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07/10/2019
10 Questions: Tax depreciation acceleration & property tax reduction
In the May 30, 2019 installment of the CohnReznick National Tax Webinar Series, members of our National Tax Practice discussed the benefits that businesses can gain through cost segregation and other tax fixed asset studies, property tax assessments, and the changes in light of the Tax Cuts and Jobs Act.
Below are a few of the questions asked by attendees of the webinar, with answers provided by members of our National Tax and Commercial Real Estate Practices: Ron Kaplan, Andrew DiSalvo and Derek Weaver.
Q. If Congress does not fix the Qualified Improvement Property (QIP) rule, does that mean that I cannot take bonus depreciation in connection with those costs?
A. If Congress does not fix the QIP rule, then QIP would not be eligible for bonus depreciation and would be subject to a 39-year Modified Accelerated Cost Recovery System life. However, companies can still identify short-lived property that might make up part of that cost to recognize bonus depreciation on those assets. For example, if a restaurant built out a new space and those costs would have otherwise met the QIP requirements absent a cost segregation study, they can perform a cost segregation study that might identify 30% to 60% of those costs as bonus-eligible personal property or land improvements.Q. If Congress fixes the QIP rules after I file my 2018 tax return, can I later take advantage of those rules?
A. If Congress fixes the QIP rule after a company files its 2018 tax return, how a company implements the change would depend on two things: (1) whether Congress enacts the fix retroactively to Jan. 1, 2018; and (2) the IRS procedural guidance telling taxpayers how to implement the change. If Congress enacts the change back to Jan. 1, 2018, then there is a good chance the IRS would allow the taxpayer to file a Form 3115 to recognize the “catch-up” (accelerated) depreciation in a later year, instead of amending the 2018 tax return.Q. If I acquire a property with the immediate intent to rehab the property, how does this affect my ability to take bonus depreciation on my acquired personal property and land improvements?
A. You cannot take depreciation on assets that you dispose of in the same year you place them into service. So, if the rehab results in the retirement of an asset that would be considered personal property in the same year, then you cannot take depreciation on that asset. The acquired personal property and land improvement assets that exist after the immediate rehab are eligible for 100% bonus depreciation when they are acquired.Q. If I make the election under Section 163(j) to be a qualified real property trade or business, I know that I must change how I am depreciating building(s) owned by that entity. How do I implement that change?
A. The IRS rules would treat that change as a “change in use.” Commercial (non-residential property) would be changed from a 39-year life to a 40-year life. Residential rental property would be changed from a 27.5-year life to a 40-year life (if the building was placed in service before Jan. 1, 2018) or to a 30-year life (if the building was placed in service on or after Jan. 1, 2018). You must also change the treatment of any QIP as well. These changes are made on a prospective basis.Q. Under Section 163(j), is the $25 million in annual gross receipts test determined on an entity-by-entity basis or must related entities (partnerships/LLCs) be combined?
A. The $25 million gross receipts test is based on the aggregate gross receipts of related entities. Whether the entities are related is spelled out in existing tax regulations.Q. For multifamily sites, are in-unit appliances considered part of the fair market value of the real property (as opposed to declared as BPP)?
A. It depends. In many cases, the cost of the appliances is included in the rent amount and is therefore included in the valuation based on the income or comparable sales approaches. Some jurisdictions deduct the value of the appliances from their income approach. It is best to inquire of the assessor how they are treating the appliances and ask for a copy of the income approach to confirm their answer.Q. In my jurisdiction, virtually every appeal ends up in court. Why not just sue the jurisdiction directly if I feel my property is over-assessed?
A. It is important to follow the process in your jurisdiction. Many jurisdictions require an appeal to the quasi-judicial board before proceeding to court. Also, your best chance at a reduction might be talking to the assessor informally or attending the informal appeal hearings held in many jurisdictions.Q. I receive an annual request from the assessor regarding the income and expenses associated with my commercial property. Do I need to respond to these requests?
A. Generally, yes, you should respond. Failure to do so could result in a penalty to your assessment or a reduction in your rights to appeal. It is always a good idea to consult your tax advisor to review the document before you submit it to the assessor.Q. My personal property declaration is the same as last year. Do I need to file it every year?
A. Yes, you should file your declaration timely every year by certified mail or delivery service that offers tracking to ensure you have a receipt. Some states offer exemptions for small filers. Consult your tax advisor to see if you qualify.Q. Our company recently leased office space in a multitenant building, and we incurred a significant expense to up fit the space. All the fit out is standard construction associated with a business office. Should I report the improvements on my business personal property declaration?
A. It depends. You need to verify that the assessor is picking up the improvements in the real property assessment. If they are included in the real property assessment, you should not report the improvements. Review the real property card. Also ask for a copy of the income approach to value from the assessor. It is best to consult a property tax expert to do this type of analysis.Contact
Richard Shevak, JD, Principal, National Tax
862.245.5029
Andrew DiSalvo, Director, National Tax
404.250.4039
Derek Weaver, Senior Manager, National Tax
301.280.2727
Richard Shevak
JD, Principal
Ronald Kaplan
CPA, Partner - Commercial Real Estate Industry Leader
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Any advice contained in this communication, including attachments and enclosures, is not intended as a thorough, in-depth analysis of specific issues. Nor is it sufficient to avoid tax-related penalties. This has been prepared for information purposes and general guidance only and does not constitute legal or professional advice. You should not act upon the information contained in this publication without obtaining specific professional advice specific to, among other things, your individual facts, circumstances and jurisdiction. No representation or warranty (express or implied) is made as to the accuracy or completeness of the information contained in this publication, and CohnReznick LLP, its partners, employees and agents accept no liability, and disclaim all responsibility, for the consequences of you or anyone else acting, or refraining to act, in reliance on the information contained in this publication or for any decision based on it.