Real estate, like many professions, has its own unique jargon. And when you move into the world of commercial real estate, you start encountering terms that are even more niche. One of these is FF&E, or furniture, fixtures, and equipment. Keep reading to find out what types of items are and aren’t included in the FF&E umbrella, and why it’s an important term in commercial real estate. (Hint: It has something to do with taxes and accounting!)
What Is FF&E?
FF&E refers to furniture, fixtures, and equipment. In some cases, the word “equipment” is replaced by “accessories,” in which case the term becomes “FF&A.” So, which items count as FF&E, and which ones don’t?
To begin with, FF&E cannot include any items that are part of the building. So while a faucet or light fixture is considered a fixture in ordinary parlance, these types of fixtures are not considered to be FF&E. FF&E refers to objects or assets that are movable and could be taken out of the building and used elsewhere. These include furniture, shelving, industrial equipment, grocery checkout lanes, and other similar features.
In most commercial real estate situations, some FF&E is owned by the property owner, and some is owned by the tenant. For example, in an office building, it would be perfectly normal for the tenant to provide their own desks and chairs.
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Why Is FF&E important In Real Estate?
Whether you’re a landlord or a commercial tenant, FF&E is an important part of your business’ accounting and taxes. This is because FF&E items depreciate differently from real estate and other property types. Therefore, they have a significant impact on your company’s book value.
To understand how significant the difference is, consider the difference between computers and real estate. Because they tend to go obsolete, computers depreciate very quickly, over a five-year timespan. An office building, on the other hand, depreciates much less over five years.
This is important because you might be foregoing FF&E deductions that could save your company a significant amount of taxes.
Factors That Determine The Value of FF&E
Before you figure out how to depreciate your FF&E assets, you need to know what types of items you can include. The last thing you want to do is overvalue your FF&E and get in trouble with the IRS. At the same time, you don’t want to pass up on any deductions that you’re legally entitled to.
Which exact items are FF&E will vary from industry to industry and from company to company. This is where it’s helpful to have an accountant work through the details. That said, FF&E assets normally share three common attributes:
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Functionality. To count as FF&E, it’s not enough that an item is present on the property and belongs to your company. It also has to serve a function in your company’s business operations. Take a warehouse, for example. The forklifts, racking, and pallet-wrapping equipment would all be considered FF&E since they’re a part of the business. But a pile of broken old shelves on the premises would not count, even if the metal has value as scrap.
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Durability. Some items have such a short useful lifespan that they’re considered disposable. These are items with a useful life of 12 months or less in most cases. If it doesn’t last for a whole tax year, it doesn’t count. Take a restaurant, for example. The register and furniture are FF&E, but food and paper napkins are not. That’s because food is not expected to last 12 months, and napkins only last for a single meal. They may be essential to the business, but they don’t last. That said, such items will often count as operating supplies and equipment (OS&E).
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Useful life. All FF&E assets have a designated useful life for tax purposes. Each year, the assets lose a percentage of their book value until that value drops to zero. Since different items have different useful lives, it’s important to know how much to deduct each year on your taxes.
Examples of FF&E
It’s impossible to list every single item that could be considered FF&E. That said, here’s a list of some of the most common assets:
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Electronics. Computers, point of sale systems, speakers, and stereo systems are some of the most common examples.
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Industry-specific assets. These are machines or equipment that are necessary for your particular line of business. For example, a microbrewery has all kinds of bottling and sanitizing equipment. A gym has treadmills, weights, and other workout machines. A mom and pop shop might have a safe and a cash counting machine.
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Furniture. Desks, chairs, sofas, bookcases, and most retail shelving is considered FF&E.
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Decorative items. Sculptures, photos, wall hangings, and other removable cosmetic features.
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Non-permanent lighting. Floor lamps, rope lights, and anything else that isn’t hardwired into the building.
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Security equipment. This includes machines like metal detectors that can be easily removed from the building.
The rule of thumb for determining whether an item is FF&E is simple. An item is normally considered FF&E if:
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It has a useful life of 12 months or longer.
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It’s not a product that the business sells to customers.
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It can easily be removed from the building and used elsewhere.
Example of FF&E Accounting Treatment
FF&E items lose their book value over time in a process called depreciation. The IRS provides guidelines for the rate at which different assets appreciate. As an asset depreciates, an accountant will be able to claim a tax deduction for the depreciated amount. You can also spread out your costs over the same period, so you don’t have to account for a significant expense all at once.
If that sounds confusing, it really isn’t. Let’s look at a quick example to see how this works in practice.
Example of FF&E Depreciation
Your company invests in a batch of new servers with a value of $100,000. According to the IRS, computing equipment has a useful life of five years. Let’s also assume that the servers are expected to retain 10% of their value as salvage. Here’s how the servers’ book value would look:
[$100,000 – (10% x $100,000)]/60 months = $1,500.
On your books, your server equipment would lose $1,500 in value every month until the end of 60 months, when it would have a book value of $10,000.
What Is Not Covered In The FF&E?
Before we wrap up, let’s discuss which items aren’t considered FF&E. Here are examples of things that don’t count as FF&E:
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Office supplies. Things like pens, paper, and staples are considered to have a useful life of less than 12 months. Therefore, they don’t count as FF&E.
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Anything that would make the building non-functional. Toilets, faucets, and HVAC units might all technically be removable. But for legal purposes, they’re considered part of the building, not FF&E.
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Consumables. Food, drink, paper towels, and other single-use items don’t count.
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Built-in furniture. Built-in benches, booths, desks, and bookcases that are part of the building are not considered FF&E.
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Ordinary inventory. Items that your business sells or produces are not considered FF&E. For example, if you manufacture tires, you can’t claim the tires in your factory as FF&E.
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Intangible assets. FF&E only includes physical objects. Non-physical assets like intellectual property and stock don’t count as FF&E.
Summary
As you can see, the concept of FF&E is pretty straightforward. As long as you keep the basic principles in mind, it’s usually easy to determine whether or not an asset is FF&E. Keeping inventory of your FF&E assets is an important practice for your real estate investing business. This is because FF&E items depreciate differently than other real estate-related assets, which in turn impacts how you do your accounting and report your finances for tax purposes. It’s helpful if you have an accountant on your team who can help you keep track of your FF&E values and depreciation schedules.
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