TAX TIPS AND STRATEGIES: PART 1
“While working through those April 15th tax returns, remember you are your client’s quarterback to a successful investment. Ensure you are utilizing your engineering-based cost segregation study to capture the added benefits of asset dispositions, repairs, maintenance, and energy incentives.”
It’s no secret CPAs work long, grueling hours during tax season. Fortunately, the rush of the March 15th corporate deadline is behind them but there is only room for a quick breather, as they must quickly shift their focus to the April 15th tax deadline. After that, things will go quiet for about a week or two as many CPAs take a much-deserved break. Upon their return to the office, they will need to begin looking at opportunities for their clients who filed extensions in addition to taking steps to reduce 2017 taxes. To save time and offer a head start, we have compiled a list of items CPAs and their real estate clients should consider and discuss over lunch.
Items to consider for 2016 Extensions and 2017 Tax Planning
As we roll into the final weeks of tax season and begin filing extensions, revisit your current depreciation schedules and be aware of doors that may be closing!
Energy Policy Act of 2005: 179D Tax Deduction and 45L Tax Credit
Keep in mind that projects with completion dates between January 1, 2006 and December 31, 2016 still qualify for the 179D tax deduction and 45L tax credit. The 179D tax deduction is available to commercial property owners for the installation of energy-saving lighting, HVAC, and building envelopment systems in new or existing buildings. Each system qualifies for up to $0.60 cents per sq. ft. with a maximum benefit of $1.80 per square foot. Similarly, 45L is an energy incentive for developers of multi-family housing projects. Residential buildings (3 stories or less) that are optimized for energy efficiency should be evaluated for the $2,000 per unit 45L tax credit. With the future uncertain for these incentives, make sure you don’t miss the opportunity before it expires.
Like the energy incentives, the ability for tangible property regulation look backs are also set to expire and should be considered on 2016 tax returns in addition to being part of 2017 tax strategies.
If you or your client have undertaken demolition or renovated a building to tear out lighting, HVAC units, and other components, those assets can be abandoned or retired from the building. As such, their book value can be treated as a business deduction. The tangible personal property within a structure (or a part of it) allows for the remaining depreciable value (or basis) to be written off when the asset is retired, provided the personal property is no longer in service and was not purchased with the intent to demolish. This must be identified and valued prior to demolition and can still be applied to 2016 returns. Moving forward, it should be deducted in the year of disposal.
Repair Regulation Compliance:
Under the final regs, the IRS issued final guidance to taxpayers that refine and clarify the treatment of costs incurred for acquisition, repairs, or improvements of tangible property. This guidance constitutes a change for most taxpayers resulting in required documentation for write-off’s over and above safe harbor limits. If applied correctly, these guidelines provide additional write-offs, reduced tax liability, and a safer tax filing position.
This will probably be the last opportunity these taxpayers will have to review their prior method changes and ensure that they fully complied with the rules while looking for opportunities to unlock the tax benefits associated with their prior method changes.
Cost segregation is the bread and butter for identifying the tax incentives mentioned above. A proper cost segregation study serves as a tool for identifying dispositions, repairs and maintenance items for expensing and can even reduce insurance premiums by substantiating the replacement costs to the insurance carrier. Read our article, “Next Generation Cost Segregation Study,” to learn more.
Whether you or your clients plan to purchase, renovate, or even sell a commercial property in 2017, a comprehensive cost segregation study can carve out certain qualifying portions of a building into 5, 7, and 15 year lives to accelerate depreciation and realize millions of dollars hiding within those real estate investments.
Identifying these tax planning strategies for 2016 extensions and 2017 taxes can get you ahead of the game and allow you to file your taxes with ease. Contact Engineered Tax Services for further guidance on niche tax strategies for 2017 firm growth.