With uncertainty in the economy, minds naturally gravitate toward ways to save money. For commercial real estate owners, this is a particularly crucial time to be aware of a few tax incentives that have the potential to lower your tax liability and improve the after-tax return on your investment.
2023 marks the beginning of a gradual decrease for real estate bonus depreciation. Therefore, before the year progresses further, now represents an excellent time to consider a cost segregation study to see if your property qualifies for enhanced depreciation deductions. It’s also an opportune moment to consider a “look back study” to determine if you can realize the benefits of a cost segregation study even after the year in which the property was purchased or constructed. Additionally, the Inflation Reduc- tion Act of 2022 (IRA) has introduced a higher energy tax deduction for commercial property owners that maybe worth consideration.
TAKE ADVANTAGE OF BONUS DEPRECIATION
Real estate has been and remains a tax favored asset class; one example is bonus depreciation. Bonus depreciation is an incentive that allows taxpayers to deduct a large percentage of the cost of qualifying property in the year it is placed in service (either by purchase or self-construction).
Qualifying property is property with a tax useful life of 20 years or less and includes items such as landscaping, furniture, wall and floor coverings, and many more assets that can be uncovered in a cost segregation study. The Tax Cut and Jobs Act of 2017 (TCJA) allowed for used property that is of original use to the taxpayer and that meets certain acquisition requirements to qualify for bonus depreciation as well.
The TCJA increased the first-year bonus depreciation from 50% to 100%, and that amount was available through the end of 2022. In 2023 this percentage is reduced to 80%. It will be 60% in 2024 and so on until it is set to be eliminated by 2027 (unless extended by Congress).
CONSIDER A COST SEGREGATION STUDY
A cost segregation study is a detailed analysis of the costs within and around a building that can be depreciated over shorter IRS prescribed tax lives, and further deducted via bonus depre- ciation. Depending on property type, it is possible for 25% or more of the cost of the building to be expensed in one year by combining a cost segregation study with bonus depreciation. A cost segregation study should be performed by a qualified firm that reviews available blueprints and physically inspects the property to allocate the component costs to their appropriate tax lives. A clear, well-documented report should be provided to the taxpayer to ensure defensibility.
Even if you purchased or constructed a build- ing a few years ago and allocated 100% of the improvements to real property with a 39-year recovery period, you can still have a “look back” cost segregation study performed. The difference between the depreciation claimed with a cost segregation study and the amount claimed by the taxpayer using a 39-year recovery period can be claimed in one year without the need to amend prior years’ tax returns.
LEVERAGE THE ENERGY TAX DEDUCTION
The recent passage of the IRA includes provisions that could significantly boost climate actions in the building sector. One of the most significant changes was to the Energy Efficient Commercial Buildings Tax Deduction (Section 179D), which incentivizes builders and building designers for building energy-efficient commercial buildings.
The newly implemented changes both increase eligibility to a wider group of taxpayers and the amount of the potential deduction. The changes include raising the maximum tax deduction from $1.88 per square foot in 2022 to as much as $5.00 per square foot in 2023 and lowers the required minimum savings in total annual energy and power costs from a 50% reduction to a 25% reduction.
Paul Rosenkranz is managing director of CBIZ, a business consulting, tax and financial services provider and works closely with MHM (Mayer Hoffman McCann P.C.), an independent CPA firm providing audit, review and attest services. This publication is distributed with the understanding that CBIZ is not rendering legal, accounting or other professional advice. The reader is advised to contact a tax professional prior to taking any action based upon this information.
