Own Commercial Real Estate? Here are 3 Things to Consider Before 2022 Ends

Own Commercial Real Estate? Here are 3 Things to Consider Before 2022 Ends

As we approach the end of 2022, thoughts inevitably turn to taxes — specifically, ways to lower your tax bill. So, if you're a commercial real estate owner, it's important to note some recent critical changes that could save you money.

This year marks the last chance to take advantage of the 100% real estate bonus depreciation, so it's essential to act now. The Inflation Reduction Act (IRA) has also introduced a higher energy tax deduction, making going green a more lucrative option. And with the year coming to a close, it is an excellent time to consider a cost segregation or lookback study to see if your property qualifies for any tax benefits, even after a project or purchase is complete.

Here we’ll discuss some details on how these three strategies may save you money on your taxes.

Take Advantage of Bonus Depreciation

If you need to make property improvements or other purchases, getting them in service before the end of this year can allow you to take advantage of bonus depreciation to expense up to 100% of the cost. Otherwise, the costs will be 80% bonus eligible if placed in service in 2023.

Bonus depreciation is a tax incentive that allows taxpayers to deduct a larger percentage of the cost of qualifying property in the year it is placed in service. Qualified property may include machinery, equipment, vehicles and depreciable computer software. While bonus depreciation isn't available on real property, it can be used for capital improvements as long as the modification is new, has a useful life of 20 years or less and was not purchased from a related party.

The Tax Cut and Jobs Act of 2017 increased the first-year bonus depreciation from 50% to 100%, and that amount will be available through the 2022 tax year. However, this percentage will be reduced to 80% in 2023, 60% in 2024, and so on until it is eliminated by 2027 (unless Congress changes it).

Consider a Cost Segregation Study

Around this time of year, many CFOs and other C-suite leaders reflect on what they have accomplished and what still needs to be done. Now is an excellent time to consider whether your commercial property qualifies for a cost segregation study or would benefit from one.

Many property owners are not familiar with cost segregation studies and how they can be used to maximize deductions and minimize taxes. As a result, they often overlook this powerful tool when it comes time to file their taxes.

A cost segregation study is a detailed analysis of the costs associated with purchasing, constructing or renovating commercial real estate. It can help identify improvements that can be deducted immediately (via bonus depreciation) and those that must be depreciated over the default 39-year timeline for commercial real estate.

Even if you invested in a building a few years ago but allocated 100% of the cost to real property with a 39-year recovery period, you may still have time to break out some expenses from the total purchase, or project cost and depreciate them over a shorter period.

A cost segregation lookback study involves a detailed review of cost capitalizations on prior acquisitions, construction and renovations. Once the analysis identifies all the construction-related costs that can be depreciated over five, seven or 15 years, it's easy to claim missed depreciation on those assets (and claim significant tax refunds) without amending prior tax returns.

Leverage the Energy Tax Deduction

The buildings sector in the United States has long been one of the most challenging regarding climate action. Buildings are responsible for a significant share of greenhouse gas emissions, but property owners find it challenging to secure funding for upgrades that would improve energy efficiency and reduce emissions. However, the recent passage of the IRA includes provisions that could significantly boost climate actions in the building sector.

Signed into law in August 2022, the IRA features numerous tax incentives for renewable energy, electric vehicles and clean energy investments. One of those incentives was a significant change to the Commercial Buildings Energy-Efficiency Tax Deduction (Section 179D), which incentivizes builders and building designers to create energy-efficient commercial buildings.

Section 179D was introduced around 2006 for the purpose of helping businesses reduce their tax burden while also making energy-efficient investments. The incentive was recently made permanent by the Consolidated Appropriations Act. The newly implemented changes from the IRA increase eligibility for larger deductions and make the tax credit available to a wider range of taxpayers looking to decrease their carbon footprints.

Before the IRA changes were implemented, a taxpayer was required to show a 50% reduction in energy and power costs to claim the deduction. The maximum deduction was $1.88 per square foot. The IRA modifications to the deduction offer taxpayers more breathing room.

Those changes include the following:

  • Increasing  the maximum tax deduction from $1.88 in 2022 to $5.00 per square foot in 2023
  • Lowering the required minimum savings in total annual energy and power costs from 50% to a 25% reduction
  • Allowing buildings to qualify for a partial deduction of $0.60 per square foot for the efficiency of each lighting, HVAC and building envelope
  • Allowing a higher deduction for taxpayers that meet prevailing wage and apprenticeship requirements
  • Allowing tax-exempt entities to assign the deduction to the architect, engineer or contractor that performs design-build services for government-owned buildings
  • Removing the lifetime limit, allowing the 179D deduction to be taken every three tax years, four in some situations – previously, the deduction was permitted only once over the life of the building.

These changes to 179D allow commercial real estate owners to accelerate deductions for the costs of building and improvements, providing immediate cash flow relief.

Next Steps

If you think your business could benefit from bonus depreciation, a cost segregation or lookback study, or the Commercial Buildings Energy-Efficiency Tax Deduction, our dedicated commercial real estate team at CBIZ can help. Explore additional resources and connect with us for solutions.


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CBIZ MHM is the brand name for CBIZ MHM, LLC, a national professional services company providing tax, financial advisory and consulting services to individuals, tax-exempt organizations and a wide range of publicly-traded and privately-held companies. CBIZ MHM, LLC is a fully owned subsidiary of CBIZ, Inc. (NYSE: CBZ).

Own Commercial Real Estate? Here are 3 Things to Consider Before 2022 Endshttps://www.cbiz.com/Portals/0/Images/Hero-Article_OwnCommercialRE.jpg?ver=e0krbG5IgqZjXE_cIB5P3g%3d%3dhttps://www.cbiz.com/Portals/0/Images/Thumbnail-Article_OwnCommercialRE.jpg?ver=zj0-1DurQuYTHZ_wuThnlA%3d%3dCommercial real estate owners. There are many ways to lower your tax bill. Learn how to leverage bonus depreciation, cost segregation studies and the energy tax deduction.2022-12-13T18:00:00-05:00

Commercial real estate owners. There are many ways to lower your tax bill. Learn how to leverage bonus depreciation, cost segregation studies and the energy tax deduction.

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