Neilley & Co. CPA Blog

Businesses that acquire, construct or substantially improve a building — or did so in previous years — should consider a cost segregation study. It may allow you to accelerate depreciation deductions, thus reducing taxes and boosting cash flow. And the potential benefits are now even greater due to enhancements to certain depreciation-related breaks under the Tax Cuts and Jobs Act (TCJA).

Real property vs. tangible personal property

IRS rules generally allow you to depreciate commercial buildings over 39 years (27½ years for residential properties). Most times, you’ll depreciate a building’s structural components — such as walls, windows, HVAC systems, elevators, plumbing and wiring — along with the building. Personal property — such as equipment, machinery, furniture and fixtures — is eligible for accelerated depreciation, usually over five or seven years. And land improvements — fences, outdoor lighting and parking lots, for example — are depreciable over 15 years.

Too often, businesses allocate all or most of a building’s acquisition or construction costs to real property, overlooking opportunities to allocate costs to shorter-lived personal property or land improvements. In some cases — computers or furniture, for instance — the distinction between real and personal property is obvious. But often the line between the two is less clear. Items that appear to be part of a building may in fact be personal property, like removable wall and floor coverings, removable partitions, awnings and canopies, window treatments, signs and decorative lighting.

In addition, certain items that otherwise would be treated as real property may qualify as personal property if they serve more of a business function than a structural purpose. This includes reinforced flooring to support heavy manufacturing equipment, electrical or plumbing installations required to operate specialized equipment, or dedicated cooling systems for data processing rooms.

A cost segregation study combines accounting and engineering techniques to identify building costs that are properly allocable to tangible personal property rather than real property. Although the relative costs and benefits of a cost segregation study depend on your particular facts and circumstances, it can be a valuable investment.

Depreciation break enhancements

Last year’s TCJA enhances certain depreciation-related tax breaks, which may also enhance the benefits of a cost segregation study. Among other things, the act permanently increased limits on Section 179 expensing. Sec. 179 allows you to immediately deduct the entire cost of qualifying equipment or other fixed assets up to specified thresholds.

The TCJA also expanded 15-year-property treatment to apply to qualified improvement property. Previously this break was limited to qualified leasehold-improvement, retail-improvement and restaurant property. And it temporarily increased first-year bonus depreciation to 100% (from 50%).

Assess the potential savings

Cost segregation studies may yield substantial benefits, but they’re not right for every business. To find out whether a study would be worthwhile for yours, contact us for help assessing the potential tax savings.

© 2018

 

IRS unveiled a draft copy of the new form 1040 which is a double-sided half-sheet of paper, making it 8-1/2” x 5”. One side is basically just your name, address, dependents, and the signature section. The other side shows all the calculations.

IRS accomplished this feat by leaving only the lines that the majority of tax filers actually use, and moving everything else to six new schedules. For example, the new form has lines to show income only for wages, interest, dividends and retirement. Any other type of income you might have, such as capital gains, rentals, flow through income from K-1s, self-employment and so on, will be summarized on new Schedule 1.

The payments section has been reduced to two lines… one for taxes withheld, and the other for everything else, such as estimated tax payments and certain refundable credits, which again, will go on a new schedule. The same goes for adjustments to income such as IRA or SEP retirement deductions, self-employed health insurance, etc., as well as itemized deductions, credits, and other taxes, such as self-employment tax for example, or the penalty for not having health insurance coverage all year (2018 is the last tax year for that, as things currently stand).

Apart from fulfilling any campaign promise our current President may have made, this has to be a good move on IRS’s part purely from a logistical perspective. They already had three versions of the 1040 to deal with: 1040EZ for taxpayers with no dependents and basically just wage and limited interest income, 1040A which allows for dependents as well as dividend and retirement income, and the regular long form 1040. The tax reform bill Congress passed in December also mandated IRS come up with yet a 4th version they dubbed the 1040SR, for retirees to accommodate more than the 1040A could handle, but still shorter than the regular long form. The redesigned 1040 replaces all four versions.

Frankly, the new form doesn’t really change anything in terms of preparing and filing a tax return. The length of the form is a moot issue for the majority of taxpayers who already prepare and file their returns electronically, either by themselves or through a CPA or other tax service. And no matter how long or short the tax form is, most people still have to gather and report all the same information as before. If you’re eligible for the new 20% deduction for business income, there will in fact be even more data and calculations needed to get that benefit. If you’re one of those who used to itemize deductions and now won’t thanks to the higher standard deduction in effect for 2018, maybe it will be little less. But that doesn’t have anything to do with a new form per se, and you may well still need to figure up your itemized deductions anyway in order to decide if the standard deduction actually is higher or not.

As always, please feel free to get in touch with us if you have questions about this or any other tax matters.

Best wishes,

Neilley & Co. CPAs

You can see a draft copy of the new 1040 at http://bit.ly/2J2zLmV.

 

If you’re ever contacted by phone or email by the IRS, it’s probably not them.

 

The latest common scam is for tax id thieves to file a fraudulent return in your name, but actually have the bogus refund deposited to your personal bank account.  Then they call you pretending to be IRS, to let you know the deposit was a mistake, and asking you oh so kindly to please return the funds.  But the check won’t be made out to Department of the Treasury, and the address won’t be one of the seven IRS service centers throughout the country.  They might not even ask for a check, sometimes they want you to send a prepaid debit card.  (As if IRS would ever want you to pay anything that way!)

Continue reading →