On December 22, 2017, President Trump signed into law the TAX CUTS and JOBS ACT (commonly known as TCJA). The passage of this Act provides the most significant and comprehensive overhaul of the US Tax Code since the Reagan Administration. The Act is wide-reaching and impacts individuals, businesses and trusts in both the US and international arenas.
Though not mentioned specifically by name, the TCJA impacts cost segregation studies, in particular, how assets are either depreciated or expensed. Cost segregation is still viable under the new tax act and some highlights are as follows.
The new law permits 100% expensing of property that qualifies for bonus depreciation, so long as the property is acquired and placed in service after September 27, 2017 and before January 1, 2023. After December 31, 2022, expensing of such property placed in service is as follows: 80% in 2023, 60% in 2024, 40% in 2025 and 20% in 2026.
Under the new law there is no requirement that an asset needs to be new to be eligible for 100% expensing. Used property will now qualify as long as it is the first use by the taxpayer.
Under the new law, qualified improvement property, defined as improvements made to the interior portion of a nonresidential building AFTER the building is placed in service, will be eligible for immediate Section 179 expensing.
In addition, the new law extends this deduction to cover improvements related to roofs, HVAC, fire protection and security systems of nonresidential buildings placed in service after the date the building was first placed in service.
The recovery periods for depreciation deductions with respect to nonresidential real property and residential rental property remain at 39 years and 27.5 years, respectively. However, for property placed in service after December 31, 2017, the alternative depreciation system (ADS) is available which lengthens the property lives to 40 years and 30 years, respectively. The ADS life of qualified improvement property (QIP) is 20 years. The use of the ADS is required for these asset classes of assets if the taxpayer makes the election to be exempt from the limitation on net interest expense deductions.
Our cost segregation team at Withum is available to help you navigate the new law and its impact on your real estate property. If you are contemplating a cost segregation study, we can provide a complimentary high-level assessment of the impact a study will have on your tax situation in order to assist in your decision.