fire sprinkler systems as 15-year QIP makes them eligible for two tax incentives. The first is 100% bonus depreciation, which allows a business to deduct the full cost of the sprinkler system in the first year it is placed in service. The bonus depreciation percentage is scheduled to phase down, decreasing to 60% for property placed in service in 2024, 40% in 2025, and 20% in 2026, before being eliminated.

An alternative to bonus depreciation is Section 179 expensing. This provision of the tax code allows a taxpayer to elect to treat the cost of qualifying property as an expense and deduct it in the year the property is placed in service. For 2025, the maximum Section 179 expense deduction is $1,250,000.

This deduction is subject to a phase-out threshold of $3,130,000 in total equipment purchases. If a business’s total investment in qualifying property for the year exceeds this threshold, the Section 179 deduction is reduced dollar-for-dollar. This makes it a useful option for many small and medium-sized businesses.

Eligible Properties and Systems

The tax incentives for fire sprinkler installations are specifically targeted at nonresidential real property. This category includes a wide range of commercial buildings such as offices, retail establishments, industrial warehouses, and hospitality venues. The property must be used for business or income-producing activities. Consequently, residential rental properties are excluded from eligibility for these specific incentives related to Qualified Improvement Property.

A new fire sprinkler system installed during the ground-up construction of a building would not be considered QIP. Instead, it would be part of the building’s original cost and depreciated over the standard 39-year period for a commercial structure.

The incentives apply to the complete installation of a fire protection sprinkler system. This includes the costs of pipes, sprinkler heads, valves, and all related components that form the operational system. The costs associated with retrofitting or upgrading an existing sprinkler system also qualify for these deductions.

Claiming the Tax Deduction

To claim the tax deduction for a fire sprinkler system, property owners must use IRS Form 4562, “Depreciation and Amortization.” This form is filed along with the business’s annual income tax return and is used to report both Section 179 expensing and bonus depreciation.

When electing to use Section 179, the taxpayer completes Part I of Form 4562. Here, they will list a description of the property and enter its total cost. The form requires the taxpayer to calculate the elected cost to be expensed, ensuring it does not exceed the annual dollar limitation.

If the taxpayer chooses to take bonus depreciation, the fire sprinkler system would be listed in Part II of Form 4562. The system would be identified as 15-year property, and the taxpayer would calculate the bonus depreciation amount based on the property’s cost and the applicable percentage for that year. Bonus depreciation is automatic for qualifying property unless the taxpayer explicitly elects out of it.

Maintaining thorough records is required, regardless of the method chosen. Business owners must keep all documentation related to the fire sprinkler installation, including detailed invoices, canceled checks, or other proofs of payment. These records substantiate the cost of the system and the date it was placed in service, which are necessary for completing Form 4562 and for verification in the event of an IRS audit.