With tax season already right upon us, it’s time to start reviewing the processes and what your business should expect if you are extending for 2018 and looking ahead to the 2019 tax season. In 2017, the most sweeping federal tax law seen in decades took effect — and many commercial real estate investors and owners were poised to profit from such a move. Although not all real estate holdings advanced (or were even directly affected) by tax reform, analysts agreed that the structure of many of the tax relief provisions recently signed into law provided tangible benefits to commercial property owners.
One year later, the same principles still hold true. And at Valbridge Property Advisors, we’re here to explain how your commercial property, this year, could benefit greatly from cost segregation.
What is Cost Segregation in Commercial Real Estate?
Cost Segregation is the act of identifying assets, their associated costs, and classifying those assets for federal tax purposes. Cost segregation enables commercial real estate owners to reallocate real property to personal property. This results in a substantially shorter depreciable tax life and accelerated depreciation methods. The end result is lower income taxes of $30,000 – $100,000 per million in building cost for the building owner(s).
In a cost segregation study, certain commercial building costs previously classified with a 39-year depreciable life, can instead be classified as personal property or land improvements, with a 5, 7, or 15-year rate of depreciation using accelerated methods. This results in a lower taxable income for the owners of a building.
The benefits of a cost segregation study include:
- Immediate increase in cash flow
- Reduction in current tax liability
- Deferral of taxes
- Ability to reclaim “missed” depreciation deductions from prior years without having to amend tax returns
With less taxable income, you’ll have the ability to increase your company’s cash flow from here on out – year after year! Cost segregation allows you to keep more of the money you make, so it’s a win for you and your business.
Cost Segregation and Commercial Tax Reform
How Does Cost Segregation Result in Increased Income?
Because cost segregation is the process of re-classifying components of your commercial building in a way that allows much of those assets to be depreciated on a 5-, 7-, or 15-year schedule as opposed to the more-traditional 39-year schedule, it allows your current, taxable income to be greatly reduced. In fact, it’s so effective that it could propel your annual cash flow to increased anywhere from $30-$100K for every $1M of building costs.
Will Tangible Property Regulations Impact Your Business?
New business repair and maintenance regulations are some of the biggest tax changes in many years. They need attention that cannot be overlooked. U.S. tax code shows that cost segregation studies are on the rise since the issuance of these regulations. Why? Well, compliance to these regulations is not optional – it must be adhered. Cost segregation studies are known as the “certain method” to getting calculations right and maximizing the associated tax benefit.
Prior to an audit, your existing depreciation schedule needs to be “scrubbed” or reviewed. Any and all items that do not meet the new level of capitalization must be expensed. As you move forward, it is important to know that, with the new criteria, there are several “safe harbors” that assist in expensing expenditures that would normally be capitalized. You and your advisor can use these safe harbors to strategize when and how changes should be made.
Renovating Your Commercial Property
Have you renovated or conducted maintenance to your commercial property over the past year? If so, you may be able to expense the work! Under what is known as the De Minimus safe harbor limit, businesses (as of 2016) can expense any expenditure under $2,500. Even more, if the expenditures in question are deemed to be repair and maintenance – as opposed to betterment – they can be expensed.
A Partial Asset Deposition (PAD) allows you to write down what you have removed from your property and the costs for the removal and disposal of those items. Your friendly advisors over at Valbridge can help you differentiate what is and is not tangible. Then, those items can be written off. Your process should be to expense as much as you can while staying compliant with the tax law then using strategies like PADs and Cost Segregation Studies on assets that must be capitalized.
More Tax Reform Solutions for Commercial Property Owners
Aside from conducting a cost segregation study, there are a number of steps and methods commercial property owners can take to maximize their income tax return. What are you potentially missing out on? We’re here to break down the details.
Building Systems Valuation
For building owners, it’s important to know that you can now reverse previously capitalized costs (based on new and evolving regulations) in a way that will expense them in the current year. Of course, a cost segregation study provides the basis for this outcome. Working with a trusted partner who is familiar with these regulations can result in valuable savings for you and your business.
Energy Reprofit Projects with Major Savings!
Federal tax, state tax, and even local utility organizations are now providing monetary incentives to those companies and properties who are implementing turn-key energy-savings projects on and within their walls. Aside from reducing your own property’s energy costs, energy reduction projects also have the possibility of being funded through repair regulation savings, rebates, and other incentives. Translation: going green could save your company more than just wasted energy.
What Else Do You Need to Know?
The income tax savings opportunities we’ve outlined above are all reliant on the valuation of your property and the proper segregation of such assets. It’s imperative to work with a trusted professional to reap maximum benefits.
Valbridge Property Advisors is North America’s largest independent commercial appraisal firm, with nationwide office locations. Valbridge provides independent appraisal services consistent with the highest industry standards of practice. The pros at VPA can work with you to survey your property and disperse assets accordingly – in a way that will maximize the benefits you will be able to see on your commercial property’s next tax return.
CSSI- Cost Segregation Services Inc is the nation’s premier engineering-based consulting firm specializing in the tax law surrounding commercial buildings. CSSI works with your accounting professionals to maximize these benefits while maintaining compliance with the tax regulations. With over 20,000 studies completed the CSSI team provides repair regulation, tax reform and cost segregation studies for individuals and businesses throughout the United States.
Reach out to the experts at Valbridge today to learn more, and/or to get an analysis of your building’s eligibility to segregate expenditures.