Tax Reform & the Impact on Cost Segregations

Did you purchase or renovate a building recently or are you planning to do so? Assuming you will capitalize it and depreciate it over 27.5 or 39 years?  That’s a long time to wait to recoup those depreciation costs. Good news!  You may be eligible to do cost segregation and move some of those building costs to a shorter depreciable life.

What is a Cost Segregation Study?

Cost segregations have traditionally broken down 27.5/39 year building assets into 5, 7, and 15-year buckets. This allows a building or renovation to be broken down into different classes of property and may allow for accelerated depreciation. For example, the carpeting in a building could be moved to the 5 year bucket and be eligible for bonus depreciation. If it was simply capitalized as part of the building, it would be depreciated over 39 years instead.

Prior to the passage of the Tax Cuts and Jobs Act, real property that was broken down into 5 and the 7-year property was eligible for 50% bonus. 15-year property was eligible for bonus depreciation if it was Qualified Leasehold Improvement Property or Qualified Restaurant Property. Additionally, Qualified Improvement Property, although a 39 year asset, was eligible for bonus depreciation as well. With the passage of tax reform, qualifying assets placed in service after September 27, 2017, are now eligible for 100% bonus depreciation. Assets no longer have to be brand new to be eligible for bonus depreciation, as used assets now qualify.

The Qualified Leasehold Improvement and Qualified Restaurant Property categories were also removed and replaced with an expanded definition of Qualified Improvement Property (QIP). This new QIP category is much broader than the previous, and improvements no longer need to be made pursuant to a lease. There was a mistake made when the new tax reform law was written that currently makes QIP ineligible for bonus depreciation. It is expected, however, that a technical correction will be issued, making QIP both 15 year property and eligible for bonus depreciation.

Tax reform also implemented some changes for Section 179 depreciation as well. The Section 179 limit was increased to $1,000,000 and the spending cap was increased to $2,500,000. Certain real property is also now eligible for Section 179 treatment for commercial buildings. This includes roofs, HVAC systems, fire protection systems, alarm systems, and security systems. These items were previously ineligible for Section 179 and had to be depreciated over 39 years.

While depreciation is normally a timing difference, 2017 presents a unique situation in which accelerated depreciation may present a permanent tax savings due to the lowering of tax rates for 2018. By having a cost segregation done, you can take advantage of 100% bonus depreciation for assets that would otherwise be 39 year assets. Work closely with your tax advisor to determine if any buildings purchased or renovated would qualify for a cost segregation study so you do not miss out on the potential savings.

For more information or questions about this article, please contact Kelly Koman, Tax Supervisor with McKonly & Asbury, at kkoman@macpas.com.