Depreciation Archives – Cost Segregation Consultants, LLC

Cost Segregation Benefits Increased Under the New Tax Cuts and Jobs Act (TCJA)

Leave a Comment / 1031 Exchange, Bonus, Depreciation, New Tax Law / By Admin

The recently enacted Tax Cuts and Jobs Act (“TCJA”) is a sweeping tax package. Here’s an overview of the important changes that highlight the already beneficial Cost Segregation Study. Unless otherwise noted, the changes are effective for tax years beginning in 2018.

TCJA’s Bonus Depreciation Changes Make Cost Segregation Even More Beneficial:

Under the new law, a 100% first-year deduction is allowed for qualified new and used property acquired and placed in service after September 27, 2017 (with no written binding contract for acquisition in effect on Sept. 27, 2017) and before 2023. Pre-Act law provided for a 50% allowance, to be phased down for property placed in service after 2017. Under the new law, the 100% allowance is phased down starting after 2023.
September 27, 2017 becomes significant since it triggers different levels of bonus depreciation based on in-service dates and when qualified property improvements (QIP) were made. Unlike past years’ requirements that bonus depreciation be related to original use property, the final version applies to acquired property as well effective September 27, 2017!

Modification of Like-Kind Exchange Rules:

In a like-kind exchange, a taxpayer doesn’t recognize gain or loss on an exchange of like-kind properties if both the relinquished property and the replacement property are held for productive use in a trade or business or for investment purposes. For exchanges completed after Dec. 31, 2017, the TCJA limits tax-free exchanges to exchanges of real property that is not held primarily for sale (real property limitation). Thus, exchanges of personal property and intangible property can’t qualify as tax-free like-kind exchanges.
Although the real property limitation applies to exchanges completed after Dec. 31, 2017, transition rules provide relief for certain exchanges. Specifically, the real property limitation doesn’t apply to an exchange if the relinquished property is disposed before Jan. 1, 2018, or the replacement property is received by the taxpayer before Jan. 1, 2018. If the transition rules apply and all other requirements for a tax-free exchange are satisfied, an exchange of personal property or intangible property that is completed after Dec. 31, 2017 can qualify as a tax-free like-kind exchange.

Qualified Improvement Property:

Under new law, for tax years beginning after 2017, provides that Qualified Improvement Property (QIP), in addition to being eligible for bonus depreciation and being newly eligible as section 179 property, is depreciable using a 15-year recovery period and the straight-line method (rather than 39-year period for non-residential buildings).

Definition of QIP:

QIP is any improvement to an interior portion of a building that is nonresidential real property placed in service after the building was placed in service. It does not include expenses related to the enlargement of the building, any elevator or escalator, or the internal structural framework.

Qualified Leasehold, Retail, and Restaurant Improvement Property:

There are no longer separate requirements for Qualified Leasehold Improvement Property (QLIP) and Qualified Restaurant Property (QRP) and Qualified Retail Improvement Property (QRIP). These separate distinctions were eliminated as of December 31, 2017, leaving only Qualified Improvement Property (QIP).

Qualified Real Property:

For tax years beginning after 2017, the definition of this property has been expanded for Section 179 purposes to include roofs, HVAC, fire protection and alarm/security systems. It can also be expensed under Section 179 subject to its parameters below.

Tax Rates:

One of the more significant new law provisions cuts the corporate tax rate to a flat 21%. Before the new law, rates were graduated, starting at 15% for taxable income up to $50,000, with rates at 25% for income between 50,001 and $75,000, 34% for income between $75,001 and $10 million, and 35% for income above $10 million.

Section 179:

Under new law for tax years beginning after 2017, the annual 179 expense threshold is set at $1,000,000 with a $2,500,000 phase out.
Also, items (for example, non-affixed appliances) used in connection with residential buildings (but not the buildings or improvements to them) are section 179 property.

Real Property Depreciation:

Apartment buildings and other residential rental buildings placed in service after 2017 generally continue to be depreciated over a 27.5 period, but should the alternative depreciation system (ADS) apply to a building either under an election or because the building is subject to one of the conditions (for example, tax-exempt financing) that make ADS mandatory, the ADS depreciation period is 30 years instead of the pre-TCJA 40 years.
For tax years beginning after 2017, if a taxpayer in a real property trade or business “elects out” of the TCJA’s limits on business interest deductions, the taxpayer must depreciate all buildings and qualified improvement property under the ADS.

Other Changes Relating to Cost Recovery and Property Transactions:

TCJA makes the following additional changes with respect to cost recovery and property transactions:

allows for expensing of certain costs of replanting citrus plants lost by reason of casualty;
allows an electing real property trade or business to use the ADS recovery period in depreciating real and qualified improvement property;
shortens the recovery period from 7 to 5 years for certain machinery or equipment used in a farming business;
repeals the required use of the 150-percent declining balance method for depreciating property used in a farming business (i.e., for 3-, 5-, 7-, and 10-year property);
excludes various types of self-created property from the definition of a “capital asset”, including: patents, inventions, models or designs (whether or not patented), and secret formula and processes;
specifies situations in which a contribution to the capital of a corporation is includable in the gross income of a corporation (i.e., contributions by a customer or potential customer, and contributions by governmental entities and civic groups); and
tweaks the carried interest rule to provide that a profits interest must be held for three years, rather than one year, in order to receive favorable long-term capital gain treatment.

Contact us for a brief informational webinar on the increased benefits under the new Tax Cuts and Jobs Act.

Why 2016 may be an especially good year to take bonus depreciation

Leave a Comment / Depreciation / By Admin

Bonus depreciation allows businesses to recover the costs of depreciable property more quickly by claiming additional first-year depreciation for qualified assets. The PATH Act, signed into law a little over a year ago, extended 50% bonus depreciation through 2017.

Claiming this break is generally beneficial, though in some cases a business might save more tax in the long run if they forgo it. However, 2016 may be an especially good year to take bonus depreciation. Keep this in mind when you’re filing your 2016 tax return.

Eligible assets

New tangible property with a recovery period of 20 years or less (such as office furniture and equipment) qualifies for bonus depreciation. So does off-the-shelf computer software, water utility property and qualified improvement property. And beginning in 2016, the qualified improvement property doesn’t have to be leased.

It isn’t enough, however, to have acquired the property in 2016. You must also have placed the property in service in 2016.

Now vs. later

If you’re eligible for bonus depreciation and you expect to be in the same or a lower tax bracket in future years, taking bonus depreciation (to the extent you’ve exhausted any Section 179 expensing available to you) is likely a good tax strategy. It will defer tax, which generally is beneficial.

But if your business is growing and you expect to be in a higher tax bracket in the near future, you may be better off forgoing bonus depreciation. Why? Even though you’ll pay more tax for 2016, you’ll preserve larger depreciation deductions on the property for future years, when they may be more powerful — deductions save more tax when you’re paying a higher tax rate.

Making a decision for 2016

The greater tax-saving power of deductions when rates are higher is why 2016 may be a particularly good year to take bonus depreciation. With both President Trump and the Republican-controlled Congress wishing to reduce tax rates, there’s a good chance that such legislation could be signed into law.

This means your tax rate could be lower for 2017 (if changes go into effect for 2017) and future years. If that happens, there’s a greater likelihood that taking bonus depreciation for 2016 would save you more tax than taking all of your deduction under normal depreciation schedules over a period of years.

Also keep in mind that, under the PATH Act, bonus depreciation is scheduled to drop to 40% for 2018, drop to 30% for 2019, and expire Dec. 31, 2019. Of course, Congress could pass legislation extending 50% bonus depreciation or making it permanent — or it could eliminate it or reduce the bonus depreciation percentage sooner.

If you’re unsure whether you should take bonus depreciation on your 2016 return — or you have questions about other depreciation-related breaks, such as Sec. 179 expensing — contact us.

Depreciation