Cost segregation is the process of identifying property components that are considered "tangible personal property" or "land improvements" under the federal tax code. The primary goal of a cost segregation study is to identify all construction-related costs that can be depreciated over a shorter tax life (typically 5, 7, and 15 years) than the building (39 years for non-residential real property or 27.5 years for residential rental property).
Under the Tax Cuts and Jobs Act (TCJA) passed in December 2017, businesses may take 100% bonus depreciation on qualified property both acquired and placed in service after September 27, 2017, and before January 1, 2023. The bonus depreciation rules have allowed businesses to fully expense qualified fixed assets resulting in significantly reduced taxes. However, it’s important to note that this tax incentive is coming to an end and businesses should execute plans sooner rather than later if they want to take advantage of this tax benefit as the qualified percentage amounts will be phased out over a five-year period.
Beginning January 1, 2023, full bonus depreciation will decrease by 20% each year until it phases out completely in 2027. That means, as of the date of this writing, 80% bonus depreciation is currently available for the 2023 calendar year, 60% for the 2024 calendar year, 40% for 2025, and the last year of bonus depreciation will be 20% for the 2026 calendar year. Bonus depreciation rules can result in significant federal tax savings, but these savings won’t last forever.
Bonus Depreciation Case Studies
A midwestern steel manufacturing facility was acquired for approximately $1.65 Million. After land allocation, first-year tax savings equated to more than $550,000 of additional depreciation.
A large Texas warehouse property was acquired for $9.3 Million. After land allocation, first-year tax savings equated to more than $2.2M of additional depreciation.
A California mixed-use property was acquired for $3 Million. After land allocation, first-year tax savings equated to almost $450,000 of additional depreciation.
Time is of the Essence
If you want to find out what a cost segregation study can do for your business, and you want to take advantage of as many tax benefits as possible before the opportunity window closes for good, please reach out to a CTI tax specialist. A no-obligation, complimentary benefit assessment is available.
If you are worried that you missed an opportunity, don’t fret, we can assist with the preparation of the IRS Form 3115 needed to capture the 481(a) adjustment. Let bonus depreciation and the time-value of money concept work together to reduce your tax burden.