The potential benefits are now even greater due to enhancements to certain depreciation-related breaks under the Tax Cuts and Jobs Act (TCJA).
Real property vs. tangible personal property
IRS rules generally allow you to depreciate commercial buildings over 39 years (27½ years for residential properties). Most times, you will depreciate a building’s structural components - such as walls, windows, HVAC systems, elevators, plumbing and wiring - along with the building. Personal property - such as equipment, machinery, furniture and fixtures - is eligible for accelerated depreciation, usually over five or seven years. And land improvements - fences, outdoor lighting and parking lots - for example are depreciable over 15 years.
Too often, businesses allocate all or most of a building’s acquisition or construction costs to real property, overlooking opportunities to allocate costs to shorter-lived personal property or land improvements. In some cases - computers or furniture - for instance the distinction between real and personal property is obvious. But often the line between the two is less clear. Items that appear to be part of a building may in fact be personal property, like removable wall and floor coverings, removable partitions, awnings and canopies, window treatments, signs and decorative lighting.
In addition, certain items that otherwise would be treated as real property may qualify as personal property if they serve more of a business function than a structural purpose. This includes reinforced flooring to support heavy manufacturing equipment, electrical or plumbing installations required to operate specialized equipment, or dedicated cooling systems for data processing rooms.
A cost segregation study combines accounting and engineering techniques to identify building costs that are properly allocable to tangible personal property rather than real property. Although the relative costs and benefits of a cost segregation study depend on your particular facts and circumstances, it can be a valuable investment.
Depreciation break enhancements
The TCJA temporarily increased first-year bonus depreciation to 100% (from 50%) for qualified property acquired and placed in service after September 27, 2017 through 2022.
Another significant, historical change is that bonus depreciation is now allowed on qualified acquisitions of used property. Therefore, if you acquire a building after September 27, 2017 you may be able to claim 100% bonus depreciation on the qualified tangible personal property.
The 2017 TCJA enhances certain depreciation-related tax breaks, which may also enhance the benefits of a cost segregation study. Among other things, the act increased the dollar limitation to $1 million along with the investment limitation up to $2.5 million on Section 179 expensing. Sec. 179 allows you to immediately deduct the entire cost of qualifying equipment or other fixed assets up to specified thresholds.
Assess the potential savings
Cost segregation studies may yield substantial benefits, but they are not right for every business. To find out whether a study would be worthwhile for yours, contact us for help assessing the potential tax savings.