By Rich Maiolo, Director of Business Development
The recent finalization of the IRS regulations Tangible Property Regulations – 080713 v1 and IRS Revenue Section 263(a) that delineates “Changes to Asset Classification under Tangible Property Regulations” will give commercial building owners a way to help pay for long life building systems and component repair and/or replacement.
How do these regulatory changes apply to commercial Building owners that have replaced or are considering long life system or component replacement?
If a commercial building owner is considering making building improvements, various tax strategies may apply to their particular situation. One of these is abandonment, which allows the taxpayer to reduce the tax burden when replacing long life systems or components that exist within a commercial property. If the property strategy includes replacing a HVAC system, for example, the owner may be able to take advantage of an abandonment (expensing the remaining depreciation) tax deduction in the year of abandonment via Tangible Property Services® Study.
Individual long life systems or components being replaced may even qualify for abandonment if they were never identified or segregated in the accounting records of the business when the building was purchased or constructed. If the books reflect just the large asset, such as “Building”, the value of each individual system or component is included in the value or tax basis of the building. Typically, a “Building” is being depreciated over 27.5 years for commercial residential or 39 years for commercial property. These individual systems or components do have a value of their own, and when the time comes to replace them a tax deduction can be taken for all remaining value associated with those systems or components if they have not been fully depreciated. If no specific value was assigned to these long life systems or components, a qualified advisor may be able to determine the remaining value at the time of replacement thus allowing for a deduction that will help defray the cost of the new system or component. Included in the category of long life systems or components are Windows, HVAC systems, Lighting/Electrical, Walls, Plumbing, Roofs, Parking lots, and Landscape Features.
Tangible Property Services® (TPS) can determine whether an abandonment deduction may be taken, as well as identifying the remaining value of the systems or components being replaced. Long life systems and components do have a finite life span. Information such as the type and specifications of the existing system or component along with the date the systems or components were placed in service would be needed to determine the remaining depreciable value. When looking at replacing long life building systems or components, it should be noted that in order to qualify for abandonment, the systems or components must be discarded so that they cannot be sold or used again.
Working with advisors who understand tax strategies such as abandonment, cost segregation and various energy-efficiency tax deductions that are available to qualified businesses ensures that replacements and improvements are made as part of a holistic business strategy that takes full advantage of tax benefits available to commercial building owners and potentially provides capital for property expenditures.
Capital Review Group (CRG) is an experienced and highly respected national firm that specializes in building related tax strategies for commercial building owners. The CRG accounting and engineering staff are available to discuss available tax benefits for commercial property owners and their tax consultants/advisors.