By Christopher Suto, CPA, Withum
The real estate industry has gotten very comfortable with the luxury of having 100 percent bonus depreciation on certain asset classes since it was re-enacted by the Tax Cuts and Jobs Act on September 27, 2017.
This luxury is set to phase out starting January 1, 2023, until it is fully eliminated in 2027. In 2023, the allowance dropped to 80%, and it will drop by 20% each succeeding tax year until it is gone for good in 2027.
Taxpayers have calendar year 2023 to take advantage of 80% bonus depreciation on qualifying property before the allowance drops again in 2024. Qualifying property is loosely defined as property with a depreciable life of 20 years or less. In general, machinery and equipment bought new or used (new to the taxpayer) qualifies. Important for real estate and other industries, thanks to the Coronavirus Aid, Relief, and Economic Security Act update, Qualified Improvement Property (QIP) is 15-year property and eligible for 80% bonus depreciation. QIP consists of building improvements to an interior portion of a nonresidential building placed in service after the date the building was placed in service. Many tenant improvements fit into this category. QIP excludes elevators, structural modifications, or any enlarging construction work. It is important to note that bonus depreciation is not available on QIP for taxpayers in real property trades or businesses that have made the election out of the Sec. 163j interest expense limitation.
Cost segregation, another relevant tax savings opportunity for real estate assets and very important when considering bonus depreciation, takes buildings with 27.5- or 39-year depreciable lives and allocates a significant portion of the cost into shorter-lived assets — QIP, furniture, equipment, etc. These are all items eligible for bonus depreciation and can result in tax savings and increased cash flow.
An advantage of planning early is avoiding delays caused by recent production trends. Whether it is construction materials or business vehicles, items can take months to get. If a placed-in-service date is delayed until the following calendar year, property owners miss out on an accelerated deduction.
This is a brief overview of bonus depreciation, just scratching the surface of rules and tools to use and take advantage of current tax rules. This is a complex area with tax implications so please reach out to your real estate tax professional for guidance.
Christopher Suto, CPA is a tax manager at Withum.
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