[Author: Randy Koski & Michelle Thornburg, Koski Professional Group, P.C., 2013 | Keywords: Business, Operations, Depreciation]
When constructing or buying business real estate, you should take steps to maximize the income tax depreciation deductions you can claim for the property. Accelerating the depreciation deduction reduces your current tax bill and helps improve current cash flow, resulting in a greater “present value” to the property owner.
Most commercial real estate must be depreciated over a period of 39 years, with somewhat more favorable treatment for residential real estate (27.5 years) and for certain other types of buildings and improvements. On the other hand, most personal property (furniture, equipment, etc.) is depreciable over considerably shorter periods (generally 5-7 years). In addition, personal property is eligible for Section 179 depreciation and if the personal property is new, it will also be eligible for additional first-year bonus depreciation (if placed in service before 2014).
At the time you acquire or construct real estate, it is important to take steps to identify and document the items that are personal property or building components that may qualify for a shorter depreciable life. For some items, the distinction follows “common sense” – a chair is personal property, a weight bearing brick wall is part of the building. However, for many items, such as lighting fixtures, signs, floor coverings, wall coverings, electrical systems, heating and cooling systems, the distinctions are governed by tax rules that can be complex and may necessitate consultation with professionals.
In addition to separating personal property costs from the building costs, it is important to evaluate the purchase of land and improvements. The cost of land itself is not depreciable. However the costs of land improvements are. Examples of items that may qualify for depreciable land improvements include, landscaping, parking lots, sidewalks, fencing, and some of the costs of grading and clearing.
If you think you could benefit from accelerated depreciation for items that were incorrectly included as land or buildings in previous years, please contact us. You don’t need to amend past returns to claim the depreciation that you could have already claimed. Instead, with the next return you file, you claim the depreciation in accordance with IRS procedures for an “automatic” IRS consent change.
If you are interested in pursuing the possibility of making favorable changes in depreciation, we can consult with you on whether a cost segregation study would result in overall tax savings greater than the cost of the work involved to complete the cost segregation study.
Koski Professional Group, P.C., a CPA firm located in Omaha, NE, has over 25 years of experience in working with equipment dealers in Nebraska and Iowa. Randy Koski and Michelle Thornburg have over 50 years combined experience working with equipment dealers. Feel free to contact Randy or Michelle at 402-445-4040 with your questions or for additional information on how we may be able to help you.