Accelerated Deductions - Restaurant CPA Firm

Authors: So Sum Lee, CPA

It may have been one of the most hotly contested, controversial campaigns in living memory, but there can be no denying the outcome of the 2016 US presidential election is generally friendly for business. President Donald Trump and the Republican Party both agree that that tax reform is a top priority to help stimulate the economy. An effort of this magnitude is no simple task and requires significant deliberation on which parts of the tax code to change. While it’s still not clear exactly which tax laws will be repealed or replaced, the most probable change will be the lowering of business and individual tax rates.

Tax Insight: Deductions are more valuable when tax rates are higher, so carefully planning the timing of deductions can create significant permanent tax savings. Accelerating deductions into the 2016 tax year lowers current tax liabilities while effectively shifting income into future years when tax rates drop. Taxpayers should consider all opportunities to accelerate deductions into the 2016 tax year.

There are a number of opportunities to accelerate deductions into the 2016 tax year using the automatic changes in accounting method procedures under Rev. Proc. 2016-29. Many of these procedures are common and do not require amending any returns (see rules on filing of a Form 3115).

For example, taxpayers who have opted not perform a cost segregation study in the past because it only represented a timing difference in cash flow should now reconsider for 2016, so they do not miss out on the permanent tax saving that will no longer be offered after rates fall. Rev. Proc. 2016-29 allows taxpayers to apply deductions realized from a cost segregation study any time after the building is purchased, providing a unique opportunity to plan which tax year depreciation deductions are utilized.

Case Study: ABC, LLC owns a building that was purchased in 2014 for $1 million. This year, ABC has a cost segregation study performed on their building and applies it to their 2016 tax return. The cost segregation study accelerates $100,000 of future depreciation deductions into the 2016 tax year where Federal income tax rates are 39%, creating an immediate tax savings of $39,000. Assuming tax rates drop in 2017 to 30%, ABC now realizes a $9,000 permanent tax savings ($39,000 – $30,000) on top of the traditional benefits of accelerated cash flow generated by a cost segregation study.

Any type of current year construction improvement activity may also indicate there could be available partial disposition deductions if existing components are replaced. Other notable accounting method changes that would benefit taxpayers who own capital assets such as real estate include: claiming missed repair deductions, claiming missed retirements of capital assets, and claiming missed energy tax deductions. Taxpayers who have not reviewed their tax depreciation schedules for these opportunities should consider hiring a third party expert who can maximize deductions for the 2016 tax year.

For more information, please contact us.

Opportunities to Accelerate Deductions

Cost Segregation for Buildings and Improvements: If you have purchased, constructed, or remodeled a building in the last 15 years a Cost Segregation Study could benefit you.

Partial Dispositions: If you have spent significant dollars on capital improvements to your building, you are eligible for a partial disposition deduction on the components removed.

Repair vs. Capitalization Review: Now extended through the 2016 tax year (see IRS Notice 2017-6), taxpayers can claim missed repair deductions if they mistakenly capitalized certain expenditures for items such as HVAC units, roofs, parking lots and more.

Retirement Studies: Taxpayers who replace building components often do not identify and retire the original components removed. Identification of these assets allows for the immediate deduction of any remaining depreciable value.

179D Incentive for Energy Efficient Commercial Buildings: Federal deduction worth $1.80 per square foot of energy efficient buildings. Available to architects, engineers, design/build contractors and building owners.

Residential Cost Segregator®: Cost segregation software designed for smaller residential rental properties under 6 units.

For more information regarding these opportunities, contact us.