Benefiting from cost segregation in the new tax environment
You may have heard the federal tax code underwent a few changes recently. While some measures impacted the 2017 tax year, the most significant revisions went into effect Jan. 1, 2018.
Major alterations — and the impact on taxpayers — have been covered extensively by national media and discussed within the industry in great detail: lowering of the corporate tax rate, lower rates for certain “pass-through” entities, and rate decreases for individual tax brackets.
One area that hasn’t received much attention is depreciation and the many new opportunities for additional tax savings via cost segregation.
A cost segregation analysis allows a taxpayer to look at their real estate assets and identify the portions that, for federal tax purposes, can be treated as personal property. This allows a taxpayer to identify assets that are being depreciated as 39-year property, and accurately move them to five, seven or 15-year personal property. By accelerating depreciation deductions, the taxpayer reduces the tax burden in the early years of an investment.
Cost segregation treatment has been around for a long time, so why is it more relevant now than ever? The answer: bonus depreciation.
Established in 2001 as a stimulus measure, bonus depreciation allows a taxpayer to write off a portion of an eligible asset in the year it is acquired. Traditionally, bonus depreciation was limited to new property and primarily for assets with a life of less than 20 years (with some exceptions). Prior to the Tax Cuts and Jobs Act of 2017, bonus depreciation was equal to 50 percent of the eligible asset in 2017 and 40 percent in 2018.
With the law’s passage, bonus depreciation increased to 100 percent for assets acquired after Sept. 27, 2017. Additionally, Congress extended bonus depreciation eligibility to used property.
So what does this mean for CPA firms and their clients?
It means that a cost segregation study performed on a property acquired after Sept. 27, 2017 is now significantly more valuable. For a used property, the value is even higher.
Take for example a taxpayer who acquires a warehouse in January 2018 for $2 million. A cost segregation analysis determines approximately $200,000 is related to 15-year land improvements and $100,000 is related to five-year personal property. Under the new law, all of this property is now eligible for bonus depreciation, allowing the taxpayer to deduct $300,000. If the taxpayer is at a 30 percent rate, this change alone will save them $90,000.
Bonus depreciation is just one component of a sweeping overhaul of the U.S. tax code. It is important for CPA firms and their clients to understand both new deduction opportunities and also the interplay with section 179 and tangible property regulations to ensure taxpayers can take full advantage of these measures.