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Bonus depreciation rules make cost segregation even more valuable

August 14, 2020 Article 3 min read
Lawrence Knutson
If your business purchases or improves real property, the Tax Cuts and Jobs Act has enhanced your ability to recover costs sooner using a cost segregation study. Here’s how.
Man sitting at a kitchen table on his laptop

Bonus depreciation rules enacted as part of the Tax Cuts and Jobs Act (TCJA) have enhanced the benefits available to real property owners through a cost segregation study. These studies are conducted by a team of qualified CPAs and engineers who examine and analyze project costs to determine their proper classification for federal tax purposes. The goal is to identify components of a building that can be depreciated over a shorter life than the default 39-year real property life and accelerate those deductions into earlier tax returns.

The TCJA’s bonus depreciation rules make the cost segregation process even more valuable in two ways. First, the Act increased the bonus depreciation percentage to 100% for property that has a useful life shorter than 20 years, and is placed in service between Sept. 27, 2017 and Jan. 1, 2023. Second, it extended bonus depreciation treatment to purchases of previously used assets. So, costs attributable to qualifying components of a building placed in service within this period can now be fully deducted in their first year, even if they’re purchased used.

Cost segregation

Cost segregation studies are used to separate elements that are “dedicated, decorative or removable” from those that are “necessary and ordinary for operation and maintenance of the building.” Only the first group qualifies to be separated from the cost of the property and recovered over a shorter period. For instance, floors, walls, general HVAC, and building electrical and lighting costs will always be considered necessary and ordinary parts of the building and recovered over the longer period. But expenditures for things like carpets (removable), specialized wiring or cooling systems for process equipment (dedicated), and ornamental millwork (decorative) can be accelerated and fully deducted in the year purchased.

The TCJA’s bonus depreciation rules make the cost segregation process even more valuable in two ways.

Our team blends the expertise of accountants, engineers, building construction professionals, and attorneys to provide a report that accurately documents the components of your property that qualify for this beneficial treatment.

100% bonus until 2023

The TCJA’s bonus depreciation rules created significant opportunities for accelerated deductions, but the Act also left several questions about the future of the program. As enacted, the 100% treatment will start to phase out beginning in 2023 and will be fully eliminated after 2027. Given the popularity of the provision, there will undoubtedly be considerable efforts made to lobby for its extension.

Previous to the TCJA, only property with its original use commencing with the taxpayer could claim bonus depreciation, in other words, used property couldn’t qualify for bonus depreciation. The new rules allow a taxpayer who purchases previously used property to claim the 100% bonus depreciation on the property. The IRS defines “new to the taxpayer” as never previously having a depreciable interest in the property.

In addition, there was a significant piece left out of the final bill. Legislators had intended to shorten the recovery period on “qualified improvement property” to 15 years, so that it would qualify for bonus depreciation treatment. This change would’ve allowed “non-structural” improvements such as interior renovations placed in service after the building was originally placed in service by the taxpayer to qualify for the 100% bonus treatment. Efforts continue at this point to enact this change, but the cost of the provision has made it a hard sell.

If you think your business could benefit from a cost segregation study, or if you have questions about the future of provisions like the qualified improvement property rules, we have a team of experts focused on this program. Please contact us to learn more about how a cost segregation study could help your business.

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