Fixed Asset Considerations: Bonus Depreciation and Beyond

Timely fixed asset work can help increase current year depreciation deductions, free up your time to focus on your business, and provide peace of mind through reduced exposure. Below are several important fixed asset strategies and topics to consider in a frequently shifting economic and regulatory environment.

Bonus Depreciation

Below are some frequently asked questions related to bonus deprecation.

What Is Bonus Depreciation?

Bonus depreciation allows taxpayers to take additional depreciation expense for a qualifying asset in its first year in service.

What’s the Challenge of Bonus Depreciation?

For tax year 2023, additional first-year bonus depreciation has phased down to 80%. It is no longer the 100% write-off that it has been since late 2017, and will decease to 60% in 2024, and decrease by 20% each year until its sunset in 2027, barring any related federal tax law changes.

Capital projects with estimated completion dates close to year-end could benefit from additional planning. Completing those projects by year’s end could help reduce current year tax burden through a better bonus depreciation rate.

For example, for companies scheduled to construct or remodel buildings by the end of 2023, keeping that timeline could allow for a higher bonus depreciation deduction before further phasedown in bonus depreciation rates.

Cost Segregation

Cost segregation studies and other fixed asset services can help taxpayers increase current year deductions. Performing studies on assets placed in service between late 2017 and the end of 2022 allows access to 100% bonus depreciation.

What Is Cost Segregation?

Cost segregation is a tax deferral strategy aimed at increasing cash flow by reducing current tax liability through accelerated depreciation deductions.

This strategy involves an engineering study that identifies short-life property from a larger building or improvement asset. Cost segregation studies can be done on acquired or newly constructed buildings as well as improvements to existing buildings.

What’s the Challenge of Cost Segregation?

It’s important to find a cost segregation provider to perform a study in line with tax authority, as IRS guidance changes frequently with new laws and court cases. A cost segregation provider who is up to date with these changes can help you optimize depreciation under the current tax law.

How Can Cost Segregation Help?

Increased depreciation deductions could reduce your current year tax liability, putting more money in your pocket to invest in your business.

Cost segregation studies can be done on projects placed in service in prior years without having to amend prior tax returns. The look-back deduction can be taken in the current year, which makes a cost segregation valuable for buildings you may have placed in service while in a loss position.

Fixed Asset Tax Analysis

For companies looking for depreciation deductions from fixed assets, a fixed asset tax analysis can provide value without requiring a significant investment of time or cash.

What Is Fixed Asset Tax Analysis?

Acquiring new properties, constructing buildings, and performing remodels all require a significant amount of cash investment, particularly during times of soaring construction costs and inflation, while finding additional current year depreciation deductions from existing fixed assets doesn’t.

What Can a Fixed Asset Analysis Provide?

Fixed asset tax analysis is designed to keep client’s fixed assets in compliance and reduce their current year federal and state income tax by comprehensively applying tax laws to existing fixed asset holdings. The result can be an immediate tax deferral by accelerating deductions on assets that were previously placed in service with improper tax lives and methods.

Changes to a client’s fixed assets can be implemented with an accounting method change filed with your current tax return, without the need to amend prior tax filings.

States like California that don’t conform to bonus depreciation and other beneficial federal tax laws concerning fixed assets have additional state income tax benefits. These benefits can include expensing capital projects as repairs or routine maintenance instead of capitalizing them as fixed assets and accelerating depreciation due to a reduction in tax life.

Outsourcing Fixed Asset Maintenance

With tax laws often changing, keeping up with the current rules can be burdensome and daunting. There are complexities in maintaining depreciation for both internal financial statements as well as tax reporting. For companies struggling with internal capacity and staffing, outsourcing maintenance of fixed asset depreciation can free up your team’s time.

Many companies spend a lot of time and money internally preparing their fixed asset reports every year. A third-party fixed-asset maintenance team working alongside your tax return team can help provide the full range of needed filing reports, including depreciation reports, disposal reports, and the full set of tax forms surrounding depreciation.

What Does Outsourced Fixed Asset Maintenance Provide?

Outsourcing your fixed asset maintenance could help you capitalize fixed assets correctly the first time, saving time and money otherwise wasted on fixing mistakes in prior years.

Section 179D

Owners of commercial buildings and designers of buildings owned by government and tax-exempt entities may find value under Internal Revenue Code (IRC) Section 179D, which provides tax incentives for newly constructed energy efficient buildings and improvements.

What Is Section 179D?

The deduction, originally up to $1.80 per square foot (and adjusted for inflation up to $1.88 per square foot in 2022), was made permanent by the Consolidated Appropriations Act of 2021 and benefitted commercial building owners and designers of government buildings.

The recently signed Inflation Reduction Act, which applies to buildings placed in service on or after January 1, 2023, expanded eligibility to include real estate investment trusts, as well as designers of buildings owned by tax-exempt entities, including not-for-profit organizations, churches, Tribal organizations, and not-for-profit schools and universities.

The overall base deduction changed to a sliding scale of 50 cents to $1.00 per square foot in 2023, with a bonus deduction between $2.50 and $5.00 per square foot.

This bonus deduction vastly increases the benefit of the Section 179D deduction but is only available to companies that meet specific local prevailing wage and apprenticeship requirements, provided construction begins on or after January 29, 2023. For projects that begin construction prior to that date, the labor requirements don’t apply, and projects are automatically eligible for the bonus deduction.

Beginning in 2023, this deduction can be claimed on subsequent improvements made to these energy efficient buildings, as long as the previous full deduction claim occurred more than three tax years in the past.

What Does a Section 179D Deduction Provide?

Completing a Section 179D study on your newly constructed building can provide great value in the form of increased current year deductions which lower your current tax liability. Note that deductions under Section 179D may be claimed in addition to the benefits of a cost segregation study for commercial building owners.

Section 45L

Credits claimed under Section 45L create permanent tax savings for developers of single and multifamily properties.

What Is Section 45L?

IRC Section 45L provides tax incentives for the energy efficient construction or renovation of residential dwelling units in the form of tax credits.

Through December 31, 2022, the credit was $2,000 per dwelling unit and is for property owners who constructed, manufactured, or substantially renovated energy efficient single or multifamily residential dwelling units of three stories or less that are then sold, leased, or rented for the first time as a residence.

The Inflation Reduction Act also extends taxpayer eligibility for this credit through 2032, and starting in 2023, removes the three stories or less requirement, and increases the credit to $2,500 with applicable Energy Star certification, and up to a maximum of $5,000 with the Zero Energy Ready Home program, which has additional energy efficiency and prevailing wage requirements.

For multifamily properties, the same prevailing wage requirements as Section 179D are applicable to the $2,500 and $5,000 credit amounts under Section 45L. Projects that begin construction on or after January 29, 2023, would need to comply with prevailing wage requirements to unlock the higher credit amounts. Otherwise, those amounts drop to $500 and $1,000, respectively.

How Are Section 45L Tax Credits Generated?

Taxpayers who construct multifamily properties can combine the benefits of the Section 45L tax credit with a cost segregation study. The Section 179D deduction can also be applied to multifamily development projects four stories or greater placed into service after December 31, 2022, which means that some taxpayers can reap the benefits of all three incentives for the same project.

We’re Here to Help

If you have questions about bonus depreciation, cost segregation, fixed asset tax analysis, or outsourcing fixed asset maintenance, reach out to your Moss Adams professional.

Visit our Fixed Asset Accounting Services for more information.

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