The Tax Cuts and Jobs Act (TCJA) significantly expands the first-year depreciation deductions available to businesses that acquire qualifying fixed assets. Unfortunately, commercial buildings generally don’t qualify for either bonus depreciation or Section 179 expensing.

With a cost segregation study, however, some components that qualify for these breaks may be carved out and depreciated sooner than the building and its structural components. Here are the details.

The Basics

Businesses have used cost segregation studies for decades to defer income taxes. In general, for tax purposes, commercial property is depreciated over 39 years; residential property (like an apartment complex) is depreciated over 27.5 years. That’s a long period of time, and many buildings (or businesses) are sold before the property is fully depreciated.

A cost segregation study identifies building components that can be depreciated over a shorter time period — typically 5, 7 or 15 years, depending on the type of asset. Shorter-lived assets may be eligible for bonus depreciation and Sec. 179 expensing. In addition, if you don’t claim those breaks, the assets will qualify for MACRS depreciation, which allows larger deductions in the earlier years of an asset’s depreciable life.

Examples of building components and land improvements eligible for quicker depreciation include:

• Movable partitions and cubicles,
• Wall and floor coverings,
• Window treatments and awnings,
• Decorative lighting,
• Landscaping,
• Signage, and
• Parking lots.

Plus, certain items may qualify as personal property if they serve more of a business function than a structural purpose. Examples include reinforced flooring to support heavy manufacturing equipment, electrical or plumbing installations, and dedicated cooling systems for server rooms.

Expanded Tax-Saving Opportunities

Under the TCJA, the bonus depreciation program has been temporarily expanded, and the annual limit on Sec. 179 expensing has been permanently increased. For 2018, the inflation-adjusted Sec. 179 deduction limit is $1 million, and the phaseout threshold increases to $2.5 million. After 2018, these amounts will be indexed annually for inflation.

Plus, more assets now qualify for the Sec. 179 expensing. Examples include property used predominantly to furnish lodging and various nonstructural improvements to commercial property such as roofs, HVAC equipment, and fire and security systems. The Sec. 179 changes are effective for assets placed in service in tax years beginning after 2017.

Divide and Conquer

Businesses that have recently invested in commercial properties may benefit from a cost segregation study. Contact our tax professionals to determine whether this tax planning strategy could work for you. We can also perform a “look-back” study to claim missed deductions for investments made in previous tax years.

The TCJA…So Many Changes, So Many Questions…we can help you navigate this huge tax overhaul! Need help with your tax planning? Contact any member of our Tax Services Team.