By E. Lamont Cosby, Cost Segregation Services, Inc. Senior Consultant
The Tax Cuts and Jobs Act of 2017, along with other tax reform, has made investment in commercial real estate an even better proposition. There is now the opportunity for a greater “Return On Investment” for commercial buildings. This legislation is also important to investors considering the purchase of a commercial building.
To put it simply, ROI is positively impacted by a 5% to 8% influx of cash flow from a significant reduction in income tax liability. This reduction in income tax is largely from bonus depreciation. Money that is not paid in income taxes is now money available to building owners, business owners, and investors to use or invest.
The Tax Cuts and Jobs Act increased the bonus depreciation of commercial buildings from 50% to 100% for qualified property purchased after September 27, 2017. While there are technical and other considerations, bonus eligible property must have a depreciation life of 20 years or less. Bonus depreciation has been expanded to include both newly constructed buildings and existing property purchased after Sept. 27, 2017.
While accountants are a part of the process, this is an engineering-platform-based building analysis. In fact, many CPAs are turning to organizations like Cost Segregation Services Inc. to provide them with the calculations and guidance to allow incorporation of the relevant data into the business or property owner’s tax returns.
Experts who handled depreciation schedules and forecasts prior to the Act are now on a steep learning curve. For example, Qualified Improvement Property (QIP) has replaced qualified leasehold improvements. Qualified retail improvements and qualified restaurant improvements, which have had a 15-year recovery period, are now eligible for 100% bonus depreciation in the current tax year.
In order to achieve these financial benefits requires that building “units” are identified and valued by a specialized building analysis called Cost Segregation. Although there are other methods of identifying buildings, Cost Segregation is the proven method and the most acceptable method by the IRS.
In summary, the way that buildings are treated for tax purposes has changed. These changes are favorable to the building owners. An engineering-platform-based Cost Segregation analysis allows building owners to take full economic advantage of the Tax Cuts and Jobs Act, as well as the Tangible Property Regulations. Cost Segregation Services, Inc. is one of the national firms that does the identification, valuing, and calculations for the owners and their accountants.
E. Lamont Cosby
Cost Segregation Services
310 218-0446 direct line