TCJA Takeaways on Bonus Depreciation and Cost Segregation (article)
Most taxpayers will have had recent discussions with their tax and other financial advisors as the recent corporate and personal tax filing deadlines approached and are now more familiar with key relevant changes of the Tax Cuts and Jobs Act of 2017 (TCJA). Now is the time for individuals and corporate entities alike to begin to develop their tax compliance and management strategies. For commercial real estate owners and investors, there are several advantageous features to consider. Cost segregation studies will continue to be key in identifying and substantiating preferred tax treatments.
- Bonus Depreciation: Bonus depreciation of 100% on qualifying assets (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 Sept. 27, 2017 (through 2022) for this treatment, as well. A cost segregation study will establish what costs will qualify for 100% bonus depreciation.
- Importance of In-Service Date: For newly acquired or constructed property, it is important to know when a binding contract was entered into between the parties, as pre Sept. 27, 2017 contracts may not qualify for 100% bonus even if the property is placed in service after Sept. 28, 2017.
- 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% deduction for pass-throughs in play for 2018, the effective federal tax rate drops from 39.6% to 29.6% (37% x 80%). 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.
- Look-Back Deductions: Cost segregation studies can provide significant tax benefits for properties that have been placed in service several years back. A look-back study can help identify costs that can be depreciated over a shorter period of time that are currently being depreciated over longer periods. The look-back deduction can be claimed on the next filed tax return without the need to amend any previously filed tax returns. The IRS considers this an automatic change of accounting method and is prepared by completing Form 3115.
- The Tangible Property Regulations (TPR): TPRs are still in play. There are potentially significant tax benefits in analyzing improvements made to buildings as the TPRs recognize the ability to deduct certain renovation costs as repair expenses if applicable, even if incurred in a prior year.
- Partial Asset Dispositions (PAD): The PAD provides for the ability to take a deduction for the net book value of assets removed resulting from a renovation performed. A cost segregation study can assist in helping identify the original cost of the assets that have been removed, if not previously identified.
In summary, there are significant potential tax savings, utilizing both cost segregation studies and the tangible property regulations. The ability to perform look-back studies as well as to potentially reclassify renovations that were previously capitalized to a repair expense can be facilitated without the need to amend previously filed tax returns.
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Larry Rosenblum is a Managing Director in the CBIZ MHM Boca Raton office and CBIZ national Cost Segregation practice leader. For additional information regarding tax reform, cost segregation studies and other tax matters, feel free to connect with him at firstname.lastname@example.org or (561) 922-3006.