The tax and accounting experts at bgr CPAs explain the importance of bonus depreciation for commercial and residential real estate owners.
Bonus depreciation is often used to incentivize real estate and business owners to purchase capital assets. This accelerated method of depreciation allows owners to make an additional deduction on the cost of qualifying property and equipment. The Protecting Americans from Tax Hikes Act of 2015 (PATH) enacted and extended a number of tax provisions including those related to bonus depreciation, and as such, renewed many opportunities for commercial and non-commercial real estate owners in terms of tax benefit.
Changes established within PATH permit real estate owners to claim bonus depreciation on qualifying asset purchases. Qualifying assets include new tangible property, computer software and qualified leasehold improvements. However, this extension is not permanent, as bonus depreciation is scheduled to phase-out with decreasing first year bonus percentages between now and 2019 with no bonus depreciation after 2019.
The PATH Act also extended real estate owners’ ability to depreciate “qualified leasehold improvements” over 15 years rather than 39 years. For nonresidential property established as “in service” in 2016, bonus depreciation may be claimed on an addition or improvement to the interior of the property.
In addition, the PATH Act added “qualified restaurant property” as a category, making it eligible for a 15 year life and bonus depreciation.
Prominent changes within the act exist in Section 179, which establishes that owners and businesses with adequate income can deduct up to $500,000 of qualified tangible property in tax years following 2015. Further, under new changes, air conditioning and heating units are considered qualified property. It is important to note that under Section 179 first year depreciation cannot be deducted from rental real estate income, so landlords must use bonus depreciation to accelerate depreciation deductions.
Among the aforementioned stipulations, the act establishes or reaffirms the following:
- Furniture and Equipment Purchases: Such purchases costing less than $5,000 per unit can be immediately expensed if the company has an audited financial statement. The limit is $2,500 if the company does not have an audited financial statement.
- Renovations, Expansion, and New Building Construction: Remodeling and other construction may be eligible depending on whether the construction meets certain rules. Demolition costs associated with renovation can be expensed as long as the old improvements are actually removed.
- Tangible Personal Property: Property such as furniture and equipment is typically eligible for bonus depreciation.
As previously mentioned bonus depreciation is scheduled to phase-out with decreasing first year bonus percentages between now and 2019 with no bonus depreciation after 2019. As a result, landlords and real estate owners should consider executing any planned furniture and equipment purchases, and completing remodeling and building construction by the end of 2019 in order to maximize potential tax benefit.
For additional information regarding bonus depreciation as it relates to the real estate industry, please contact Marc Rubin, CPA, CVA at firstname.lastname@example.org or 410-418-4400.