Tangible Property Regulations — perhaps the largest rewrite of the Internal Revenue Code (IRC) since the 1980s ─ can be complicated to interpret but equally advantageous in running your business. Known in industry circles as Repair Regs, Tangible Property Regulations provide guidelines for building owners to make capitalization or expense decisions that can bring significant economic benefit. Combining these incentives with recent real property depreciation guidelines set forth by the Tax Cuts and Jobs Act of 2017 provides extra advantage. Here are some of the highlights:
Capitalization
The final tangible regulations, issued in 2013 to make it easier to determine whether a cost is an immediately deductible expense or one requiring capitalization, allow commercial real estate owners to write off purchases of less than $500 per item. Eligibility requires that a capitalization policy be in place along with filing the correct election on annual tax returns.
Upgrades and Improvements
Qualified small business taxpayers (those with less than $10 million in assets or gross receipts) can now write off up to $10,000 or 2 percent of a building’s cost basis in improvement expenditures annually. This applies to buildings valued under $1 million. If repairs are anticipated more than once every 10 years, building owners may not be required to capitalize their next maintenance event. It’s a good idea to seek professional guidance on how to take advantage of the IRS routine maintenance safe harbor regulations.
Record Keeping and the Benefits of Cost Segregation
To take full advantage of any deductions, expenses must be tracked on a per-building, per-site basis. That is, each building is considered its own unit of property. Additionally, taxpayers may now be required to reassign starting depreciation bases in accordance with new unit of property guidelines.
Switching to a cost segregation method, which allows commercial property owners to reclassify a percentage of their assets from real property to personal property, can simplify the process while improving your bottom line. Most people are unaware that there are two ways to depreciate commercial property: straight line over a 40-year period; or through cost segregation, which allows you to segregate parts of your property into shorter tax lives.
The passing and enactment of the Tax Cuts and Jobs Act make this application even more important moving forward. It allows firms to greatly accelerate losses on acquisitions or new builds, enabling them to use that savings in income tax ─ potentially $60,000 to $150,000 per million dollars of asset value, leasehold improvements and renovations ─ toward future acquisitions. Performing an engineering-based cost segregation study can help you identify opportunities to accelerate depreciation on many non-structural components such as flooring, millwork, parking lots and security systems, translating to increased cash flow.
How a Cost Segregation Expert Can Help
Most tax professionals lack experience and training in non-structural building components and agree that engaging a cost segregation firm espousing significant construction and structural engineering knowledge is your best bet for identifying building components and their appropriate tax life categories. Look for one that will collaborate with your tax professional to ensure compliance with Tangible Property Regulations while maximizing the economic benefits allowed.
The last thing you want to do is leave deductions on the table. Items that were tossed in the dumpster can become write-offs. Think LED upgrades and the old removed lights, replaced roofing, old discarded doors or HVAC units. Repair regulations allow owners a tax deduction for these and other discarded items that could otherwise remain buried in the depreciation schedule.
Remember, if deductions are not taken during the year of the repair, any Tangible Property Regulations benefits go away. For some property owners, this could mean seizing a sizable deduction now instead of continuing to depreciate for 20 to 40 years. So, use it. Don’t lose it.