Reminder: One More Year for 100% Bonus Depreciation!

When the Tax Cuts and Jobs Act doubled the bonus depreciation rate in 2017, real estate professionals everywhere rejoiced. Time is running out, however, to capitalize (no pun intended) on this tax benefit. With the 100% rate expiring on Dec. 31, 2022, it’s time to refresh your memory on bonus depreciation and take advantage of the savings.

What is bonus depreciation?

While repairs to your property can reduce your taxable income, improvements that add value are capitalized as assets and depreciated over many years. (Read more here about the difference between capitalization vs. repair.) Bonus depreciation, however, allows a percentage of the cost of certain property and qualified improvements to be immediately deducted.

Prior to the TCJA, that rate was 50%. But the TCJA bumped it to 100%. The property must have been acquired and placed in service after Sept. 27, 2017 and before Jan. 1, 2023.

What qualifies for 100% bonus depreciation?

The property must have a useful life of no more than 20 years. Examples include vehicles, furniture, fixtures, machinery, land improvements and even computer software. (Land and buildings themselves, however, do not qualify for bonus depreciation.) Bonus depreciation must be taken within the first year the item was placed in service.

Qualified improvement property (QIP) is certain interior improvements made to an existing commercial property, such as an office building, restaurant or strip mall. Interior improvements that qualify as QIP are considered 15-year property and, thus, are eligible for bonus depreciation.

The TCJA also expanded the definition of property eligible for 100% bonus depreciation to include used qualified property acquired and placed in service after Sept. 27, 2017. Previously, bonus depreciation could only be utilized on newly purchased property. For used property to be considered eligible for the bonus depreciation deduction by the IRS, the following conditions must be met:

  • The taxpayer or its predecessor didn’t use the property at any time before acquiring it.
  • The taxpayer didn’t acquire the property from a related party.
  • The taxpayer didn’t acquire the property from a component member of a controlled group of corporations.
  • The taxpayer’s basis of the used property is not figured in whole or in part by reference to the adjusted basis of the property in the hands of the seller or transferor.
  • The taxpayer’s basis of the used property is not figured under the provision for deciding basis of property acquired from a decedent.
  • Also, the cost of the used property eligible for bonus depreciation doesn’t include the basis of property determined by reference to the basis of other property held at any time by the taxpayer (for example, in a like-kind exchange or involuntary conversion).

Property used for both business and personal reasons can also qualify as long as at least 50% of the time is for business. Certain limitations may apply.

Can a cost segregation study help?

We’re glad you asked! Yes, they can indeed help. A cost segregation study is performed to identify building components that can be depreciated over a shorter tax life. While this well-known tax strategy is a complex undertaking, it can result in significant tax savings. The IRS includes a comprehensive cost segregation guide for a number of industries on its website, and your CPA can help guide you in the process.

Is this the best move for my property?

It depends. While an immediate, 100% deduction sounds hard to beat, a 15-year depreciation can provide more long-term savings in some cases. Review your situation with a real estate CPA so you can make the best choice for your tax picture.

All content provided in this article is for informational purposes only. Matters discussed in this article are subject to change. For up-to-date information on this subject please contact a James Moore professional. James Moore will not be held responsible for any claim, loss, damage or inconvenience caused as a result of any information within these pages or any information accessed through this site.

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