July 29, 2016
Cost Segregation Services’ National Account Executive Richard Symon provided Connect Media with a quick FAQ on cost segregation and how it can help your business.
Cost segregation is the IRS-approved method of re-classifying components and improvements of your commercial building from real property to personal property. This process allows the assets to be depreciated on a 5, 7 or 15-year schedule, instead of the traditional 27 and a-half year schedule of residential real property. Thus, your current taxable income will be greatly reduced, and your cash flow will increase $30,000 to $50,000 for every $1million of building cost. This is your money to use now.
Q. Can you schedule repairs and maintenance so that they can be expensed?
A. Yes. There are three strategies available. You should be proactive and strategize on all expenditures that are over $2,500 for 2017. The first is the de minimus safe harbor limit which all businesses can take advantage of in 2016 and beyond. Any expenditure under $2,500 can be expensed. Second, if expenditures are deemed repair and maintenance, not a betterment, they can be expensed. Third is the small tax payer safe harbor which is an excellent opportunity for apartment owners. Owners would take 2% of the unadjusted basis of each building, and write down expenditures under that 2% number.
Q. Can you expense items that went in the trash during renovation, like labor?
A. This is a partial asset disposition. An owner can write off the remaining depreciable basis of assets that went in the trash during a renovation, addition or improvement, including the labor to remove the items. This can only be done in the year of the renovation.
Q. How will the new IRS Tangible Property Regulations affect business?
A. The new repair and maintenance regulations are the biggest tax change since 1986. The AICPA says that apartment owners will be affected more than any vertical market.
First, your existing depreciation schedule must be scrubbed and any items that do not rise to the new level of capitalization MUST be expensed. Regulation 1016–3 says that if this is not done prior to an audit, the remaining depreciable basis of the items can be disallowed. The IRS is very serious about this.
Second, moving forward, there are new capitalization criteria and three safe harbors that can be utilized to expense expenditures that would normally be capitalized. Your CPA can inform you so that you can strategically decide which repairs should be made and when.
Be sure to check out Connect Apartments on September 15 downtown Los Angeles at the JW Marriott.
For comments, questions or concerns, please contact Daniella Soloway