Property Deductions

How to take advantage of expiring property-related tax deductions by year end.

Many of the tax deductions surrounding capital expenditures and capital improvement are set to expire on Dec. 31. These benefits include bonus depreciation, Section 179 deductions, tenant improvement deductions, and sunsetting repair rules. To qualify for the deductions, assets must be placed in service, or repair expenditures must be paid or incurred by year-end.

“Taxpayers involved in real estate improvement or capital equipment acquisition should assess now whether they can benefit from these deductions, since it is unlikely that they will survive beyond 2013,” says Perry McGowan, a tax director with CliftonLarsonAllen’s construction and real estate group.

“Due to new tax rules, many business owners will have tax rates increase next year from 35 percent to more than 40 percent, so it is important to focus on investments that can be in-service by December 31,” he adds.

You can help maximize your deductions by taking the following steps.

Purchase fixed asset equipment

Section 179 currently allows a deduction of up to $500,000 on up to $2,000,000 of assets placed in service. If you are eligible, purchase fixed asset equipment now to receive the Section 179 deduction.

In addition, bonus depreciation currently allows for a 50 percent deduction on new five-, seven-, and 15-year assets.

“Many of these deductions can be carved out of real estate improvement projects, so keep your structures and facilities contracts on track so you can meet the year-end placed-in-service test,” says McGowan.

Complete qualified tenant improvements

Improvements placed in service in 2013 may qualify for a 15-year depreciable life; this increases to a 39-year depreciable life in 2014. In addition, 2013 qualified tenant improvements are eligible for a Section 179 deduction of up to $250,000, and a 50 percent bonus depreciation deduction.

Conduct a cost segregation or repair and maintenance study

A cost segregation study can help assess which 2013 deductions you can use by analyzing real property components for the most tax-efficient treatment. For instance, it can result in a portion of a 39-year depreciable building qualifying for five-, seven-, or 15-year depreciable lives.

The net after-tax cash benefit for segregated shorter-lived building components is significantly affected by the placed-in-service date. Therefore, certain 2013 expenditures for routine upkeep and rehab of real estate may benefit from a repair and maintenance study to assess eligible deductions. These costs are easily overlooked and can often end up as 39-year depreciable property, or even nondepreciable land.

How we can help

Talk to your tax advisor as soon as possible about your eligibility for the deductions, then do what you can to secure the deductions before the end of the year.

“All of these significant tax deductions are dependent on the placed-in-service date. If possible, reduce your taxes by getting these assets into service in December,” recommends McGowan.