What to consider for 2018 taxes
Typically, commercial buildings and improvements are depreciated over 39 years. This means you can deduct a portion of the cost every year over the depreciation period. (This excludes land- you cannot devalue it.) However, specific real estate investments have different tax breaks. Which allow you to implement deductions more rapidly.
Many tax laws were revised by the Tax Cuts and Jobs Act (TCJA) to provide a more significant benefit when you file your 2018 tax return. However, two tax breaks may not help you anymore due to a drafting mistake in the TCJA.
This tax law allows you to deduct (rather than depreciate over some years) qualified improvement property. A definition expanded by the TCJA from qualified leasehold-improvement, restaurant, and retail improvement property. The TCJA also allows expensing for certain depreciable tangible personal property used predominantly to furnish lodging. Also for the following improvements to nonresidential real estate:
- HVAC equipment
- Fire protection,
- Alarm systems
- 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 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.
Speeding up depreciation
The accelerated depreciation deduction is known for allowing a shortened recovery period of 15 years for property that qualifies. 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.”
However, 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 revised.
This additional first-year depreciation allowance is available for qualified assets. Which before the TCJA included qualified improvement property. Still, due to the drafting error noted above, qualified improvement property will be eligible for bonus depreciation only if a technical correction is made.
When available, bonus depreciation increases to 100% (up from 50%) for qualified property placed in service after September 27, 2017, but before January 1, 2023. For 2023 through 2026, bonus depreciation is scheduled to be gradually reduced.
Something important to keep in mind: Under the TCJA, real estate businesses that elect to deduct 100% of their business interest will be ineligible for bonus depreciation beginning in 2018.
What’s my advantage?
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 made later. This would be over a period of years under regular 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 regular 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.