Lock in the savings before Congress Acts!

Wednesday, November 29, 2017 by Len Berkowitz

On November 16, 2017, the House of Representatives passed legislation to overhaul the tax code. Under the House bill, corporate tax rates are set to decrease to 20% and business income earned via pass through-entities such as LLCs will be subject to tax at 25%, subject to certain conditions and limitations.

The bill makes many other changes that will impact both personal and corporate taxpayers.
The Senate passed its own version of a tax bill on December 2, 2017 that includes many of the same provisions, or are intended to have a similar effect. The two bills will now have to be reconciled before moving to the President’s desk for signing. Congress aims to have the reconciled bill ready for the President’s signature before the end of the year.


Under both the Senate bill and the House bill tax rates are generally set to decrease. Therefore, as the year is coming to a close, it is important to consider how this new legislation could impact your year-end tax planning.

One of the primary year-end tax planning strategies is to accelerate deductions to the current year in order to maximize the value of such deductions while the rates are still high. Deferring deductions to next year will decrease the value of such deductions as rates will likely be lower.

For example, assuming a 40% tax rate in 2017 and a 25% tax rate is 2018, a tax deduction of $100,000 is worth an extra $15,000 in 2017. The quantum of savings will continue to increase with additional deductions. As such, taxpayers should consider implementing strategies that will enable them to accelerate deductions to the current year.

A strategy that enables such accelerated deductions is cost segregation.

Cost segregation allows taxpayers to reclassify a portion of real property that is depreciated over 27.5 year or 39 years, to personal property that is depreciated over five years. This is accomplished through an engineering based study that identifies assets contained within real property that are in-fact eligible to be classified as personal property. Very often up to 20%, and sometimes even up to 30% or 40%, of a structure is eligible to be reclassified as personal property.

Thus, if 20% of a building with a cost basis of $10m is reclassified as personal property, then $2m of deprecation can be deducted in the first five years. On an NPV basis, the value of these accelerated deductions is worth between $320,000-$440,000. However, if taxpayers wait until next year to include such deductions, the value of such deductions are decreased.

Furthermore, taxpayers can utilize this strategy to maximize their depreciation on buildings purchased in prior periods as taxpayers are allowed to “catch-up” and include the prior missed deductions in the current year.

Therefore, it is imperative that taxpayers think about implementing this strategy prior to year-end to maximize their current year deductions.

Let the experts at Riverside TACS help you accelerate your depreciation to minimize your taxes and maximize your returns.

Got questions about Cost Segregation Studies or other real estate tax topics? Click here to ask an expert and get the answers you need.

The materials on this website are provided for informational purposes only and do not constitute legal advice. These materials are intended, but not promised or guaranteed to be current, complete, or up-to-date and should in no way be taken as an indication of future results. Transmission of the information is not intended to create, and the receipt does not constitute, an attorney-client relationship between sender and receiver. The newsletters and articles on this website are offered only for general informational and educational purposes. They are not offered as and do not constitute legal advice or legal opinions. You should not act or rely on any information contained in this website without first seeking the advice of an attorney.