capstantax - my-CPE.com · 2019-09-10 · Tangible Property Regulations (TPRs) Tax Cuts and Jobs Act (TCJA) –Bonus Depreciation –QIP Under the TCJA –Interest Deduction Limitation

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Using Cost Segregation to Take Advantage

of the TPRs and the TCJA

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Disclaimer

This information is based on Capstan's understanding of the

subject matter; the content should not be construed as situation-

specific tax or legal advice and no options should be implemented

without the validation and approval of your tax advisor or CPA. As

such, the recipient agrees to hold Capstan harmless with respect

to any actual or consequential damages incurred by direct or

indirect utilization of information or strategies contained herein.

our strength. your tax savings.

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About Capstan Tax Strategies

Partners and staff have over 70 years of combined cost segregation experience

Team has completed over 5,500 successful studies

Commitment to the best practices in the industry

– Full compliance with ASCSP MQS 2016

– IRS ATG

Clearly defined and audit-tested processes and practices

Work closely with CPA firms and Real Estate Clients


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Today’s Presenter


Bruce A. Johnson, MBA, CEM

Founding Partner

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Agenda

Cost Segregation – Vehicle for Savings

Tangible Property Regulations (TPRs)

Tax Cuts and Jobs Act (TCJA)

– Bonus Depreciation

– QIP Under the TCJA

– Interest Deduction Limitation

– Section 179 Expensing

– 1031 Like-kind exchange

9/10/2019 our strength. your tax savings.

Cost Segregation – The Vehicle for Savings

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Cost Segregation: The Vehicle for Savings

Cost segregation provides the data required to support a variety of

tax strategies

IRS-approved tool that has been in use for years, though recent

legislation has made it more effective than ever

Basic objective: Accelerate depreciation deductions

– Multiple applications/utilities, as we’ll discuss

Cost segregation is used to maximize benefits of the recent tax

reform (TCJA) and the Tangible Property Regulations (TPRs)


11capstantax.com 9/10/2019 our strength. your tax savings.

Real Property (§1250)

“Base Building” – roof,

walls, windows, foundations,

vertical transportation, etc.

39-Year

27.5-Year

15-Year5 or 7-Year

Tangible Personal Property

(§1245)

Land improvements

(§1250)

Land

Not Depreciable

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Polling Question #1


Image courtesy of Stuart Miles at FreeDigitalPhotos.net

True or False: Land improvements are NOT depreciable.

Tangible Property Regulations

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Tangible Property Regulations

Tangible Property Regulations were effective January 1, 2014

They are very much still in play, augmenting utility of the TCJA

Impact whether you expense or capitalize money spent on

real estate (and other tangible property)

Again, a cost segregation study provides the data required to

support TPR opportunities


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Routine Maintenance

Safe Harbor

DeMinimis

Safe Harbor

Small Taxpayer

Safe Harbor

Perform activity more than once in a 10 year period

AFS: written policy, $5,000 safe harbor

Non AFS: policy, $2,500 safe harbor

Gross receipts ≤ $10 million, Unadjusted Basis ≤ $1 million,

Deduct the lesser of 2% unadjusted basis or $10,000

EXPENSEExpense

Test

Betterment

Adaptation

Restoration

1. Ameliorates a material condition or defect

2. Material addition to, or a major component of, the Unit of Property

3. Materially increase productivity, efficiency, strength, quality, or output

*If normal wear and tear occur during taxpayer ownership, return to initial state is not a

betterment, If exact replacement is not available, improved but comparable replacement

is not a betterment

1. Replacement of a component of property after properly deducting a loss

2. Replacement of a component that was sold

3. Replacement of property after claiming casualty loss

4. Returns UoP to ordinary, efficient operating condition after deterioration

5. Rebuilding of UoP to like-new condition after end of class life

6. Replacement of major component (40% test) or substantial structural part (25% test)

Adapts UoP to a new or different use from the ordinary use at the time originally placed in

service

Is the expenditure material to

its Unit of Property or material

at the discrete function level

within UoP?

Unit of Property

Building Structure

Building Systems

-HVAC

-Plumbing

-Electrical

-All Escalators/elevators

-Fire protection and alarm system

-Security System

-Gas Distribution System

-Items that have different MACRS lives

Assets within UoP performing a major discrete function

CAPITALIZE

With option to write off

remaining depreciable

basis of existing asset

using Partial Asset

Disposition Election *3

Materiality

Test

NO

YES

NO

EXPENSE

The Tangible Property Regulations Flowchart: Buildings

NO

YES

Does the expenditure

meet an exception to

capitalization?

BAR

Test

Is the expenditure

an improvement to

the building’s

systems or the

building’s structural

components?

YES

* See Reverse for Supplemental Information

or

or

*1

*2

*2 Version 2.0

*3


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TPR Opportunities - Expensing

Expensing – several “Safe Harbor” options available

– Routine Maintenance Safe Harbor – useful across the board

– Safe Harbor for Small Taxpayers – extra election

– De Minimus Safe Harbor – strengthened for non-AFS taxpayers

recently

Powerful, but require a high level of detail (itemized invoices a

plus)


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TPR Opportunities – Correctly Categorize Your Spend

Often assets are capitalized that could actually be expensed

The TPR establishes a series of tests that guide taxpayers in correctly categorizing spend

– BAR Test – determines if the cost represents an improvement, in which case it must be capitalized

– Materiality Test – determines if the cost is material (aka significant) in relation to its property category, in which case it must be capitalized

Assets that are not improvements and are not material may be expensed


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TPR Opportunities – Correctly Categorize Your Spend

A client recently installed a number of PTAC units in his multifamily residential

building, hoping they’d be 5-yr. The Capstan engineer said, nope, but…

“Let’s consider them in the context of the TPRs. Would these PTAC units be

considered a ‘Betterment’?”

“No,” responded the client. “They are the exact same grade of unit we had

previously.”

“How many did you replace?”

“Oh, not too many,” answered the client. “Less than 10% of them for sure.”

“Perfect,” said the Capstan team member. “These units can actually be fully

expensed under the BAR and Materiality Tests in the TPRs.”


Example:

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TPR Opportunities -- Dispositions

Partial Asset Disposition (PAD) -- Useful election in a

renovation scenario

Permits the immediate write-off of the remaining

depreciable basis of an asset that was replaced or removed

from service

Again, a cost seg study is required to identify and

segregate the relevant assets


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TPR Opportunities – Dispositions

Multifamily property with rotting roof

The roof had to be replaced to return the property to its ordinary, efficient operating condition, and this would be deemed a “Restoration” under the TPRs*

After capitalizing the cost of the new roof, may write off the remaining depreciable basis of the rotting roof using a Partial Disposition Election under the TPRs.

*Also potential for Section 179 Expensing here


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Routine Maintenance

Safe Harbor

DeMinimis

Safe Harbor

Small Taxpayer

Safe Harbor

Perform activity more than once in a 10 year period

AFS: written policy, $5,000 safe harbor

Non AFS: policy, $2,500 safe harbor

Gross receipts ≤ $10 million, Unadjusted Basis ≤ $1 million,

Deduct the lesser of 2% unadjusted basis or $10,000

EXPENSEExpense

Test

Betterment

Adaptation

Restoration

1. Ameliorates a material condition or defect

2. Material addition to, or a major component of, the Unit of Property

3. Materially increase productivity, efficiency, strength, quality, or output

*If normal wear and tear occur during taxpayer ownership, return to initial state is not a

betterment, If exact replacement is not available, improved but comparable replacement

is not a betterment

1. Replacement of a component of property after properly deducting a loss

2. Replacement of a component that was sold

3. Replacement of property after claiming casualty loss

4. Returns UoP to ordinary, efficient operating condition after deterioration

5. Rebuilding of UoP to like-new condition after end of class life

6. Replacement of major component (40% test) or substantial structural part (25% test)

Adapts UoP to a new or different use from the ordinary use at the time originally placed in

service

Is the expenditure material to

its Unit of Property or material

at the discrete function level

within UoP?

Unit of Property

Building Structure

Building Systems

-HVAC

-Plumbing

-Electrical

-All Escalators/elevators

-Fire protection and alarm system

-Security System

-Gas Distribution System

-Items that have different MACRS lives

Assets within UoP performing a major discrete function

CAPITALIZE

With option to write off

remaining depreciable

basis of existing asset

using Partial Asset

Disposition Election *3

Materiality

Test

NO

YES

NO

EXPENSE

The Tangible Property Regulations Flowchart: Buildings

NO

YES

Does the expenditure

meet an exception to

capitalization?

BAR

Test

Is the expenditure

an improvement to

the building’s

systems or the

building’s structural

components?

YES

* See Reverse for Supplemental Information

or

or

*1

*2

*2 Version 2.0

*3


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Supplemental Information on Capstan’s TPR Flowchart: Buildings

CAPITALIZATION: 1.263A-1(a)(3)(ii) Taxpayers that produce real property and tangible personal property (producers) must capitalize all

the direct costs of producing the property and the property's properly allocable share of indirect costs, regardless of whether the property is

sold or used in the taxpayer's trade or business. Under Sec. 263(a), amounts paid to acquire, produce, or improve tangible property must be

capitalized and not deducted.

*1. BAR TEST: At this level, if the expenditure is determined to be any one of these (Betterment, Adaptation, Restoration), it must be

capitalized.

*2. RESTORATION: It may be difficult to determine whether a restoration is significant enough to require capitalization, as the regulations

do not provide any bright-line quantitative threshold for decision making. However, changes to the examples in the final regulations do

indicate some patterns, from which general guidelines may be extrapolated. See § 1.263(a)-3(k)(7) for relevant examples.

For major components of buildings and building systems, examples imply that a replacement of 40% or less of a major component may not

be a significant portion of the major component, and as such would not be considered a restoration. [Example numbers 18, 21, 23 and 25.]

For substantial structural parts, examples indicate that replacement of 25% of a building’s structure was not considered a large portion of the

substantial structural part, and therefore was not considered a restoration. [Example numbers 27 (30%) and 30 (25%).]

For discrete function, examples indicate that if a material component performs a discrete and critical function, it is a major component of the

building. Incidental components of the UoP generally will not constitute a major component. Relevant example numbers include 14, 15, 16,

17, 18, etc.

*3. PARTIAL ASSET DISPOSITION ELECTION: There may be a tax planning opportunity for taxpayers who purchase and place assets in

service and then begin renovation activities. Assuming that the assets are already "in service," that the UNICAP provisions of IRC Sec. 263A

don’t apply, and that the safe harbor provisions pertaining to IRC Sec. 280B (demolition) have successfully been met (so that amounts are

not capitalized to land), then taxpayers may be able to take a partial asset disposition election on the assets being disposed of in the

renovation.

Additional Note: Detailed examples are contained in the IRS T.D. 9636 of 10.21.13 entitled, “Guidance Regarding Deduction and

Capitalization of Expenditures Related to Tangible Property,” and in all subsequent IRS guidelines released on this topic.

DISCLAIMER: Capstan Tax Strategies, with its issuance of this Flowchart, is not providing tax, legal or accounting advice. This material has been

prepared for informational purposes only. It is not intended to provide, and should not be relied upon for, tax, legal or accounting advice. Taxpayers should

consult their personal tax, legal and accounting advisors before engaging in any transaction.

CONTACT: Terri S. Johnson – [email protected] | 215.885.7510 (o) | 215.740.7605 (c)

Version 2.0

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Polling Question #2



True or False:

Partial Asset Disposition is a useful election in a new construction scenario.

Tax Cuts and Jobs Act (TCJA)

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The Tax Cuts and Jobs Act (H.R. 1) [TCJA]

Signed into law December 22, 2017

First comprehensive tax reform since 1986

Tremendous impact on all industries, including CRE

Congressional action required to clarify QIP status under

the TCJA – we’ll revisit


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Bonus Depreciation Under the TCJA

Bonus Depreciation for TY 2017 was set at

50% by the PATH Act

The TCJA increases Bonus to 100% for

properties placed-in-service between

9/28/2017 – 12/31/2022

New Construction/Renovation

Acquisitions now eligible – qualifying assets

no longer have to be new, just “new to you”

After 2022, Bonus rates will gradually decline


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Bonus Depreciation Under the TCJA – Crucial Date

TCJA Establishes a Mid-Year Bonus Rate Split

– 9/27/2017 is the crucial day that will determine bonus rates

Note: On August 8, 2018, the IRS issued proposed

regulations confirming that the rules set out in Reg.

1.168(k)-1(b)(5) will be retained.


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Bonus Under the TCJA -- Written Binding Contract

Bonus-eligibility status is contingent on a Written Binding

Contract signed after 9/27/17

– If a written binding contract for the acquisition (or new

construction/renovation performed by a third party) of property is in

effect prior to September 28, 2017, the property is not considered

acquired after the date the contract is entered into (Act Sec.

13201(h)(1) of the 2017 Tax Cuts Act).

– NOTE: a contract is binding only if it is enforceable under STATE law


Acquisitions and New Construction/Renovation Performed By a Third Party

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Bonus Under the TCJA –Acquisitions, Third-Party New Construction/Renovation

WBC for Purchase of Property

Signed BEFORE 9/28/17

WBC for Purchase of Property

Signed ON or AFTER 9/28/17

• Considered to have been acquired

BEFORE TCJA comes into play

• Therefore, PATH Act Rules must

apply and acquired assets would

NOT be eligible for Bonus

• Acquired under TCJA, therefore

TCJA Bonus rules apply

• 100% Bonus• Remember that assets must have

MACRS class lives of 20-years or less


DRIVEN BY DATE OF WRITTEN BINDING CONTRACT (WBC)

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Polling Question #3



True or False:

Bonus depreciation is at 100% through 2022.

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Case Study

MF Residential and Extended Stay Property

– 256 units in one four-story building

– Half standard apartments, half extended stay hotel suites

– Lounge, conference rooms, café, fitness center, pool, etc.

WBC signed AFTER 9/27/2017 – TCJA rules apply

Acquired and placed-in-service 12/20/2018

Depreciable Basis: $107,838,919

18.7% moved to 5-yr

4.1% moved to 15-yr


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Results Before TCJA – No Bonus on Acquisitions


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Results After TCJA – 100% Bonus on Acquisitions


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Case Study

Full-service hotel

– 13-story building with 77 guest suites

– Lobby, fitness center, theatre, guest lounge, restaurant

– Two retail properties leased to unrelated 3rd parties

WBC signed AFTER 9/27/2017 – TCJA rules apply

Acquired and placed-in-service 6/1/2018

Depreciable Basis: $41,157,863

18.8% moved to 5-yr

0.1% moved to 15-yr


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Results Before TCJA – No Bonus on Acquisitions


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Results After TCJA – 100% Bonus on Acquisitions


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Bonus Under the TCJA – New Construction/Renovation

Driven by “Substantial Completion” Method– Taxpayer is deemed to have “acquired” the asset once manufacture, construction, or

production has begun AND “physical work of a significant nature” has also begun

– “Physical work does not include preliminary activities such as planning or designing,

securing financing, exploring, or researching.”

– PLUS -- IRS Safe Harbor Option: Physical work of a significant nature will not be

considered to begin before the taxpayer incurs (in the case of an accrual basis

taxpayer) or pays (in the case of a cash basis taxpayer) more than 10 percent of the

total cost of the property.


Self-Constructed Assets ONLY

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Bonus Under TCJA –Self-Constructed Assets

More than 10% of Hard Costs Incurred

BEFORE 9/28/17

Less than 10% of Hard Costs

Incurred BEFORE 9/28/17

PATH Act Rules Apply • Pre-existing phase-down ruleso Placed-in-Service by 12/31/17: 50% Bonus

o Placed-in-Service by 12/31/18: 40% Bonus

o Placed-in-Service by 12/31/19: 30% Bonus

• Also applies to new spend on renovations post-

acquisition

TCJA Rules Apply• 100% Bonus

• Acquired assets are eligible


DRIVEN BY SUBSTANTIAL COMPLETION DATE


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Qualified Improvement Property THEN: QIP-PATH

Established as a new property category under the PATH Act

Defined as any improvement to an interior portion of a building which is nonresidential real property if the improvement is placed-in-service after the date the building was placed-in-service

Restrictions associated with QLI, QRI, and QRIP didn’t apply

– No “Three-Year Rule”

– Didn’t have to be made pursuant to a lease

QIP classified as 39-year after Bonus (other three categories classified as 15-year SL, not Bonus-eligible)


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Qualified Improvement Property NOW: QIP-TCJA

Any improvement to an interior portion of a building which is

nonresidential real property if the improvement is placed-in-service

after the date the building was first placed-in-service by any

taxpayer.

Replaces the separate categories of QLI, QRI, QRIP


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The QIP-TCJA Controversy

QIP placed-in-service after 12/31/2017 was intended to have a

15-year SL recovery period and be eligible for Bonus

However…

– Section 168(e)(3)(E) is the subparagraph that lists assets eligible for a 15-

year class life

– In a drafting error, the new QIP was never actually included in that

subparagraph


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Qualified Improvement Property NOW: QIP-TCJA

A technical correction was expected for some time

In August 2018, the IRS released the first proposed regulations on the TCJA,

but avoided any discussion of the QIP drafting error, implying that clarification

depends on Congressional action

So, unless and until a technical corrections bill is passed…

QIP placed-in-service after 12/31/2017 is 39-year, and as

such is not eligible for Bonus [only property with a depreciable life of 20-years or less is eligible for Bonus]

*Taxpayers should consult with their tax professional before engaging in any transaction


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Qualified Leasehold Improvement (QLI):

Expired Incentive that May Be Accessed Through a Look-Back Study

QLI: Any improvement to an interior portion of a building which is non-residential real property if – Such improvement is made under or pursuant to a lease by the lessee of such portion or by the lessor of

such portion

– Such portion is to be occupied exclusively by the lessee of such portion, and,

– Such improvement was placed-in-service more than 3 years after the building was placed-in-service

(Exclusions: enlargement of building, elevator, escalator, internal structural framework)

Existed from 2001-2017 at which time it was rolled into the “new QIP” designation

Can still access benefits when doing a look-back cost seg study, such as: – QLI placed-in-service in 2011 eligible for 100% Bonus

– QLI placed-in-service 2012-2017 eligible for 50% Bonus


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Polling Question #4



True or False:

QIP TCJA can get 100% bonus (slight trick question)

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QIP Driven by Placed-In-Service Date

Placed-in-Service Before

9/27/2017

Placed-in-Service

9/28/2017-12/31/2017

Placed-in-Service After

12/31/2017

39-year 39-year 39-year

Bonus(Rate determined according to

PATH Act rules)

Bonus(Rate determined by date of

WBC or Substantial

Construction)

NO BONUS on QIP*

(*Until and unless a technical

corrections bill is passed. Note:

bonus still available for 5, 7, and 15-

year property carved out in a Cost

Segregation Study)


2017 2018

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QIP Under the TCJA – Final Thoughts (For Now)

Under PATH Act, QIP was long-lived 39-year after Bonus

– To depreciate using shorter 15-year life, asset had to meet additional

qualifications to be considered QLI/QRI/QRIP

The “new” QIP-TCJA has the same long-lived 39-year recovery

period, without the benefit of Bonus

– No other qualified property categories exist

– This could be a big hit, may make taxpayers rely all the more on

traditional accelerated depreciation

Keep in mind – status of QIP is still subject to change



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Interest Deduction Limitation

Starting 1/1/2018, companies are subject to a limitation on deductible interest expense

– The deductible amount is capped at 30% of adjusted taxable income, after certain adjustments

Good news for smaller firms --

If a firm’s three-year average annual gross receipts are $25M or less yearly, it is completely exempt from the deduction limitation, and you may depreciate property using MACRS class lives as usual


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Interest Deduction Limitation --

What if Our Annual Gross Receipts Average MORE than $25M?

You may be able to “elect-out” of the limitation –

– real property development, redevelopment, construction,

reconstruction, acquisition, conversion, rental, operation,

management, leasing or brokerage trade or business

The catch?

If you elect-out, you MUST depreciate your real

property using ADS (Alternative Depreciation System)


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Interest Deduction Limitation – ADS

For a company that elects-out of the interest deduction

limitation and must use ADS:

– Residential real property assets are 30 years straight line

– Nonresidential real property assets are 40 years straight line

– Qualified Improvement Property is 40 years straight line

ADS classes are longer-lived, and properties depreciated

with ADS are generally not Bonus-eligible – need to

consider ramifications of choosing to elect out


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Rev. Proc. 2018-31 Clarifies Interest Deduction Rules

Rev. Proc. 2018-31; IR-2018-257 released 12/24/2018

Clarifies several outstanding issues

– No need to file a 3115 when converting nonresidential, residential or Qualified

Improvement Property (QIP) to ADS due to the interest limitation.

– ADS treatment applies to “old” and newly acquired nonresidential, residential or

QIP property.

– 30-year ADS life for residential real property only applies to property placed-in-

service after 12/31/17. This implies that already-held residential real property on

the books prior to 1/1/18 would be depreciated using the 40-year ADS life for an

electing real estate entity.


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Rev. Proc. 2018-31 Clarifies Interest Deduction Rules

Clarifications continued:

– “Change in Use” rules apply. Generally, these rules require the adjusted

depreciable basis of the MACRS property as of the beginning of the year of

change to be depreciated over the remaining portion of the new, longer

recovery period as of the beginning of the year of change.

– Bonus depreciation previously claimed on assets that are now required to use

ADS is not recaptured.

– Electing farmers must depreciate any existing and newly acquired property with

a MACRS recovery period of ten years or greater using ADS.


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NO

• An electing real property trade or

business is any real estate

development, redevelopment,

construction, reconstruction,

acquisition, conversion, rental,

operation, management, leasing, or

brokerage trade or business.

• An electing farming business is any

trade or business involving the

cultivation of land or the raising or

harvesting of any agricultural or

horticultural commodity. It also

includes a trade or business of

operating a nursery or sod farm, or

the raising or harvesting of trees

bearing fruit, nuts, or other crops, or

ornamental trees

ADS vs. MACRS Decision Tree

Are Your 3-Year

Average Annual

Gross Receipts More

Than $25M?

Version 1.0

Are You Voluntarily*

Making an ADS

Election?

MACRS(Bonus)

ADS(No Bonus*)

NO

Are You Electing Out

of the Business

Interest Limitation?

[Subject to Eligibility]Do Any of the

Mandatory ADS

Descriptions Apply?

NO YES

YES

Interest Deduction

Limitation of 30%

Applies.

YES

NO

YES

• Tangible property used

predominantly outside of the United

States during the tax year;

• Tax-exempt use property;

• Tax-exempt bond-financed property;

• Property imported from a foreign

country for which an Executive Order

is in effect because the country

maintains trade restrictions or

engages in other discriminatory acts

(Code Sec. 168(g)(1))

• Listed property with 50% or less

qualified business use

• Property used predominantly in a

farming business if it is placed-in-

service in a year an election not to

apply UNICAP rules to certain

farming costs

Taxpayers making a

voluntary ADS election

may still be eligible for

Bonus depreciation.

See IRC Sec.

168(k)(2)(D)

*


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Section 179 Expensing – THEN

Entity-level election

Permits the full purchase price of a qualifying asset to be written off completely in the year of purchase.

Qualifying assets have included:

– business equipment

– computers

– business related vehicles, etc.

Election has long encouraged businesses to invest in their own growth.


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Section 179 Expensing Under the TCJA

Effective 1/1/2018, the TCJA expands the eligible assets to include

the following improvements to nonresidential building systems

placed-in-service after the building was placed-in-service:

– Qualified Improvement Property (QIP) or

– Roofs

– HVAC

– Fire protection and alarm systems

– Security systems


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Section 179 Expensing Under the TCJA

Increased the dollar limitation of the election from $510K to $1.0M

Eliminated the exclusion of tangible personal property used in

connection with lodging facilities (i.e. hotels)

Assets may be new or used


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Section 179 Expensing Under the TCJA – Final Thoughts

This is another “win” for cost segregation

– The newly included improvements can be easily carved out

during a cost segregation study – adds even more value

– Limitation on the election is increased by almost 50%

– PLUS: for the first time, assets used in hotels, motels, and

dormitories may now be eligible for expensing under Section 179

Exciting new potential tax strategy


Expensing Hierarchy:

Interplay Between Section 179, QIP, and Bonus

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QIP and 179 Expensing: 2018 and Beyond

Assets qualifying for QIP are eligible for 179 expensing

A table of QIP property does have value even without

Bonus on QIP – it highlights exactly what assets you might

elect to expense under Section 179


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What is the Hierarchy? With $1,000,000 of 179 Expense (Post 12/31/2017)

Hierarchy:

– Apply TPRs first to determine capitalization.

– When TPRs are capitalized, then utilize any combination of

Section 179 or Bonus.

– When both are utilized, Section 179 receives first priority in

reducing basis.

– Remaining basis is utilized by Bonus

– Final remaining basis recovered over MACRS life.


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Tangible Property

Regulations

Section 179

Expensing

Accelerated Depreciation

and Bonus

A thoughtful and comprehensive tax plan will

include the interplay of multiple strategies

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Points to Consider When Making 179 Election

$2.5M is ceiling of 179-eligible property that can be placed-in-service in

one year before phase out occurs (Post 12/31/2017)

Example 1: Bruce puts in service $1.5M of computers and desks in

2018. Bruce can claim $1.0M of 179 expense on these assets with no

phase out.


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Points to Consider When Making 179 Election

Example 2: Same example, only Bruce put in an additional $2.0M in qualified real property in the same tax year.

– If Bruce elects to treat qualified real property as eligible for Section 179, phase out will begin on a dollar-for-dollar basis once $2.5M is reached. He will be completely phased out of 179 expense for this tax year.

– If Bruce just sticks with electing $1.0M of computers – he can still claim $1.0M deduction with no phase out

Planning Opportunity: Cost seg study can identify more 5-year property in the qualified real property and provide for more Sec. 179 and/or Bonus depreciation


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HIERARCHY OF EXPENSING 1/1/2018 and BEYOND

Expense Under the Tangible

Property Regulations

Does De Minimus Safe Harbor Apply? OR

Does Routine Maintenance Safe Harbor Apply? OR

Can asset be written off using BAR/Materiality testing?

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Eligible for Section 179

Expensing?

MACRS Class Lives Used to Depreciate

Remaining Basis

NO

100% BONUS Depreciation

On 5,7,15-yr assets

YES

Asset Capitalized Asset Expensed

OR

Section 179

Expensing

Bonus

Depreciation

Applies to New Assets

Applies to Used Assets

Applies to Personal Property

Applies to Elected Qualified Real Property

Represents 100% Expensing of Asset

Applies to Qualified Improvement Property (QIP)

Applies to Commercial Roofs, HVAC, Fire Protection, Security Systems

Subject to Overall Business Income Limitation

Requires an Affirmative Election Made in the Year the Asset is Placed-

In-Service

Can Be Used Retroactively Through CSS Look-Back Study

Permits Related-Party Acquisitions

Associated Expensing Limit with Inflation Adjustment ($1M – 2018)

Associated Phase-Out with Inflation Adjustment ($2.5M – 2018)

May Apply to Property Used 50% or Less for Business (Except Listed

Property)

Requires Recapture if Business Use of Property Falls to 50% or Less

(Except Listed Property)

Consider Partial Asset

Disposition Election to

write off remaining

depreciable basis of

replaced asset

DISCLAIMER: Capstan Tax Strategies, with its issuance of this chart, is not providing tax, legal or accounting advice. The above summary does not apply in every scenario applicable to Sec. 179 and/or Bonus depreciation and their respective limitations. This material

has been prepared for informational purposes only. It is not intended to provide, and should not be relied upon for, tax, legal or accounting advice. Taxpayers should consult their personal tax, legal and accounting advisors before engaging in any transaction.

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Polling Question #5



True or False:

Section 179 has been expanded starting January 2018.

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Like-Kind Exchanges Under the TCJA

Section 1031 real estate like-kind exchanges are preserved

and will continue to be eligible for tax deferral

Effective 1/1/2018, like-kind personal property exchanges

are no longer permissible

– NOTE: the definition of what constitutes personal property is

determined at the FEDERAL level


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Finding Opportunities

Have you had any recent activity?

– New Construction

– Acquisition

– Renovation

Have you taken advantage of the following?

– Accelerated depreciation through Cost Segregation

– Expensing of eligible assets under the Tangible Property Regulations

– Partial Asset Disposition to dispose of assets retired, replaced, or demolished in a renovation?


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Questions?

Bruce A. Johnson, CRE

Capstan Tax Strategies

101 West Avenue, Suite 301

Jenkintown, PA 19046

215.885.7510 (o)

215.740.1593 (c)

[email protected]


Documents

capstantax - my-CPE.com · 2019-09-10 · Tangible Property Regulations (TPRs) Tax Cuts and Jobs Act (TCJA) –Bonus Depreciation –QIP Under the TCJA –Interest Deduction Limitation