Opportunity Zones paired with Bonus Depreciation?

[Yonah Weiss]

Everyone has heard about the potential tax benefit of Opportunity Zones, but has anyone noticed the even greater potential when combined with bonus depreciation. Our tax counsel pointed this out to me, and I was wondering if some of the other active CPAs here on BP have any opinions (I take that back, what are your opinions):

According to the opportunity zone regulations (copied below in full), the "substantial improvements" required can be significantly lowered by reducing your depreciable basis through a Cost Segregation Study.

Since your properties are eligible for bonus depreciation, you would be able to write off a large amount of depreciation immediately, and thus the substantial improvement requirement could be calculated based on a much lower amount.

The Proposed Reg. reads as follows, take note of the text in bold:

(8) Substantial improvement of tangible property--(i) In general. Except as provided in paragraph (c)(8)(ii) of this section, for purposes of paragraph (c)(4)(ii) of this section, tangible property is treated as substantially improved by a QOF only if, during any 30-month period beginning after the date of acquisition of the property, additions to the basis of the property in the hands of the QOF exceed an amount equal to the adjusted basis of the property at the beginning of the 30-month period in the hands of the QOF.

With this new information, we regard Cost Segregation as a very exciting and highly beneficial tool for opportunity zone investors. While we are still waiting for final regulations on the opportunity zone laws, the IRS has stated we can currently rely on the proposed regulations.

Bonus depreciation when done with a proper cost segregation study can create first year depreciation of 20-40% reduction of the basis.

What do ya'll have to say? @Michael Plaks @Brandon Hall @Daniel Hyman @Eamonn McElroy @John Woodrich @Linda Weygant @Natalie Kolodij