Commercial buildings and improvements generally are depreciated
over 39 years, which essentially means you can deduct a portion of the cost
every year over the depreciation period. (Land isn’t depreciable.) But special
tax breaks that allow deductions to be taken more quickly are available for
certain real estate investments.
Some of these were enhanced by the Tax Cuts and Jobs Act (TCJA)
and may provide a bigger benefit when you file your 2018 tax return. But there
are two breaks you might not be able to enjoy due to a drafting error in the
TCJA.
Section 179 expensing
This allows you to deduct (rather than depreciate over a number
of years) qualified improvement property — a definition expanded by the TCJA
from qualified leasehold-improvement, restaurant and retail-improvement
property. The TCJA also allows Sec. 179 expensing for certain depreciable
tangible personal property used predominantly to furnish lodging and for the
following improvements to nonresidential real property: roofs, HVAC equipment,
fire protection and alarm systems, and security systems.
Under the TCJA, for qualifying property placed in service in tax
years starting in 2018, the expensing limit increases to $1 million (from
$510,000 for 2017), subject to a phaseout 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.
Accelerated depreciation
This break historically allowed a shortened recovery period of
15 years for property that qualified. Before the TCJA, the break was available
for qualified leasehold-improvement, restaurant and retail-improvement
property. Again, the TCJA expanded the definition to “qualified improvement
property.”
But, due to a drafting error, no recovery period was given to
such property, so it defaults to 39-year property. For accelerated depreciation
to be available for qualified improvement property, a technical correction must
be issued.
Bonus depreciation
This additional first-year depreciation allowance is available
for qualified assets, which before the TCJA included qualified improvement
property. But due to the drafting error noted above, qualified improvement
property will be eligible for bonus depreciation only if a technical correction
is issued.
When available, bonus depreciation is increased to 100% (up from
50%) for qualified property placed in service after Sept. 27, 2017, but before
Jan. 1, 2023. For 2023 through 2026, bonus depreciation is scheduled to be
gradually reduced. Warning:
Under the TCJA, real estate businesses that elect 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 may offer
substantial savings on your 2018 tax bill, it’s possible they won’t 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
normal 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 normal
depreciation deductions could be more valuable long-term.
For more information on these breaks or advice on whether you
should take advantage of them, please contact us.
© 2019
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