There's good news for entrepreneurs who own business real estate. Recent guidelines from the IRS indicate that the tax agency is now more receptive to business owners accelerating depreciation on buildings already built or being built. Properties with the best tax-savings potential include retail stores and chains, restaurants, office buildings and warehouses. As you know, accelerating a tax deduction is worth more in today's terms than it will be worth in the future. Another benefit is increased cash flow.
You may want to have a cost segregation study (CSS) performed on your property. A CSS is a review of all the costs associated with the purchase or construction of a building. This helps classify costs as either real or personal property. The professional doing these studies must understand the tax code and have sufficient knowledge to work with architects, engineers and appraisers. Depending on the complexity of the project, all or a few of these professionals may be involved.
When a component is classified as personal property, it can be depreciated on an accelerated basis and qualifies for a five-, seven- or 15-year write-off period, rather than 39 years for building and acquisition costs. While land costs are not typically depreciable, some--including parking lots and landscaping--may be considered depreciable improvements in a CSS, says CPA Mallory Collier with Jackson, Rolfes, Spurgeon & Co., an accounting firm in Cincinnati. A portion of indirect costs, such as architectural and engineering fees, can be allocated to the personal property components for additional accelerated depreciation.
This tax break has been made even more attractive with the increased Section 179 expensing of $102,000 in 2004 for fixed assets that are not real property, as well as the 50 percent bonus depreciation for assets with a useful life of 20 years or less. Bonus depreciation is due to expire December 31, unless Congress extends it.
With the help of a CSS, "Our small-business clients have saved anywhere from $35,000 to $165,000," says Collier. "While a CSS is typically recommended for projects in excess of $1 million, they can be worthwhile on some as small as $600,000."
Another plus for business owners is that, unlike many changes in accounting (a change in depreciation is considered a change in the accounting method), there is no user fee to pay the IRS for accelerating depreciation.
In addition, the IRS recently released a list of all the items included in the restaurant business that can be depreciated more quickly under a CSS. These include canopies/awnings, foundations for signs, light poles and decorative light fixtures. The IRS noted that this list may be used by other industries where applicable.
Great Falls, Virginia, writer Jaon Szabo has reported on tax issues for 17 years.