On Thursday, September 27, Republican leaders in Congress and the Trump administration released the Unified Framework for Fixing Our Broken Tax Code. Among the many ideas outlined within the plan is to reduce the corporate tax rate to 20% and provide a maximum tax rate of 25% for business income from flow through entities of small and family owned businesses. Another proposed change would allow businesses to immediately write off new investments in depreciable assets. Most notable for real estate owners is that unlike previous proposals, this one specifically excludes building structures from being immediately deducted. These proposed ideas make the longstanding tax strategy known as cost segregation more advantageous to perform in 2017 than delaying for future tax years.
KBKG Insight: Deductions are more valuable when tax rates are higher, so carefully planning the timing of deductions can create significant permanent tax savings. Accelerating deductions into the 2017 tax year lowers current tax liabilities, while effectively shifting income into future years when tax rates drop. Taxpayers should consider all opportunities to accelerate deductions into the 2017 tax year.
There are several opportunities to accelerate deductions into the 2017 tax year using the automatic changes in accounting method procedures under Rev. Proc. 2016-29. Many of these procedures are common and do not require amending any returns (see rules on filing of a Form 3115).
For example, taxpayers who have opted not to perform a cost segregation study in the past, because it only represented a timing difference in cash flow, should now reconsider for 2017. Taxpayers that do not take advantage of this opportunity in 2017 miss out on the permanent tax saving that will no longer be offered after rates fall. Rev. Proc. 2016-29 allows taxpayers to apply deductions realized from a cost segregation study any time after the building is purchased, providing a unique opportunity to plan which tax year depreciation deductions are utilized.
Case Study: ABC, LLC owns a building that was purchased in 2014 for $1 million. This year, ABC has a cost segregation study performed on their building and applies it to their 2017 tax return. The cost segregation study accelerates $100,000 of future depreciation deductions into the 2017 tax year where Federal income tax rates are 39%, creating an immediate tax savings of $39,000. Assuming tax rates drop in 2018 to 25%, ABC now realizes a $14,000 permanent tax savings ($39,000 – $25,000) on top of the traditional benefits of accelerated cash flow generated by a cost segregation study.
Any type of current year construction improvement activity may also indicate there could be available partial disposition deductions if existing components are replaced. Taxpayers who have not reviewed their tax depreciation schedules for these opportunities should consider hiring a third-party expert who can maximize deductions for the 2017 tax year.
The full contents of the Unified Framework for Fixing Our Broken Tax Code can be found » Here
Opportunities to Accelerate Deductions:
Cost Segregation for Buildings and Improvements: If you have purchased, constructed, or remodeled a building in the last 15 years a Cost Segregation Study could benefit you. » Cost Segregation
Partial Dispositions: If you have spent significant dollars on capital improvements to your building, you are eligible for a partial disposition deduction on the components removed. » Partial Disposition Calculator
Retirement Studies: Taxpayers who replace building components often do not identify and retire the original components removed. Identification of these assets allows for the immediate deduction of any remaining depreciable value. » Retirement Studies
Residential Cost Segregator®: Cost segregation software designed for smaller residential rental properties under 6 units. » Retirement Studies
Author: Gian Pazzia, CCSP and Lester Cook, CCSP