Commercial buildings and improvements usually are depreciated over 39 years, meaning you can deduct a share of the cost every year over the depreciation period. (Land is not depreciable.) However, special tax breaks that allow deductions to be taken more quickly are available for specific real estate investments.
Some of these were enhanced by the Tax Cuts and Jobs Act (TCJA) and might provide a more significant benefit when you file your 2018 tax return. However, due to a drafting error in the TCJA, there are two breaks you might not be able to enjoy.
Section 179 expensing
This section allows you to deduct, rather than depreciate over several years, qualified improvement property—a definition expanded by the TCJA from qualified restaurants, leasehold-improvement, and retail improvement property. The TCJA also allows Sec. 179 expensing for certain depreciable tangible personal property used mainly to furnish lodging and for the following improvements to nonresidential real property: fire protection, roofs, HVAC equipment, security systems, and alarm systems.
Under the TCJA, the expensing limit increases to $1 million (from $510,000 for 2017) and for qualifying property placed in service in tax years starting in 2018 will be subject to a phase-out if your qualified asset purchases for the year exceed $2.5 million (compared to $2.03 million for 2017). These amounts will be adjusted annually for inflation, and for 2019 they’re $1.02 million and $2.55 million, respectively.
This break historically allowed a shortened recovery period of 15 years for the property that qualified. Before the TCJA, the break was available for qualified restaurant, retail improvement, and leasehold improvement property. Again, the TCJA expanded the definition to “qualified improvement property.”
However, due to a drafting error, no recovery period was given to such property, so it defaults to 39-year property. A technical correction needs to be issued for accelerated depreciation to be available for qualified improvement property.
This additional first-year depreciation allowance is available for qualified assets, which before the TCJA included qualified improvement property. However, due to the drafting error noted above, if a technical correction is issued qualified improvement property will be eligible for bonus depreciation.
When available for qualified property placed in service after Sept. 27, 2017, but before Jan. 1, 2023, bonus depreciation is increased to 100% (up from 50%). For 2023 through 2026, bonus depreciation is scheduled to be steadily reduced. Warning: Under the TCJA, real estate businesses that decide to deduct 100% of their business interest will be ineligible for bonus depreciation starting in 2018.
Can you benefit?
Although the enhanced depreciation-related breaks might offer substantial savings on your 2018 tax bill, it’s possible they would not prove beneficial over the long term. Taking these deductions now means forgoing deductions that could otherwise be taken later, over a period of years under standard depreciation schedules. In some situations—such as if in the future your business could be in a higher tax bracket or tax rates go up—the standard depreciation deductions could be more valuable long-term.
Please contact us for more information about these breaks or advice on whether you should take advantage of them.
Ben R Shull CPA LLC provides clients with tax, transaction, and advisory services. The insights and quality services we deliver help lead our clients through the next generation of changes, and accelerate growth while reducing risk. CPA Katy, TX.