If You Build It . . .
Business construction plans in your future? Make sure you properly depreciate assets. A recent survey by PricewaterhouseCoopers found some fast-growth companies involved in new construction or remodels may be missing out on significant deductions. Just 44 percent of CEOs of fast-growth product and service companies (ranging from $5 million to $100 million in sales) across the nation were aware of the tax savings available by depreciating assets in new construction and major remodeling projects.
Construction projects are on the upswing for these businesses, with 57 percent of the nation's fastest-growing companies involved in new construction or major remodeling over the past five years. Projects include major leasehold improvements, new office buildings and light-manufacturing plants. Approximately 36 percent say they plan projects over the next two to three years.
Companies may be able to reclassify constructed property to gain a potential savings of 20 percent of the asset cost. Under IRS regulations, structural components that relate to the operation or maintenance of the building have a recovery period of 39 years. But there are items within a construction project defined as personal property that qualify for a five- to seven-year recovery. These include electrical wiring for communications, air conditioning for computers, plumbing for kitchen and pantry equipment, and millwork. "The advantage of this shorter recovery period is that it provides benefits on an accelerated basis, providing immediate cash flow to the company," says Joe Castriano, a tax partner with PricewaterhouseCoopers in Chicago.
These items may be eligible for the temporary depreciation bonus
enacted as part of the Job Creation and Worker Assistance Act of
2002 and the Jobs and Growth Tax Relief Reconciliation Act of 2003.
Under the 2002 law, small companies could deduct an additional 30
percent of the cost of most new equipment. Qualified property must
have been purchased after Sept. 10, 2001, and before Sept. 11,
2004. The 2003 law enhances the benefit to a first-year deduction
50 percent of the property. It applies to assets placed in service after May 6, 2003, and before January 1, 2005.
Often in a construction project, costs become so commingled businesses don't identify individual items. As a result, they fail to correctly break out personal property and other short-life components of their real property improvements. The good news is that it's possible to go back and deduct a catch-up adjustment for understated depreciated deductions in the same year you request a change in your accounting method. To avoid missing deductions, says Castriano, "know what components are essential to the purchase of machinery and equipment vs. improvement in the building."
Great Falls, Virginia, writer Joan Szabo has reported on tax issues for 16 years.