Over the last few years one of the most dynamic portions of the tax code has been depreciation and capitalization regulations.
Between the changes to capitalization rules, updates to bonus depreciation and limits to Section 179 expensing, many professionals have had a hard time keeping up with the current rules. Now that we are through another tax season, it is a good time to sit back and review where we stand as it relates to capitalization and depreciation and how to utilize the rules for tax planning.
Whether a 3115 was filed or not, the new tangible property regulations became law in 2015 and need to be adopted. This is not a bad thing for taxpayers or professionals as these regulations provide many opportunities for tax planning. The ability to write off partial dispositions, claim more expenditures as repairs, and take advantage of other aspects of these rules provide ample opportunities for tax planning. Expenditures need to be closely reviewed and discussed to determine the correct and most advantageous capitalization procedures. Additionally, taxpayers need to ensure they have quality capitalization policies in place to take advantage of much more liberal rules surrounding de minimis expenditures for tax purposes.
Just as taxpayers emerged from dealing with the tangible property regulations, uncertainty remained about 179 expensing limitations, bonus depreciation and the 179D tax deduction. However, late in 2015 some certainty and guidance was issued on these areas as well. Congress finally got to the point where they were willing to permanently extend increased 179 expensing, setting the new limit at $500,000 with adjustments for inflation. Additionally, bonus depreciation was extended with phasedowns beginning in 2018. These changes, along with the extension of 179D through the end of 2016, allow taxpayers and professionals to plan in ways that were unavailable in recent years.
While bonus depreciation was extended, it also became more complicated under the PATH Act. In addition to the existing categories for bonus depreciation, the PATH Act added a new category called Qualified Improvement Property, or QIP for short. To qualify as QIP, the assets must meet the following criteria:
• Placed in service after Dec. 31, 2015
• 39-year recovery period
• Improvement to the interior portion of the building, excluding:
o Enlargement of building
o Internal structural framework
• Improvement must be placed in service after the original placed in service date of the building.
This now means owner-occupied properties may receive bonus depreciation for certain renovations. Thus, an owner could renovate a building and take bonus depreciation for many of the improvements made to the interior of the building.
Combining these new rules is where the tax planning comes into play. For example, look at a taxpayer who has an existing property they plan on completely renovating. Under the old rules they could complete a cost segregation study on the renovation and possibly the original building, accelerating some of the depreciation into the current year. Under the new regulations, they have the ability to:
• Accelerate the personal property
• Take partial dispositions on the assets removed from service
• Take bonus depreciation on QIP installed during the renovation
• Take bonus depreciation on personal property and land improvements installed during renovation
• Take 179D energy efficient building deduction on eligible property.
The new regulations can supercharge the benefits associated with the renovation. However, it is important to note that a qualified cost segregation study should be completed to identify the assets removed, the assets eligible for bonus depreciation, and the units of property eligible for future dispositions.
More than ever it is important that these studies are completed by qualified practitioners. Having a quality analysis completed will identify the assets eligible for special treatment and will provide valuable breakdowns for future tax planning.
David McGuire is director of the Cost Segregation Practice at McGuire Sponsel. His expertise includes fixed assets, cost segregation, and depreciation law. His background includes consulting on repair and maintenance studies under the 263(a) regulations and reviewing corporate capitalization policies. He is a frequent speaker on the topic of the repair regulations for various accounting training seminars nationwide. Additionally, he has a thorough knowledge in bonus deprecation, which includes step up in basis, Section 108, and passive loss limitations.