Summertime is the Right Time: Creating a Comprehensive and Thoughtful Tax Plan
School is out. The sun is shining. It’s time to think of cold drinks, backyard barbeques, and, well, taxes. It may seem strange to think about next year’s tax season during these lazy, hazy, possibly crazy days of summer, but this is the perfect time to pause and self-assess. Planning ahead is the key to a comprehensive and thoughtful tax plan, ensuring that no possible opportunity is overlooked.
As you take stock of your situation, know that you may be able to maximize savings on your commercial real estate using IRS-approved engineering-based tax strategies. The following are just some of the ways a cost segregation study can free up cash flow:
- Cost segregation accelerates depreciation deductions by shifting building components into shorter class-lives, resulting in increased cash flow and a decreased tax burden.
- The Tangible Property Regulations (TPRs) clearly delineate which costs must be capitalized, and which may be expensed.
- TPR guidelines also allow the remaining depreciable basis of replaced or demolished assets to be expensed using a Partial Asset Disposition (PAD) election.
- The PATH Act of 2015 has further extended the utility of cost segregation, extending Bonus Depreciation for a whopping five years, through the end of 2019. Bonus Depreciation will be permitted at a rate of 50% for Tax Year 2017.
- The PATH Act also established Qualified Improvement Property (QIP), a broadly-defined category of property improvements that expands the availability of this lucrative Bonus Depreciation.
These strategies are very powerful, and may apply to your property at any stage of its life cycle. To ensure that you are optimizing tax savings on your most lucrative of fixed assets, consider the following:
- Have you constructed or acquired a new property?
- Was a cost segregation study performed to begin maximizing deductions from year one?
- Was a Unit of Property study performed simultaneously, to create an accurate and complete breakdown of assets useful for capturing further deductions?
- Have you renovated or improved any previously acquired property?
- Was a PAD Analysis performed to dispose of the remaining cost basis of assets retired, replaced, or demolished?
- Can any improvements be classified as QIP and therefore be Bonus-eligible?
- Has all spend been categorized correctly using the TPR guidelines? Have the BAR and Materiality tests been performed to identify and reclassify current any assets that were capitalized but are actually expensable under the TPRs?
- Have you maximized your expensing using the Safe Harbors established by the TPRs?
- Routine Maintenance Safe Harbor is a powerful election for all property owners and the Safe Harbor for Small Taxpayers is an extra election for the smaller property.
- The De Minimus Safe Harbor is an excellent source of deductions for taxpayers with an Applicable Financial Statement (AFS) at $5000 per item, and was recently raised to $2500 per item for non-AFS taxpayers as well.
- Are you considering renovation of your property in the near future?
- Consider performing studies now, in order to document and breakdown assets that could be written off post-renovation through PAD elections.
- Keep in mind that future improvements may be simultaneously classified as QIP and QLI/QRIP as long as all qualifications are met. This double classification would allow for spend to be both bonus-eligible and a 15-year life.
- Are you considering new construction? Keep the powerful Bonus Depreciation incentives established by the PATH Act in the back of your mind.
Clearly, there is a great deal of potential opportunity, and every situation calls for a unique strategy set. Often, collaboration with a third-party consulting firm like Capstan allows for the development of a comprehensive, customized plan that explores all possible opportunities. If we can be of any assistance this summer, or anytime, don’t hesitate to give us a call.