Tax Cases Involving MACRS
Hospital Corporation of America v. Commissioner, 109 T.C 21 (1997)
This landmark court case provided the legal support to use Cost Segregation Studies for computing depreciation. It ruled that property qualifying as tangible personal property under the former Investment Tax Credit (ITC) rules would also qualify for purposes of federal income tax depreciation under MACRS (Modified Accelerated Cost Recovery System).
IRS Legal Memorandum 199921045
This advised it’s agents that the IRS would not fight the Hospital Corporation of America Tax Court decision. Additionally, this legal memorandum directs agents to verify that an engineering or architectural study has been completed to identify those portions of the building's systems not related to the operation and maintenance of the building. Without these studies, agents are advised not to accept the reclassifications for purposes of federal income tax depreciation under MACRS.
Revenue Procedures Concerning Real Estate Depreciation
Revenue Procedure 87-56
The purpose of this revenue procedure was to set forth class lives to be used in computing depreciation allowances available under Section 168 of the Internal Revenue Code.
Revenue Procedures 2002-9 and 2002-19
These revenue procedures clarified and enhanced the ability of a taxpayer to perform a "retroactive Cost Segregation analysis” for a property placed in service in an earlier year. Also allowed any negative Sec. 481(a) adjustment (increase in depreciation) resulting from a retroactive Cost Segregation to be taken into account in a single year, typically the current tax year.
Revenue Procedures 2008-52, 2009-39 , 2011-14 and 2015-2020
These revenue procedures clarified that a taxpayer obtains IRS consent to an accounting method change by filing Form 3115 – Application for Change in Accounting Method. Retroactive Cost Segregation Studies modify recovery periods of assets which are corrected by filing a timely Form 3115 in year of change.
Recent Tax Acts
Job Creation and Worker Assistance Act of 2002
- Created first-year 30% Bonus Depreciation for assets purchased after September 10, 2001 and before September 11, 2004
Jobs and Growth Tax Relief Reconciliation Act of 2003
- Increased first-year Bonus Depreciation from 30% to 50% for assets purchased after May 5, 2003 and before January 1, 2005
American Jobs Creation Act of 2004
- Introduced qualified leasehold improvement property (15-year straight line) for costs capitalized after October 22, 2004, and before January 1, 2006
- Introduced qualified restaurant improvement property (15-year straight line) for costs capitalized after October 22, 2004, and before January 1, 2006
Tax Relief and Health Care Act of 2006
- Extended qualified leasehold improvement property through YE 2007
- Extended qualified restaurant improvement property through YE 2007
Emergency Economic Stabilization Act of 2008
- Brought back first-year 50% Bonus Depreciation for 2008
- Extended qualified leasehold improvement property through YE 2009
- Extended qualified restaurant improvement property through YE 2009
- Introduced qualified retail improvement property (15-year straight line) for 2009
- Increased §179 expensing limits to $250,000 and the investment limit to $800,000
American Recovery and Reinvestment Act of 2009
- Extended first-year 50% Bonus Depreciation through YE 2009
- Extended §179 expensing limits of $250,000 and the investment limit of $800,000 through YE 2009
- Permitted small businesses to use an extended five-year carryback period for 2008 net operating losses (NOLs)
Small Business Jobs Act of 2010
- Extended first-year 50% Bonus Depreciation through YE 2010
- Increased §179 expensing limits to $500,000 and the investment limit to $2,000,000
- Expanded the definition of §179 property to include qualified real property (i.e. qualified leasehold, restaurant and retail improvement property)
Tax Relief, Unemployment Insurance Reauthorization and
Job Creation Act of 2010
- Introduced first-year 100% Bonus Depreciation for September 9, 2010 through the end of 2011
- Increased §179 expensing limits to $125,000 and the investment limit to $500,000 for 2012
- Extended qualified leasehold improvement property through YE 2011
- Extended qualified restaurant improvement property through YE 2011
- Extended qualified retail improvement property through YE 2011
American Taxpayer Relief Act of 2012
- Income tax rate increase. A 39.6 percent rate (up from 35 percent) will be imposed on individuals making more than $400,000 a year and families making more than $450,000
- Payroll tax holiday ends. The two-percent cut in the Social Security tax for all earners up to the Social Security wage base ($113,700) will not be extended into 2013
- Alternative minimum tax patched. A permanent AMT patch, adjusted for inflation, will be made retroactive to 2012, promising to protect an additional 30 million taxpayers for AMT liability
- Estate tax. The estate tax regime will continue to provide an inflation-adjusted $5 million exemption (effectively $10 million for married couples) but will be applied at a higher 40 percent rate (up from 35 percent in 2012)
- Business tax credits. The research tax credit and the production tax credits, among others, will be extended through 2013
- Energy Tax Credit. Sec. 45L Tax Credit is extended as is, for now
- Extended qualified leasehold improvement property through YE 2013
- Extended qualified restaurant improvement property through YE 2013
- Extended qualified retail improvement property through YE 2013
TCJA - Public Law No: 115-97 (12/22/2017)
- Bonus depreciation: 100% bonus depreciation is a key benefit for real estate owners as well as investors. Prior to the TCJA, bonus depreciation only applied to newly constructed or original use property. TCJA includes used property acquired September 28, 2017 or after for this treatment as well. Additionally, properties under $1M can now take advantage of bonus depreciation. A forensic cost segregation study will establish what assets will qualify for 100% bonus depreciation treatment.
- In-service date is crucial: For newly constructed property, it is important to know when a binding contract was entered into between the owner and the general contractor for construction, as pre-September 27, 2017 contracts will not get 100% bonus even if the property is placed in service after September 28, 2017 – but will get 50% bonus based on the contract date.
- Increased 179 Expenses: Qualifying property now includes roofs, HVAC systems, fire protection, alarm systems, and security systems. Additionally the allowable expense has been increased from $500,000 to $1,000,000 in 2018, with the phase-out deduction increased to $2.5M. These rules now include Sec. 1245 tangible personal property acquired for rental properties, furniture and appliances and add another benefit and increased value to a foresnsic cost segregation study.
- Pass-through Deduction: With the potential 20% deduction for pass-throughs in play for 2018, the effective federal tax rate drops from 39.6% to 29.6% (37% x 80%).
- Qualified Improvement Property (QIP): There are no longer separate requirements for Qualified Leasehold Improvement Property (QLIP) and Qualified Restaurant Property (QRP) and Qualified Retail Improvement Property (QRIP). These separate distinctions were eliminated as of December 31, 2017, leaving only Qualified Improvement Property (QIP). For example, restaurant structure will now be depreciated over 39 years.
(NOTE: A significant drafting error failed to grant QIP the reduced 15-year class life. The result is depreciation over 39 years and no qualification for 100% expensing without correction. This is expected to be addressed in a future technical corrections bill, although that is not certain. Bonus depreciation is still available for qualifying assets as long as they are non-structural in nature.)
- The Tangible Property Regulations (TPR): TPR are still in play. There are significant tax benefits in analyzing improvements made to buildings as the TPR’s still recognize the ability to deduct certain renovation costs as repair expenses if applicable. Check with your tax professional.