Cost Recovery

Specialty Tax Services – Cost Segregation

 

What Is It?

Cost segregation is an analysis of real estate to maximize the return on investment through depreciation deductions. The analysis identifies assets comprising the building and assigns cost and the most advantageous recovery period to accelerate deductions and generate cash. With the changes from the Tax Cuts and Jobs Act in effect, the benefits of reclassifying costs to a shorter recovery period; potentially eligible for bonus depreciation, and the impact of no longer having qualified leasehold improvement property may present added incentive for taking advantage of this analysis in current years as opposed to years prior.

What’s the Benefit?

By accelerating depreciation deductions, less taxes are paid now resulting in a present value of savings!

How Does it Work?

Buildings are analyzed by a review of the blueprints and assets present within the facility to assign an estimate of cost to each component. These components are then classified in the most advantageous way for tax purposes. The analysis can be completed on buildings that were constructed, renovated, or purchased. There is no required timeframe in when the analysis can take place – additional depreciation deductions can be claimed in the year of your choosing through filing a Form 3115 – Change in Accounting Method as long as the taxpayer has basis in the facility.

Next Steps:

To prepare an initial estimate of potential benefit as well as fee, please provide electronic copies of depreciation schedules (if depreciation has been claimed on the property), blueprints, purchase agreement and closing statement if the facility was acquired, and a summary of construction costs incurred including a general contractor’s payment application if the facility was constructed or renovated.

These documents can be provided to your Lurie, LLP tax advisor or Julie Helms, Director of Specialty Tax Services.

 


 

The Death of Qualified Restaurant Property – What Now?!

 

At this point, we’re all aware that The Tax Cuts and Jobs Act (P.L. 115-97) passed in December of 2017 has made a lot of changes to the Code, the impact of which has direct ties to the real estate industry. The speed in which the legislation was passed has also provided challenges and disconnect between supposed intent and the reality of the signed legislation. One of these areas – the removal of the qualified restaurant property classification for depreciation purposes – has the potential for significant negative impact on restaurant owners.

What Happened?

Qualified restaurant property allowed for a 15-year recovery period for buildings or building improvements where more than 50% of the building’s square footage was devoted to the preparation of and seating for on-site consumption of prepared meals. With the desire to simplify the tax code, the Tax Cuts and Jobs Act (TCJA) eliminated this classification along with qualified leasehold improvement property, and qualified retail property for a simplistic qualified improvement property classification.

Qualified improvement property allows for preferential treatment of nonstructural improvements that are made to the interior portion of a building that was previously placed in service. The intent, based on Committee Reports and discussions occurring at the time the legislation was passed, was that the qualified improvement property definition would allow a 15-year recovery period for assets placed in service after December 31, 2017. The 15-year recovery period would, by default, also allow the qualifying improvements to be eligible for bonus depreciation.

Since the legislation was passed so quickly however, not all of these changes made it through to the signed legislation. What did make it through was the removal of qualified restaurant improvement property, qualified leasehold improvement property; and qualified retail property along with the provision to allow for bonus depreciation for qualified improvement property placed in service by December 31, 2017. What didn’t make it into the signed legislation was the 15-year recovery period for qualified improvement property placed in service on or after January 1, 2018.

What does this mean to me?

If you’re a restaurant owner, you most likely were taking advantage of the qualified restaurant property definition and depreciating the entire restaurant (with the exception of equipment and interior furniture) as 15-year property; not eligible for bonus depreciation.

With the current legislation, restaurant buildings placed-in-service after December 31, 2017 will be subject to a 39-year recovery period and not eligible for bonus depreciation unless a technical correction is made or additional analysis completed.

Next Steps:

If you have or are planning on purchasing, constructing, or renovating a restaurant after December 31, 2017; a similar depreciation deduction from years past may not be available without additional analysis. A cost segregation study could provide you with the additional deductions needed and could potentially exceed the deductions you received in the prior year. Our Specialty Tax Services group is happy to provide an initial analysis and determination of potential benefit of cost segregation to you and your portfolio.

 


 

The Death of Qualified Leasehold Improvement Property – What Now?!

 

At this point, we’re all aware that The Tax Cuts and Jobs Act (P.L. 115-97) passed in December of 2017 has made a lot of changes to the Code, the impact of which has direct ties to the real estate industry. The speed in which the legislation was passed has also provided challenges and disconnect between supposed intent and the reality of the signed legislation. One of these areas – the removal of the qualified leasehold property classification for depreciation purposes – has the potential for significant negative impact on restaurant owners.

What Happened?

Qualified leasehold improvement property allowed for a 15-year recovery period for nonstructural improvements made to a building that was at least three years old and subject to a lease. With the desire to simplify the tax code, the Tax Cuts and Jobs Act (TCJA) eliminated this classification for a simplistic qualified improvement property classification.

Qualified improvement property allows for preferential treatment of nonstructural improvements that are made to the interior portion of a building that was previously placed in service – not required to be pursuant to a lease and not subject to a three-year period. The intent, based on Committee Reports and discussions occurring at the time the legislation was passed, was that the qualified improvement property definition would allow a 15-year recovery period for assets placed in service after December 31, 2017. The 15-year recovery period would, by default, also allow the qualifying improvements to be eligible for bonus depreciation.

Since the legislation was passed so quickly however, not all of these changes made it through to the signed legislation. What did make it through was the removal of qualified leasehold improvement property along with the provision to allow for bonus depreciation for qualified improvement property placed in service by December 31, 2017. What didn’t make it into the signed legislation was the 15-year recovery period for qualified improvement property placed in service on or after January 1, 2018.

What does this mean to me?

If you’re an owner of real estate or tenant improvements, you most likely were taking advantage of the qualified leasehold improvement property definition and depreciating a large portion of tenant fit-outs or improvements (with the exception of equipment and interior furniture) as 15-year property eligible for bonus depreciation.

With the current legislation, tenant improvements placed-in-service after December 31, 2017 will be subject to a 39-year recovery period and not eligible for bonus depreciation unless a technical correction is made or additional analysis completed.

Next Steps:

If you have or are planning on purchasing, constructing, renovating, or completing tenant fit-outs after December 31, 2017; a similar depreciation deduction from years past may not be available without additional analysis. A cost segregation study could provide you with the additional deductions needed and could potentially exceed the deductions you received in the prior year. Our Specialty Tax Services group is happy to provide an initial analysis and determination of potential benefit of cost segregation to you and your portfolio.