6 TCJA Takeaways on Bonus Depreciation and Cost Segregation (article)
Virtually all taxpayers will be impacted in some way by the new tax law introduced as the Tax Cuts and Jobs Act of 2017 (TCJA). Individuals and corporate entities alike now endeavor to identify key relevant changes as they plot out their tax compliance and management strategies. For commercial real estate owners and investors, there are several advantageous features to consider. Cost segregation studies will be key in identifying and substantiating preferred tax treatments.
- Bonus depreciation: Bonus depreciation of 100 percent (immediate expensing) is a key benefit for real estate owners and investors. Prior to TCJA, bonus depreciation only applied to newly constructed or original use property. TCJA includes used property acquired after September 27, 2017 (through 2022) for this treatment as well. Additionally, properties under $1MM can now take advantage of bonus depreciation. A cost segregation study will establish what costs will qualify for 100 percent bonus depreciation.
- Importance of in service date: For newly constructed property, it is important to know when a binding contract was entered into between the owner and the general contractor for construction, as pre Sept. 27, 2017 contracts will not get 100 percent bonus even if the property is placed in service after Sept. 28, 2017 – but will get 50 percent bonus based on the contract date.
- Increased 179 Expenses: Qualifying property now includes roofs, HVAC systems, fire protection, alarm systems, and security systems. Additionally the allowable expense has been increased from $500,000 to $1,000,000 in 2018, with the phase-out deduction increased to $2.5M. These rules now include tangible personal property acquired for rental properties, furniture, and appliances and add another benefit and increased value to a cost segregation study.
- Pass-through Deduction: With the potential 20 percent deduction for pass-throughs in play for 2018, the effective federal tax rate drops from 39.6 percent to 29.6 percent (37 percent x 80 percent). While each case is unique, it may be beneficial to take advantage of the deduction against a higher rate of tax in 2017, if possible. You will want to discuss this with your tax advisor.
- Qualified Improvement Property (QIP): There are no longer separate requirements for Qualified Leasehold Improvement Property (QLIP) and Qualified Restaurant Property (QRP) and Qualified Retail Improvement Property (QRIP). These separate distinctions were eliminated as of Dec. 31, 2017, leaving only Qualified Improvement Property (QIP). For example, restaurant structure will now be depreciated over 39 years.
NOTE: A significant drafting error failed to grant QIP the reduced 15-year class life. The result is depreciation over 39 years and no qualification for 100 percent expensing without correction. This is expected to be addressed in a future technical corrections bill, although that is not certain. Bonus depreciation is still available for qualifying assets as long as they are non-structural in nature.
- The Tangible Property Regulations (TPR): TPR are still in play. There still are significant tax benefits in analyzing improvements made to buildings as the TPR’s still recognize the ability to deduct certain renovation costs as repair expenses if applicable.
In summary, it appears there will be both benefits and tradeoffs to consider for commercial real estate owners and investors. Clearly, though, cost segregation studies will be one important measure to properly evaluate and substantiate preferred tax treatments under TCJA.
For additional information and questions regarding TCJA, cost segregation studies and other tax matters, feel free to connect directly with Larry Rosenblum (561-922-3006).
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