Congress Extends 50 Percent Bonus Depreciation With Economic Stimulus Act
Real Estate/Construction Advisor, Spring 2008 Issue
 
President Bush signed the Economic Stimulus Act of 2008 into law on February 13, 2008. This legislation reenacts the 50 percent Bonus Depreciation for 2008, which can make cost segregation even more valuable.  

What Is Cost Segregation?

If you’ve purchased, contracted, or renovated property in the last 15 years, you may be eligible for cost segregation—a process that can result in significant tax benefits for real estate owners. Cost segregation accelerates depreciation of qualifying assets, thereby reducing taxable income and improving cash flow.  

Very simply, you don’t have to depreciate 100 percent of building costs over 39 years. Certain items are subject to much shorter depreciation schedules—5, 7, or 15 years.  

Where Does Bonus Depreciation Come In?

The Economic Stimulus Act allows taxpayers to expense 50 percent of the cost of qualifying new property placed in service during the period beginning January 1, 2008 and ending December 31, 2008, regardless of the taxpayer’s taxable year. Qualifying property includes most assets with a tax depreciation life of less than 20 years, but the property’s original use must have started with the taxpayer after December 31, 2007.   

If done correctly, cost segregation, coupled with bonus depreciation, can save as much as 3–10% of a building’s cost.  

A Working Example

Plante & Moran performed a cost segregation study on a recently constructed office building. The total construction cost excluding land was $3,000,000. With our detailed engineering approach, we were able to allocate $810,000 of the cost to short-lived property: land improvements (15-year life); office furniture, fixtures, and equipment (7-year life); information systems (5-year life); and distributive trades and services (5-year life).  

This resulted in increased cash flow of $25,425 in the first year. Increased cash flow in the first five years was $149,525. The net present value of savings was $109,578. If this project was eligible for 50 percent bonus depreciation, the first-year savings would be $160,974, the first five-year savings would be $206,517, and the net present value of savings would be $134,409.        

We Can Help

The point of expanding bonus depreciation is to encourage people to invest in real estate and machinery and equipment. Combining 50 percent bonus depreciation with cost segregation can substantially enhance the economics of a new real estate deal and may make 2008 the time to move forward with that project you’ve had on the shelf. If you’re a developer, or you’re thinking about expanding or building a new facility, consider moving forward now.