As you wrap up end-of-year business tax planning, here's a provision not to miss, particularly if your company has renovated a building in the past few years, or made other physical improvements on other fixed assets.
The IRS has finalized new rules that allow businesses for the first time to immediately write off the components of business property that have been retired, replaced or renovated. And for this year only, it is allowing companies to go back and take write-offs for those components previously "retired" by making an election for certain tax years beginning before Jan. 1, 2015.
Previously, a building was seen as one structural unit for tax purposes, and such piecemeal write-offs were not allowed.
In other words, when you replaced a roof or old windows, to the extent they were not deducted as repairs, you would continue depreciating the old components as part of the entire building's value, as well as now also depreciating the new roof and windows.
The new rules allow taxpayers, if they choose, to fully deduct the unrecovered value of the components now gone.
For example, assume you owned a commercial building purchased 10 years ago for $750,000. You substantially renovated it in 2012 and parts of the building were removed or demolished. You had been depreciating those parts for the past 10 years. If the value of components minus the depreciation you've already taken is $250,000, you can write that off and tax savings could be as much as $100,000.
The deduction can apply to numerous building components — for example, an HVAC unit, lighting fixtures or a building façade.
This has obvious impact for real estate operators and investors. But because the new rules apply to all depreciable tangible property such as machinery, vehicles and equipment, all sorts of companies should take notice.
The change was part of an effort to bring clarity to a complicated part of tax law on whether an expenditure on a property could be counted as a repair that could be expensed, or an improvement that had to be depreciated over time.
To take fullest advantage of the change, companies will need to review their fixed asset strategy, and should consult with their tax professional to determine a reasonable current value of any replaced components.
For some businesses who have not kept updated accounting records, the change could require some effort. But savings could be significant.
Jeff Talley is a partner in the Tax Services practice at LBMC, the largest regional accounting and financial services family of companies based in Tennessee. Contact Jeff at firstname.lastname@example.org or 615-309-2286.