What is cost segregation?

Cost segregation is a tax deferral strategy aimed at increasing cash flow by reducing current tax liability through accelerated depreciation deductions. This strategy involves an engineering study that identifies short-life property from a larger building or improvement asset. Cost segregation studies can be done on acquired or newly constructed buildings as well as improvements to existing buildings.

What’s the challenge of cost segregation?

It’s important to find a cost segregation provider to perform a study in line with tax authority, as IRS guidance changes frequently with new laws and court cases. A cost segregation provider who is up to date with these changes can help you optimize depreciation under the current tax law.

How can cost segregation help?

Increased depreciation deductions could reduce your current year tax liability, putting more money in your pocket to invest in your business. Cost segregation studies can be done on projects placed in service in prior years without having to amend prior tax returns. The look-back deduction can be taken in the current year, which makes a cost segregation valuable for buildings you may have placed in service while in a loss position.

What is fixed asset tax analysis?

Acquiring new properties, constructing buildings, and performing remodels all require a significant amount of cash investment, particularly during times of soaring construction costs and inflation, while finding additional current year depreciation deductions from existing fixed assets doesn’t.

What can a fixed asset analysis provide?

Fixed asset tax analysis is designed to keep client’s fixed assets in compliance and reduce their current year federal and state income tax by comprehensively applying tax laws to existing fixed asset holdings. The result can be an immediate tax deferral by accelerating deductions on assets that were previously placed in service with improper tax lives and methods. Changes to a client’s fixed assets can be implemented with an accounting method change filed with your current tax return, without the need to amend prior tax filings. States like California that don’t conform to bonus depreciation and other beneficial federal tax laws concerning fixed assets have additional state income tax benefits. These benefits can include expensing capital projects as repairs or routine maintenance instead of capitalizing them as fixed assets and accelerating depreciation due to a reduction in tax life.

What does outsourced fixed asset maintenance provide?

Outsourcing your fixed asset maintenance could help you capitalize fixed assets correctly the first time, saving time and money otherwise wasted on fixing mistakes in prior years.

What is section 179D?

The deduction, originally up to $1.80 per square foot (and adjusted for inflation up to $1.88 per square foot in 2022), was made permanent by the Consolidated Appropriations Act of 2021 and benefitted commercial building owners and designers of government buildings. The recently signed Inflation Reduction Act, which applies to buildings placed in service on or after Jan. 1, 2023, expanded eligibility to include real estate investment trusts, as well as designers of buildings owned by tax-exempt entities, including not-for-profit organizations, churches, Tribal organizations, and not-for-profit schools and universities. The overall base deduction changed to a sliding scale of 50 cents to $1.00 per square foot in 2023, with a bonus deduction between $2.50 and $5.00 per square foot. This bonus deduction vastly increases the benefit of the Section 179D deduction but is only available to companies that meet specific local prevailing wage and apprenticeship requirements, provided construction begins on or after Jan. 29, 2023. For projects that begin construction prior to that date, the labor requirements don’t apply, and projects are automatically eligible for the bonus deduction. Beginning in 2023, this deduction can be claimed on subsequent improvements made to these energy efficient buildings, as long as the previous full deduction claim occurred more than three tax years in the past.

What does a section 179D deduction provide?

Completing a Section 179D study on your newly constructed building can provide great value in the form of increased current year deductions which lower your current tax liability. Note that deductions under Section 179D may be claimed in addition to the benefits of a cost segregation study for commercial building owners.

IRC section 45L provides tax incentives for the energy efficient construction or renovation of residential dwelling units in the form of tax credits. Through Dec. 31, 2022, the credit was $2,000 per dwelling unit and is for property owners who constructed, manufactured, or substantially renovated energy efficient single or multifamily residential dwelling units of three stories or less that are then sold, leased, or rented for the first time as a residence.

How are section 45L tax credits generated?

Taxpayers who construct multifamily properties can combine the benefits of the Section 45L tax credit with a cost segregation study. The Section 179D deduction can also be applied to multifamily development projects four stories or greater placed into service after Dec. 31, 2022, which means that some taxpayers can reap the benefits of all three incentives for the same project.

Article

Fixed asset considerations: Bonus depreciation and beyond

Feb. 22, 2023 · Authored by Chris L'Heureux, Travis Cheap, Courtney Hauer

Timely fixed asset work can help increase current year depreciation deductions, free up your time to focus on your business, and provide peace of mind through reduced exposure. Below are several important fixed asset strategies and topics to consider in a frequently shifting economic and regulatory environment.

Bonus depreciation
Cost segregation
Fixed asset tax analysis
Outsourcing fixed asset maintenance
Section 179D deduction
Section 45L

Bonus depreciation

Below are some frequently asked questions related to bonus deprecation.

What is bonus depreciation?

Bonus depreciation allows taxpayers to take additional depreciation expense for a qualifying asset in its first year in service.

What’s the challenge of bonus depreciation?

For tax year 2023, additional first-year bonus depreciation has phased down to 80%. It is no longer the 100% write-off that it has been since late 2017, and will decease to 60% in 2024, and decrease by 20% each year until its sunset in 2027, barring any related federal tax law changes.

Capital projects with estimated completion dates close to year-end could benefit from additional planning. Completing those projects by year’s end could help reduce current year tax burden through a better bonus depreciation rate.

Chris L'Heureux

Principal

The information provided here is of a general nature and is not intended to address the specific circumstances of any individual or entity. In specific circumstances, the services of a professional should be sought. Tax information, if any, contained in this communication was not intended or written to be used by any person for the purpose of avoiding penalties, nor should such information be construed as an opinion upon which any person may rely. The intended recipients of this communication and any attachments are not subject to any limitation on the disclosure of the tax treatment or tax structure of any transaction or matter that is the subject of this communication and any attachments.

Fixed asset considerations: Bonus depreciation and beyond

Bonus depreciation

What is bonus depreciation?

What’s the challenge of bonus depreciation?

Chris L'Heureux

Cost segregation

What is cost segregation?

What’s the challenge of cost segregation?

How can cost segregation help?

Fixed asset tax analysis

What is fixed asset tax analysis?

What can a fixed asset analysis provide?

Outsourcing fixed asset maintenance

What does outsourced fixed asset maintenance provide?

Section 179D

What is section 179D?

What does a section 179D deduction provide?

Section 45L

What is section 45L?

How are section 45L tax credits generated?

Have questions? Baker Tilly can help.