By reclassifying certain real property assets as personal property, Cost Segregation studies offer a powerful way for commercial building owners to unlock depreciation deductions—thereby reducing their tax burdens and boosting cash flow. However, following sweeping changes under the Tax Cuts and Jobs Act of 2017, Cost Segregation may be more beneficial than ever before due to a commonly overlooked provision of the new tax law: expanded bonus depreciation.
What is Cost Segregation?
Cost Segregation is an IRS-approved tax deferral strategy that analyzes a commercial building and reclassifies certain real property assets within it as tangible personal property. These assets may include wall coverings, electrical wiring, plumbing fixtures, floor coverings, and more. Generally, real property is depreciated over 39 years, while personal property is depreciated over 5, 7, or 15 years. Therefore, by classifying more assets as personal property, building owners are able to reap the benefits of shorter depreciation lives and capture accelerated depreciation deductions.
Cost Segregation studies may be performed on any commercial buildings—including multi-family unit buildings, manufacturing facilities, office and industrial buildings, and more—that were placed into service after December 31, 1986. To ensure maximum financial benefit and compliance with IRS guidelines, Cost Segregation studies should be conducted by individuals with both tax and engineering expertise.
What is bonus depreciation?
Created as a stimulus measure under the Job Creation and Worker Assistance Act of 2002, bonus depreciation allows taxpayers to depreciate a certain percentage of the cost of eligible business property during the asset’s first year in service. This yields more substantial and immediate deductions than simply depreciating the property’s entire cost over its useful life.
Prior to enactment of the Tax Cuts and Jobs Act, bonus depreciation was only available for new property, and taxpayers could only depreciate up to 50 percent of the property’s cost as of 2017. However, the new law extended bonus depreciation to used property acquired after September 27, 2017, as long as the property was not previously used by the taxpayer. In addition, the Tax Cuts and Jobs Act allowed taxpayers to depreciate 100 percent of the cost of eligible property during its first year in service through tax year 2022. In subsequent years, taxpayers may depreciate the following amounts under bonus depreciation: 80 percent in 2023, 60 percent in 2024, 40 percent in 2025, and 20 percent in 2026.
By expanding the number of assets that qualify for bonus depreciation and increasing the potential for tax savings through accelerated depreciation deductions, the changes under the Tax Cuts and Jobs Act represent a lucrative opportunity for business taxpayers—particularly through 2022. Therefore, now is the time for taxpayers to work with their tax professionals to reap the benefits of expanded bonus depreciation. For commercial building owners, Cost Segregation studies offer a way to identify assets within the building that may qualify for bonus depreciation—thereby enabling building owners to ensure that they are not missing any opportunities to take advantage of the expansion under tax reform. By leveraging the power of both Cost Segregation and bonus depreciation, taxpayers can use their business property assets to yield accelerated tax savings and significantly boost their cash flow.
Is your business taking advantage of expanded bonus depreciation? At Capital Review Group, our team offers the ideal combination of tax and engineering expertise needed to conduct thorough Cost Segregation studies that comply with IRS guidelines. We will help you identify all real property assets that may be reclassified as personal property, as well as those that qualify for bonus depreciation. Contact us today at https://capitalreviewgroup.com/contact/ to schedule a pro bono analysis!
(Sources: https://www.journalofaccountancy.com/issues/2019/feb/bonus-depreciation-for-used-property.html, https://www.accountingtoday.com/opinion/benefiting-from-cost-segregation-in-the-new-tax-reform-environment, https://www.accountingtoday.com/opinion/tax-reform-makes-cost-segregation-even-more-beneficial).