As many of you are aware, the cost of buying, building, or improving commercial property can be very expensive. These costs are not an immediate expense for the business but must be deducted over 39 years for tax purposes. Some years back, the Investment Tax Credit existed that allowed you to deduct certain commercial property costs over a shorter period. The tax rules changed and many components of a building became structural components and had to be depreciated over 39 years.
The good news is that the rules have changed again and many construction costs can be reclassified and depreciated as personal property instead of as structural components of a building. This means you can deduct many commercial property costs over five to seven years versus 39 years.
According to cost segregation experts, 20% to 40% of a property’s construction costs can be reclassified through cost segregation as personal property or land improvements and depreciated much faster, greatly reducing an owner’s tax bill. Cost segregation is allowed for both old and new property.
What Building Costs Qualify as Personal Property?
The general rule states if a building component can be easily removed without causing significant damage and the item does not relate to the operation and maintenance of the building, it can generally be classified as personal property. Examples include:
- Removable carpeting
- Strippable vinyl wall coverings
- Interior ornamentation, such as molding, millwork and trim
- Moveable partitions
- Counters, cabinets and shelving
- False balconies
- Emergency power generators and lighting
- HVAC and air conditioning units installed solely to meet the temperature or humidity requirements necessary for the operation of machinery and equipment, etc. An HVAC and air conditioning unit for general heating and cooling is still considered a structural component that is depreciated over 39 years.
Generally, cost segregation studies require the expertise of a consultant such as architects, construction engineers and tax specialists. The IRS has set high standards for such studies and they can be costly. Typically, a feasibility study is conducted free of charge to determine whether the tax savings justify the cost of the study. Of course, it may be cost prohibitive to perform a study for older buildings since the necessary records may not exist.
If you would like any further information regarding this issue as well as any other tax related issue, please contact Henssler Financial at 770-429-9166 or [email protected].