Acquiring a commercial building may have become a little more achievable with the recent changes in the tax code. For years we have been able to break down the components of a building into shorter depreciable lives via Cost Segregation Studies. This allows taxpayers/investors to take advantage of accelerating depreciation of certain asset classes over a much shorter period than the typical 39 years for commercial real estate. The new law enhances this ability, allowing the investor/taxpayer to obtain an immediate write-off for a portion of the purchase price, subject to possible limitations depending on circumstances, in the year of acquisition. The cash flow savings that can be achieved from combining the effect of a Cost Segregation Study with the enhancements to bonus depreciation under the new law can be significant.
The Tax Cuts and Jobs Act of 2017 (TCJA) has changed many provisions in the tax code. Many of them are favorable while some take away certain benefits such as the elimination of the Domestic Production Activities Deduction and the ability to deduct state and local taxes on your personal returns. One area that we’ve seen since 2001 be of great benefit to business taxpayers is bonus depreciation. This provision was slated to be completely phased out by 2020, but it was expanded and new life breathed into it. In 2017, it was limited to 50% of the cost of acquired qualified property, with that number reducing to 40% in 2018, 30% in 2019 and eliminated in 2020.
With the passing of the TCJA, we now have bonus depreciation allowing for taxpayers to immediately write off 100% of the cost of qualified property (think equipment, furniture/fixtures and other depreciable assets). The new law allows for 100% bonus depreciation for certain property placed in service after September 27, 2017 (both new and used, essentially “new” to the taxpayer) with phaseouts starting in 2023 and expiring fully after 2026.
Section 179 expensing has also been modified and expanded, moving from $510,000 in 2017 (phaseout begins at $2,030,000) to $1,000,000 in 2018 (phaseout begins at $2,500,000). Section 179 has been further expanded to include the following previously excluded categories:
Fire/Alarm/Security Protection Systems
There have historically been differences between bonus depreciation and Section 179, but now that both are offering 100% write-offs for both new and used property, the differences aren’t as great. One of the differences remaining has to do with depreciation recapture with Section 179 if business use of the subject property falls below 50%. Your tax professional can assist in making determinations on how to best use these options depending on circumstances.
With the performance of a Cost Segregation Study, the ability to carve out a piece of the cost of building into different asset classes allows for the use, again with certain possible limitations, of the new provisions to greatly reduce the cash flow obligations by taking an immediate write-off in the year of acquisition for part of the purchase price.
With the tax law changing, many creative opportunities arise. As with any information you read, consult your professional services provider to address your particular situation.