Did you visit a certified public accountant firm recently? If so, you would encounter similar questions about the importance of cost segregation in post-tax reform. Does cost segregation make any sense with a lowered tax rate, changes to bonus depreciation, etc.? The best way to know about this is to get in touch with the best cost segregation services near you.
The most appropriate answer to this question: “Is Cost Segregation Important Post Tax Reform” is yes. Still, the specifics of a situation are difficult to dissect because it depends on specific clauses. The cost segregation services fit into different categories, and the best way to explain it is to look for the purchased property, ground-up new construction, and renovations.
For Purchased Properties
The need and benefit of cost segregation for acquired properties have increased. Under the terms and conditions of the new tax law property, there is no need to meet the demand for bonus depreciation for the “first use.” It means that the eligible assets acquired by 27th September in 2017 are available for “bonus depreciation treatment” if subjected to binding contract limitations. On purchased assets, the benefits will be supercharged with the bonus treatment associated with the segregation study. The best way to explain this is with an example:
Suppose a taxpayer has purchased a property of $10 million, where 20% of it gets reclassified as shorter lives, then in the acquisition year, he or she can write $2 million. Now, the next essential thing to know is about the bonus depreciation.
Why Are Bonus Depreciations Essential?
The bonus depreciation changes help increase the cost of segregation benefits when it comes to newly constructed property. In the new tax rules, the bonus depreciation has been improved for five years from 50% to 100%. As a result, it helps in increasing the return on investment significantly from the cost segregation.
While most of them misinterpret the term “bonus,” as they mean it is an added benefit after the “asset’s depreciable tax base.” It is a boost provided to the asset accelerating the tax depreciation in the first year of placing the asset.
The Aspect of Bonus Depreciation
The most important aspect of bonus depreciation is to enhance investment and job growth in the country. Initially, the bonus depreciation was enacted for the only first year at 30% to those who are new. But, now, a tax recovery period of 20 years is provided along with the previous one. As under the Modified Accelerated Cost Recovery System (MACRS), the tax recovery period for residential real property is 27.5 years, while for non-residential real estate, its 39 years. However, these asset classifications are not qualified for the added incentives.
Below the new tax law category, repairs are a bit less clear. QIP or Qualified Improvement Property, are non-structural assets included after the building is in service. These assets are known to be eligible for a bonus under this category. In this case, QIP would be written off when the services, but due to drafting errors, the information regarding the same was not included in the bonus rules.
A Technical Error
Due to the above reason, the 39-years property does not come under bonus depreciation, which is a significant error and to fix the error, a technical solution is required. When QIP gets set for a renovation, which includes only the interior of a building, there is no need for cost segregation studies. In case the renovation studies include HVAC systems, exterior facades, elevators, load-bearing walls, escalators, etc., a cost segregation study will be required to break the assets not termed as QIP.
What Do You Need To Do In Case Of Expansion With A Renovation?
It would be complicated for a taxpayer to determine the remaining asset if an analysis is not made to break the QIP apart. As a result, it would be tricky in maximizing the bonus-eligible property. Along with that, if the renovation includes an expansion, a study also needs to be conducted regarding the same. The research must consist of separate assets in the development of the original ones. After a taxpayer completes a renovation, a discussion will help the trusted professionals find the amount of QIP.
Other Changes Affecting Depreciation
Quite a few changes are not present in the new tax law that can affect reduction, such as NOL carryovers, opt out 30% interest limitations, etc. In many cases, it is found that cost segregation studies are beneficial and essential for taxpayers who are investing a lump sum amount in real estate.
Irrespective of a taxpayer’s structure, the new law has created a boon for investors when investing in a property. For ensuring that the savings are high, a cost segregation study is essential to identify the qualifying assets.