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Page 14 — Multifamily Properties Quarterly — January 2015
P oliticians have been continu-
ally citing the need for com-
prehensive tax reform. While
there has been little progress
for comprehensive tax reform,
there were significant rules issued
relating to property that taxpayers
should be aware of for 2014.
In late December, Congress passed
the Tax Increase Prevention Act,
which retroactively extended many
tax incentives that are very beneficial
for business owners.
Section 179 and Bonus Depreciation
Among the many extenders are
provisions for bonus depreciation
and Internal Revenue Code Section
179 expensing, both of which allow
taxpayers to accelerate deductions
for qualified property made before
Jan. 1, 2015. Bonus depreciation
allows taxpayers to deduct 50 percent
of the cost of qualified property in
2014, provided the property is placed
in service during the 2014 tax year.
The remaining 50 percent that is not
deducted using bonus depreciation is
depreciated in accordance with nor-
mal depreciable lives and recovery
rates.
The term “qualified property”
includes:
• Tangible property that has a
recovery period not exceeding 20
years;
• Certain computer software;
• Water utility property; and
• Qualified leasehold improvement
property.
In addition, the property must be
original use. Congress defined the
term “original use” as the first use to
which the property is put, whether
or not such use cor-
responds to the use
of such property by
the taxpayer.
IRC Section 179
allows taxpayers to
expense $500,000
worth of qualified
fixed-asset pur-
chases made during
2014. In contrast to
the bonus depre-
ciation rules, the
availability of this
enhanced deduc-
tion is not limited to new property;
however, a taxpayer’s ability to use
the full $500,000 election begins to
phase out as total qualified invest-
ments meet and exceed $2 million.
Taxpayers may use the IRC Sec-
tion 179 deduction only to the extent
they have positive taxable income.
No such limitation exists for bonus
depreciation, which can be used to
create a tax loss. In addition to the
taxable income limitation, IRC Sec-
tion 179 can be used only to the
extent there is income from the
active conduct of a trade or busi-
ness. Consequently, rental real estate,
which the code defines as a passive
activity, is unlikely to be eligible for
IRC Section 179. Fortunately, this
limitation does not apply to bonus
depreciation.
Unless there is additional Congres-
sional action in 2015, both bonus
depreciation and the $500,000 IRC
Section 179 expense threshold dis-
cussed above expired Jan. 1, 2015.
Taxpayers contemplating a cost-
segregation study should consider
this when making a decision, as the
availability of bonus depreciation
may dramatically
impact the present
value calculation
that is inherent in
any cost-segrega-
tion analysis.
Repairs and
Maintenance Rules
In addition to the
accelerated depre-
ciation opportuni-
ties, taxpayers need
to be cognizant of
the new rules related to repairs and
maintenance. As a result of recently
implemented Treasury regulations,
taxpayers likely will need to file one
or more changes in accounting meth-
od forms when filing their 2014 tax
returns. Failure to do so could result
in missed opportunities or unwanted
consequences.
The new regulations are extremely
voluminous. The following are
some examples of when a change
in accounting form may need to be
filed:
• Change to deducting repair costs
or capitalizing improvement costs,
including a change to adopt the new
unit of property and building system
definitions;
• Change to deducting non-inciden-
tal materials and supplies when used
or consumed;
• Change to deducting incidental
materials and supplies when paid or
incurred;
• Dispositions of a building or
structural component;
• Dispositions of tangible assets
(non buildings); and
• Removal costs.
The following examples illustrate
a couple of opportunities that tax-
payers may miss if the appropriate
change in accounting method forms
are not filed:
Example 1: If a taxpayer disposes
of a depreciable asset, including a
partial disposition, and has taken
into account the adjusted basis of the
asset or component of the asset in
realizing gain or loss, then the costs
of removing the asset or component
will not be required to be capitalized.
Example 2: B owns and leases out
space in a building consisting of 20
retail spaces. The space was designed
to be reconfigured; that is, adjoining
spaces could be combined into one
space. One of the tenants expands
its occupancy by leasing two adjoin-
ing retail spaces. To facilitate the
new lease, B pays an amount to
remove the walls between the three
retail spaces. Assume that the walls
between the spaces are part of the
building and its structural compo-
nents. The amount paid to convert
three retail spaces into one larger
space for an existing tenant does not
adapt B's building structure to a new
or different use because the combi-
nation of retail spaces is consistent
with B's intended, ordinary use of
the building structure. Therefore,
the amount paid by B to remove the
walls does not improve the building
and is not required to be capitalized.
These examples are just the tip of
the iceberg in terms of the new repair
regulations. The potential impact to
taxpayers is far-reaching. 2015 is a
critical year for taxpayers to discuss
the opportunities and/or undesired
impact related to changing tax code
and regulations.s
Regulatory
Justin Dodge
Partner, EKS&H,
Boulder
Jeremy Wilson
Senior manager,
EKS&H, Boulder
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A Division of Madison & Company Properties