If you own retail property or a restaurant and are considering an improvement, the time to act is now!

The recently passed American Taxpayer Relief Act provides immediate incentives for retail property and restaurant property owners.

Under pre-Act law, qualified restaurant property and qualified retail improvement property that was placed in service before 2012 was included in the 15-year MACRS class for depreciation purposes—that is, such property was depreciated over 15 years under MACRS. This law sunset on 1/1/12, but Congress reinstated it retroactively.

New law. The 2012 Taxpayer Relief Act retroactively extends for two years the inclusion of qualified leasehold improvement property, qualified restaurant property and qualified retail improvement property in the 15-year MACRS class. Such property qualifies for 15-year recovery if it is placed in service before Jan. 1, 2014. (Code Sec. 168(e)(3)(E), and Code Sec. 168(e)(8)(E), as amended by Act Sec. 311)

Here are some additional details.

Qualified restaurant property

(A) In general. The term “qualified restaurant property” means any section 1250 property which is—

(i) a building, or

(ii) an improvement to a building,

if more than 50 percent of the building’s square footage is devoted to preparation of, and seating for on-premises consumption of, prepared meals.

(B) Exclusion from bonus depreciation. Property described in this paragraph shall not be considered qualified property for purposes of subsection (k).

Qualified retail improvement property

(A) In general. The term “qualified retail improvement property” means any improvement to an interior portion of a building which is nonresidential real property if—

(i) such portion is open to the general public and is used in the retail trade or business of selling tangible personal property to the general public, and

(ii) such improvement is placed in service more than 3 years after the date the building was first placed in service.

(B) Improvements made by owner. In the case of an improvement made by the owner of such improvement, such improvement shall be qualified retail improvement property (if at all) only so long as such improvement is held by such owner. Rules similar to the rules under paragraph (6)(B) shall apply for purposes of the preceding sentence.

(C) Certain improvements not included. Such term shall not include any improvement for which the expenditure is attributable to—

(i) the enlargement of the building,

(ii) any elevator or escalator,

(iii) any structural component benefitting a common area, or

(iv) the internal structural framework of the building.

(D) Exclusion from bonus depreciation. Property described in this paragraph shall not be considered qualified property for purposes of subsection (k).

(E) Repealed.

Source: Thomson Reuters  

The American Taxpayer Relief Act extends (and in some cases modifies) a number of depreciation breaks, including (1) increased Section 179 expensing limitations and treatment of certain real property as eligible Section 179 property; (2) 50% bonus depreciation; and (3) 15-year straight line cost recovery for qualified leasehold improvements, qualified restaurant buildings and improvements, and qualified retail improvements.

Under pre-2012 Taxpayer Relief Act law (pre-Act law), the Code Sec. 168(k) additional first-year depreciation deduction (also called bonus first-year depreciation) generally is allowed equal to 50% of the adjusted basis of qualified property acquired and placed in service after Dec. 31, 2011, and before Jan. 1, 2013 (before Jan. 1, 2014 for certain longer-lived and transportation property). The additional first-year depreciation deduction is allowed for both regular tax and alternative minimum tax (AMT) purposes, but is not allowed for purposes of computing earnings and profits. The basis of the property and the depreciation allowances in the year of purchase and later years are appropriately adjusted to reflect the additional first-year depreciation deduction. A taxpayer may elect out of additional first-year depreciation for any class of property for any tax year.

In general, an asset qualifies for the bonus depreciation allowance if:

… It falls into one of the following categories: property to which the modified accelerated cost recovery system (MACRS) rules apply with a recovery period of 20 years or less; computer software other than computer software covered by Code Sec. 197; qualified leasehold improvement property; or certain water utility property.

… It is placed in service before Jan. 1, 2013. (Certain long-production-period property and certain transportation property may be placed in service before Jan. 1, 2014)

… Its original use commences with the taxpayer. Original use is the first use to which the property is put, whether or not that use corresponds to the taxpayer’s use of the property.

New law. The 2012 Taxpayer Relief Act extends 50% first-year bonus depreciation so that it applies to qualified property acquired and placed in service before Jan. 1, 2014 (before Jan. 1, 2015 for certain longer-lived and transportation property). (Code Sec. 168(k)(2), as amended by Act Sec. 331(a)) A conforming change is made to Code Sec. 460(c)(6)(B) (relating to 50% bonus depreciation not being taken into account as a cost in applying the percentage of completion method for certain long-term contracts).

15-Year Writeoff for Qualified Leasehold and Retail Improvements and Restaurant Property Reinstated and Extended

Under pre-Act law, qualified leasehold improvement property, qualified restaurant property and qualified retail improvement property that was placed in service before 2012 was included in the 15-year MACRS class for depreciation purposes—that is, such property was depreciated over 15 years under MACRS.

New law. The 2012 Taxpayer Relief Act retroactively extends for two years the inclusion of qualified leasehold improvement property, qualified restaurant property and qualified retail improvement property in the 15-year MACRS class. Such property qualifies for 15-year recovery if it is placed in service before Jan. 1, 2014. (Code Sec. 168(e)(3)(E), and Code Sec. 168(e)(8)(E), as amended by Act Sec. 311)

Taking advantage of Bonus Depreciation and/or utilizing Qualified Improvements could have a major effect on your bottom line.  Capital Review Group can assist you in creating a strategy for obtaining the equipment or other assets that will enhance your business, while taking advantage of generous tax deductions, improving cash flow and increasing profits.

It’s wise to be conservative when it comes to cost segregation.  One over-zealous apartment complex owner claimed on its tax returns a collection of over 1,000 components of real property asserting that they could be depreciable over shorter class periods of 15 years and 5 years.  The problem is that the taxpayer included and claimed that separate structural components of the apartment complex were eligible for the shorter depreciation times.  The IRS disagreed, and the U.S. Tax Court released a memorandum opinion holding that an apartment complex is one asset that must be depreciated over 27.5 years.  Amerisouth XXXII, Ltd. V. Commissioner, T.C. Memo 2012-67 (March 12, 2012).

The taxpayer claimed on its returns that the water-distribution and sanitary sewer systems, the gas lines, and the site electric were eligible for 15-year depreciation; it claimed property in the other categories was eligible for 5-year depreciation. The Commissioner disagreed, reasoning that some of the parts the taxpayer wanted to depreciate quickly can be depreciated only as pieces of a whole building that it must depreciate more slowly over 27.5 years and that some of the parts that the taxpayer wanted to depreciate weren’t depreciable at all.

Depreciation allows for taxpayers take reasonable deductions against income for the exhaustion and wear and tear of property used in a trade or business or held for the production of income.

However, structural elements will never hold a short-lived life, and in this case, the court ruled in favor of the IRS because there was no correlation to “the business” of the residential property.  This case is a great example of why it is so important to work with professionals who understand the subtleties and underlying theory of cost segregation and reclassification of assets, working within the specified IRS guidelines to conservatively –yet still maximize – savings for clients.

An article by Marky Moore, LEEP AP, CSBA, CEO Capital Review Group

Restaurant owners face unique challenges, especially in today’s economy. As consumers tighten their belts and cut back on their entertainment budgets, it’s imperative for restaurants to operate with the most effective business strategies in place. The good news is that restaurant owners can take advantage of targeted tax and energy strategies that can significantly increase operating cash flow and generate a substantial ROI, as well as funding renovations and energy efficiency projects through a significantly lowered tax burden. Understanding the tax opportunities that are currently available will allow you to develop a comprehensive plan for improvements that makes financial sense and allows you to keep your restaurant property up-to-date and maintain a competitive edge.

Read more at Restaurant Facility Business.

If you are considering making improvements to a commercial building, there are various tax strategies that may apply to your particular situation.  One of these is abandonment, which allows the taxpayer to reduce the tax burden when replacing assets that exist within a building.  So, if your green building strategy includes replacing metal halide lighting or your HVAC system, you may be able to take advantage of an abandonment tax deduction.

Individual assets being replaced may qualify for abandonment if they were never identified or segregated in the accounting records of the business when the building was purchased or constructed.  If the books reflect just the large asset, such as “Building”, this means that the value of each individual asset is included in the value of the building.  Typically, the “Building” is being depreciated over 27.5 years for commercial residential or 39 years for commercial property.  These individual assets do have a value of their own, and when the time comes to replace them a tax deduction should be taken for all remaining value associated with those assets.  If no specific value was assigned to your HVAC system or metal halide lighting, a qualified advisor may be able to determine the remaining value at the time of replacement, allowing for a deduction which will help defray the cost of the new equipment.

An abandonment study can determine whether a deduction can be taken, as well as identifying the value of the assets being replaced.  Metal halide lamps are commonly used around manufacturing and industrial buildings. They do have a finite life span, and information such as the make and model will help determine the value at the time of replacement.  Additional information needed would be the date the lighting was installed, the date of service, or the date of purchase for new construction.  Abandonment may also apply to HVAC assets in your building.  When looking at replacing assets in the building, it should be noted that in order to qualify for abandonment, the assets must be discarded so that they cannot be sold or used again.

Working with advisors who understand tax strategies such as abandonment, cost segregation and various energy efficiency tax deductions that are available to qualified businesses ensures that your improvements are made as part of a holistic business strategy that takes full advantage of benefits available to you and saves money on capital expenditures.

Although creating an energy efficient facility saves money for business and building owners in the long run, the cost of getting there can be prohibitive.  You might want to retrofit your existing building with energy efficient lighting, HVAC or upgrades to the building envelope in order to save money on energy costs, but you’ve first got to come up with the funding for those improvements.   Do you provide the required capital or continue to face increased operating costs?  The ROI on new, energy-efficient systems may be longer, but the equipment will perform more reliably while providing better working conditions and lowering energy costs along the way.   Most business owners will assume that funding for energy efficient upgrades has to come from dipping into their equity in the facility, or from an outside funding source such as a bank loan.

Fortunately, there are alternative strategies that can be put into place to pay for energy efficiency projects by significantly lowering your tax burden.  A cost segregation analysis identifies and reclassifies personal property assets to shorten the depreciation time for taxation purposes, which reduces current income tax obligations. Personal property assets include a building’s non-structural elements, exterior land improvements and indirect construction costs.  Depreciation expense is accelerated and tax payments are decreased when an asset’s life is shortened, which frees up cash for investment in energy efficiency projects.

The benefits of a cost segregation study are retroactive, including buildings that have been purchased, constructed, expanded or remodeled since 1987.  This allows taxpayers to recapture previously unrecognized depreciation, which increases cash flow in the current year.

Another tax benefit that can be applied to energy efficient construction or improvements is found in section 179D of the Energy Policy Act of 2005.  §179D includes full and partial tax deductions for investments in energy efficient commercial buildings that are designed to increase the efficiency of energy-consuming functions.  The deduction available is up to $.60 per square foot for lighting, HVAC and building envelope, creating potential for $1.80 per square foot if all three components qualify. These deductions are applicable to buildings that were either built or retrofitted after December 31, 2005.  In order to qualify for the deduction, the taxpayer must receive a third party energy efficiency certification.

In addition, the issuance of Revenue Procedure 2011-14 will allow some taxpayers to claim the §179D deduction all the way back to January 1, 2006 without filing one single amended income tax return. Taxpayers who wish to take the deduction without amending any returns will file a Form 3115 (Application for Change in Accounting Method) and will get to take the entire “catch up” deduction on the return that is being filed. This means that a taxpayer could potentially claim deductions from 2006-2010 (or 2011) all on one return and significantly reduce their tax burden, if not eliminate it altogether, which goes a long way toward funding energy efficiency.

Instead of looking to outside sources or reducing your valuable equity to fund energy efficiency, look to your own building for the answers.  Putting the right strategy into place can result in surprisingly significant savings and painless way to pay for your project.

According to Wikipedia, cost segregation “is the process of identifying personal property assets that are grouped with real property assets, and separating out personal assets for tax reporting purposes. A cost segregation analysis identifies and reclassifies personal property assets to shorten the depreciation time for taxation purposes, which reduces current income tax obligations. Personal property assets include a building’s non-structural elements, exterior land improvements and indirect construction costs.

Eligibility for cost segregation includes buildings that have been purchased, constructed, expanded or remodeled since 1987. A cost segregation study is typically cost-effective for buildings purchased or remodeled at a cost greater than $500,000 and is most efficient for recently constructed or new buildings, but it can also uncover retroactive tax deductions for older buildings which can generate significant short benefits due to “catch-up” depreciation.

How it Works:
Capital Review Group experts will analyze architectural drawings, mechanical and electrical plans, and other plans to segregate the structural and general building electrical and mechanical components from those linked to personal property.

Tax Benefits of Cost Segregation:
In addition to providing tax relief, a cost segregation analysis can benefit businesses in a number of ways:

1. Maximizing tax savings by adjusting the timing of deductions. When an asset’s life is shortened, depreciation expense is accelerated and tax payments are decreased. This, in turn, releases cash for investment or operating needs.
2. Creating an audit trail. Improper documentation of cost and asset classifications can lead to an unfavorable audit adjustment. Properly documented cost segregation analysis helps resolve IRS inquiries at the earliest stages.
3. Playing Catch-Up: Retroactivity. Since 1996, taxpayers can capture immediate retroactive savings on property added since 1987. This opportunity to recapture unrecognized depreciation presents an opportunity to perform retroactive cost segregation analyses on older properties to increase cash flow in the current year.
4. Additional tax benefits. Cost segregation can also reveal opportunities to reduce real estate tax liabilities and identify certain sales and use tax savings opportunities.

For more information on Cost Segregation Analysis, contact Marky Moore today to open a discussion of how to save taxes through proven, tested methods that the IRS will accept when properly applied by the right experts at Capital Review Group. Simply call 1.877.666.5539 or visit http://capitalreviewgroup.com/.

Cost Segregation is the process of segregating the costs associated with the specific commercial real property investments in real estate. Commerical real property is depreciated over 39 years (or 27.5 years for commercial residential).

In order to qualify for Cost Segregation, properties must have been constructed, acquired, or renovated after 1986, under the IRS guidelines. The property can be a new building under construction; existing buildings undergoing remodeling, restoration or expansion; purchases of existing property constructed anytime, but placed in service after 1986; office/facility leasehold improvements on your current facility and “fit outs”.

In the current economy, it is especially important to take a pro-active rather than reactive approach in business operations, especially as it relates to protecting your capital assets. A Reserve Study is a valuable budgeting planning tool that provides data for a property’s major repairs, replacements and/or required upgrades. The study gives a clear picture of the facility, and allows for budgeting of expenditures, rather than securing a loan or reducing operating funds to manage necessary replacements, improvements or repairs.

CRG conducts a thorough site survey and inspection, completes a review and analysis of blueprints, building plans and service contracts, and looks closely at historical expenditures. Our consultants utilize national costing information for calculations and projections, along with usual and customary asset longevity. This allows us to create a thorough, very detailed and complete picture of the property and anticipated asset longevity.