After the past 18+ months of economic uncertainty (who’s tired of reading/hearing that phrase?), business owners and consumers seem to be getting amped up for a serious post-pandemic surge. I could ask if we will ever really be “post-pandemic” but let’s not go down that rabbit hole. Whenever we see a surge in general economic activity, we invariably see more construction and real estate activity. A lot of business owners and real estate investors are either building or buying real estate, which means that cost segregation will continue to be a popular tax deferral strategy. The basics haven’t changed much in the past 20+ years – accelerate depreciation by reclassifying building costs to asset classes with shorter depreciation lives in order to create more deductions in the early years of building ownership. However, some of the economics have evolved over that time, especially over the last 4 years. I’ll cover how some of these changes might make cost segregation a more viable option today.
Technology Changes Everything
Technology has advanced in every aspect of life and business and cost segregation is no exception. As a result, more properties can benefit from a study since they can be prepared more efficiently compared to just a few years ago. Today’s advanced tools allow the analyst to more quickly identify and estimate costs for assets that are the subject of cost segregation. Also, with sites like Google Earth, the analyst can inspect the site and even take measurements before travelling to the building location. This can help keep travel costs down and reduce the amount of time the analyst must spend on site.
Enhancements to Bonus Depreciation
The Tax Cuts and Jobs Act of 2017 (TCJA) enacted 100% bonus depreciation (through 2022) on certain shorter-lived assets and also made “used” property eligible for bonus depreciation. While bonus depreciation has been around for quite some time, it was typically 50% or less and generally only available on “original use” property. The availability of this immediate write-off of property that was “second hand” completely opened up the cost segregation market to a particular sub-set of property purchases. The purchase of a $700,000 building might not have been a great candidate for a study in the past, but with today’s changed circumstances, it may be worth a second look.
Qualified Improvement Property
This little tidbit in the TCJA re-defined and refined some preexisting terms that essentially refer to certain interior building improvements. Some may also remember the “oops” moment in which Congress failed to properly define how we were to deal with Qualified Improvement Property (QIP). Obviously, a lot has happened since then, but the CARES Act corrected that little mishap and now we know that QIP has a 15-year straight line MACRS depreciation treatment. QIP is also eligible for 100% bonus depreciation. This can be of great benefit to anyone that purchases an existing building and performs substantial renovation on the interior, or for the owner of a multi-tenant facility where interior improvements are often made.
What’s the Next Step?
You will need to consider the unique details of your particular situation to determine if a cost segregation study is the right strategy for you. If you have recently built or purchased real property (or have substantial property already on the books) and can use some additional deductions, the next step is to determine if you can utilize the deductions. Your tax advisor can help you answer these questions.
We Can Help
Our cost segregation professionals can prepare a no-cost feasibility analysis on your project to help you decide if a study is right for you. To learn more about working with the professionals at GranthamPoole, call John McCallum at 601-499-2400.
John R. McCallum, CPA
John R. McCallum is a member with GranthamPoole PLLC and a recognized leader in the field of cost segregation and various real estate taxation matters. He has also written, taught, and spoken on many topics in the area over the years. Please contact John at firstname.lastname@example.org, www.linkedin.com/in/john-mccallum, or 601-499-2400. CPA License # 5323
The above does not represent tax advice. Each situation is fact-dependent, and you should seek the advice of a competent advisor. GranthamPoole PLLC is a provider of tax, accounting, advisory and strategic services, partnering with clients across a broad spectrum of industries and sizes.