Tax planning in the Tangible Property Regulations era - by Jeff Hiatt and David Fabian

Jeff Hiatt, MS Consultants, LLC

The Federal Tangible Property Regulations (TPR) were recently enhanced, handing taxpayers a greater number of ways to increase their income tax deductions through repair and maintenance expenses, de minimis expenses, and they continue the ability to write-off structural components of buildings.  There are currently many opportunities for tax planning strategies that will lead to tremendous savings.

In the same way, the “Protecting Americans from Tax Hikes (PATH) Act of 2015” brings taxpayers relief through a number of now-permanent deductions. Perhaps lesser known than those provisions, but just as powerful, Cost Segregation Studies (CSS) serve to maximize tax savings for organizations that own real property.

Tangible Property Regulations planning points

To begin, the IRS has increased the de minimis safe harbor election threshold from $500 to $2,500 per unit per invoice to be expensed, instead of capitalized, for taxpayers without applicable financial statements.  This safe harbor is an attempt to decrease the record keeping and compliance burden on small businesses and individual taxpayers, who can automatically expense these amounts, provided they have the necessary documentation to substantiate their claims.  Larger thresholds are available for taxpayers with applicable financial statements, provided all requirements are met.

David Fabian, MS
Consultants, LLC

Additionally, there is still opportunity to write of the remaining basis of assets that have been previously capitalized, but now meet the new definition of expense. Writing off of removed assets is still allowed, including structural and non-structural components, with the ability to look back to past removals.  Partial asset removals are still allowed as well, however only in the year of disposition.  Application for Change in Accounting Method, Form 3115 may be required for some of these expenses, with automatic approval.

The PATH to more tax planning

Congress passed a tax-extender package for 2016 and beyond, and some of its provisions became permanent.  This is tremendous news for many taxpayers.  Some of the provisions of the tax extenders are:

• Enhanced Section 179 deductions:  Taxpayers may now deduct up to $500,000 of the cost of fixed asset additions, with a phase-out beginning at $2 million of additions.  This includes qualified leasehold improvements (QLI), qualified retail improvement property (QRIP) and qualified restaurant property (QRP) at the $500,000 limit as well.

• Qualified leasehold, retail and restaurant improvements: The 15-year straight line depreciable lives for QLI, QRP, and QRIP are now permanent.

• Qualified improvement property:  Bonus depreciation is available on eligible 39-year structural improvements beginning in 2016. 

• Bonus depreciation:  Now extended through 2019, bonus depreciation allows for the immediate expensing of fixed asset additions. The bonus percentages are 50% for 2015 through 2017, 40% for 2018 and 30% for 2019. 

• Energy-efficient commercial property:  The Section 179D energy deduction is now extended through 2016. 179D is available to commercial building owners, tenants, architects, and more. The deduction is based on the square footage of the energy-efficient property.

• Energy-efficient homes:  Section 45L, which provides a $2,000 credit for manufacturing energy-efficient homes, is extended through 2016.

Cost Segregation Studies

A cost segregation study allocates various classes of assets to their proper depreciable lives that are required by the IRS. Without a cost segregation study, all assets in a commercial building are written off over 39 years, or in the case of residential property, over 27.5 years. A cost segregation study allocates assets to various depreciable lives generally ranging from 5 to 39 years. This allows a taxpayer to take increased depreciation over a shorter number of years for a portion of the building costs. The allocation of assets may also unlock bonus depreciation for eligible property. The increased depreciation allows for larger tax deductions and less income tax paid, thereby increasing cash flow in the early years of a project.  And of course, most real estate owners want the cash to acquire additional property.

Another benefit of a cost segregation study is the cost breakout it provides for structural components of a building that are required to be depreciated over 39 or 27.5 years.  Since a cost segregation study has hundreds or thousands of line items, when assets are replaced a taxpayer can write off the net tax value of the replaced asset in accordance with the Tangible Property Regulations.

Tax planning opportunities abound when considering Tangible Property Regulations, PATH Act and cost segregation studies—each of which offers attractive income tax advantages on its own.  And together they will enable taxpayers to realize significant income tax benefits for 2016 and beyond.

Jeffrey Hiatt is director of new business development and David Fabian is a partner at MS Consultants, LLC, Williamsville, N.Y.