Cost Segregation & the TCJA 2017

[Jeff Hobbs]

Almost all taxpayers are impacted in some way by the new tax law introduced as the Tax Cuts and Jobs Act of 2017 (TCJA). Individuals, LLCs, LLPs, LPs, and corporate entities alike now seek to identify key and relevant changes as they plan their tax compliance and management strategies. For commercial real estate owners and investors, there are several favorable features to consider. Forensic cost segregation studies will be key in identifying and substantiating preferred tax treatments as this is the #1 method preferred and recommended by the IRS.

1. Bonus depreciation: Bonus depreciation of 100% which is an immediate expensing of qualifying assets, is a key benefit for real estate owners and investors. Prior to the TCJA, bonus depreciation only applied to newly constructed or original-use property. TCJA includes existing real estate acquired after September 27, 2017, for this treatment as well. This provision currently expires YE2022. Additionally, properties under one million dollars can now take advantage of bonus depreciation with no lower cost-basis limit. A forensic cost segregation study will establish what costs will qualify for 100% bonus depreciation and is the only way to properly identify and allocate these building and land components.
2. In-service date is vital: For newly constructed property, it is important to understand when the original and binding contract was entered into between the owner and the general contractor/builder for construction, as contracts entered into prior to Sept. 27, 2017 will not get 100% bonus even if the property is placed in service after Sept. 28, 2017. Those assets will qualify, however, for the 50% bonus depreciation under prior law.
3. Sec. 179 Expenses Increased: Qualifying property now includes HVAC systems, fire protection, alarm systems, security systems, and roofs. Furthermore, the allowable expense has been increased from $500,000 to $1,000,000 in 2018. The phase-out deduction was increased to $2,500,000. These new rules include tangible personal property acquired for rental properties, furniture & fixtures, and appliances and add another great benefit to a forensic cost segregation study. 
4. Pass-through Deduction: With the potential 20% deduction for pass-through entities on-the-table for 2018, the effective federal tax rate plummets from 39.6% to 29.6%. While each case stands on it's own merit, it may be beneficial to exploit the deduction at the higher tax rate in 2017 - if it is feasible and makes sense. Please discuss this with your professional tax advisor.
5. Qualified Improvement Property (QIP): Qualified Leasehold Improvement Property (QLIP), Qualified Restaurant Property (QRP) and Qualified Retail Improvement Property (QRIP) no longer have separate requirements. These distinctions were eliminated YE2017 - Qualified Improvement Property (QIP) is now all-inclusive. By way of example, a restaurant building will now be depreciated over 39 years vs the 15-year period previously allowable under the prior law. The National Restaurant Association lobby obviously missed out here. However, it is a strong probability that it will be reinstated later this year under new legislation. If you own a restaurant, call your Congressman and advocate for it's reinstatement.
6. The Tangible Property Regulations (TPR): Fortunately, TPR still applies. There are still significant tax benefits in analyzing improvements made to buildings as the TPR’s still recognize the ability to deduct certain renovation costs as repair expenses if applicable.

To summarize, there are benefits and tradeoffs for those who own commercial real estate or residential rentals - investors included as well. To be certain, forensic cost segregation studies will be an extremely important measure to consider applying to your next acquisition or construction project.

Questions? Feel free to reach out!