Research and development (R&D) tax deductions and credits have long held bipartisan political support in Congress and throughout the business and consulting world. However, as part of the 2017 Tax Cuts and Jobs Act, IRC Section 174(a) was amended to require amortization and capitalization of such costs over five years for domestic costs and 15 years for foreign costs as of Jan 1, 2022.
Business and tax consultants have warned that such a change could disincentivize R&D spending in the US due to timing issues between revenue recognition and funding deductions created by the new depreciation rule.Learn More
If you have expanded or performed tenant improvements on a commercial real estate property, or have an existing, recently acquired, newly constructed or renovated property, a cost segregation study could be your next tax savings tool!
What is a cost segregation study?
A cost segregation study is a tax savings tool that allows commercial real estate owners to maximize their depreciation expense by reclassifying assets into shorter recovery lives.
A commercial property is typically depreciated over a 27.5-year (residential), or 39-year (non-residential) recovery period. A cost segregation professional identifies personal property assets such as specialty finishes, millwork, specialty electrical, plumbing and mechanical items, and land improvements that can be reclassified into 5-, 7-, or 15-year property.
On average, a study reclassifies 20-40% of the depreciable basis costs. With the application of a study, assets which qualify as 5-,7-, and 15-year recovery period increase current year depreciation expense, reducing tax liability and increasing cash flow. This allows you to invest this savings into your business.
Cost segregation studies are more beneficial now more than ever with the application of bonus depreciation. Under the Tax Cuts and Jobs Act (TCJA), assets placed into service after September 28, 2017, with a Modified Accelerated Cost Recovery System class life of 20 years or less are eligible for 100% bonus depreciation through December 31, 2022. Bonus depreciation rates will decline by 20% each year thereafter.
Assets qualifying for 100% bonus depreciation are fully deductible in the first year, increasing current year depreciation expense, as well as maximizing tax benefits.
Qualified improvement property
Another provision of the TCJA can be applied if you own a property which has been improved. Properties which have interior improvements made to an already existing building structure may have additional assets that would typically be depreciated over a 39-year recovery life, now qualify to be reclassified as 15-year qualified improvement property (QIP).
Examples of assets that qualify as 15-year QIP include interior finishes, interior doors, electrical systems, plumbing systems, and interior HVAC components. In addition, the 15-year QIP assets qualify for 100% bonus depreciation treatment and are fully deductible in the first year.
While the average results of a standard cost segregation study reclassify 20-40% of the depreciable cost basis, a renovated property that qualifies for QIP assets can reclassify up to 100% of the renovation costs. Any improvements made to the exterior structure of the building such as siding, exterior doors, roof systems, and exterior HVAC equipment will not qualify for 15-year QIP treatment.
Industries that could benefit from a study include, but are not limited to: multi-family residential homes, hotels, assisted living, retail shopping centers, grocery stores, light-industrial, manufacturing, warehouse, shipping centers, self-storage, restaurants, auto-body dealerships, auto-body repair shops, business and medical office suites, specialty medical facilities, hospitals, veterinary clinics, dry cleaners, and child daycare facilities.
Cost segregation studies can be beneficial to projects big and small in building size and in cost. An estimate of benefit can help determine if a cost segregation study is the right choice for the property.
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