By Tegan Long
Senior Manager, Moss Adams LLP
In the current economic climate, with income and resources continuing to ebb, companies need all the cash flow they can get. Some are freeing up cash with tax savings. How? One method is to evaluate assets for any applicable incentive, including bonus depreciation, to capture every available tax deduction.
Analyzing and changing the tax treatment of fixed assets can substantially reduce current federal and state tax liabilities or, for companies with net operating losses, increase the loss available for carryback to obtain refunds of taxes paid in prior years.
Fortunately, Congress extended and enhanced the 50 percent bonus depreciation enacted in 2008. Under tax laws passed in December, the bonus depreciation was increased from 50 percent to 100 percent for qualified investments made after September 8, 2010, through the end of 2011. The bonus depreciation falls back to 50 percent for calendar year 2012 and expires at the end of that year.
The two-year incentive period isn’t limited to smaller companies or capped at a certain dollar level. However, only new property qualifies for the 100 percent bonus depreciation.
So, for example, if a company purchases $500,000 of qualifying property eligible for the 100 percent bonus depreciation deduction, it could claim a $500,000 depreciation deduction for the property on its 2011 tax return.
Changing the company’s accounting method is another technique to claim additional tax deductions in certain circumstances. For example, if a business is using its book method of accounting to determine deductible repair and maintenance costs of its real estate, it may be overpaying current income tax. By changing its tax accounting method for repair and maintenance expenses, the business may be able to deduct eligible costs now instead of later, reducing current taxes and strengthening cash flow.
This opportunity applies to most any company with real estate assets, but it has particular relevance for real estate investors and operators whose primary business is commercial property. The benefits could be substantial for businesses that own a great deal of real property or have other assets with long useful lives ― such as heavy equipment ― on their books. Examples of activities that could be eligible for immediate deduction include repainting, repairing leaks, and repairing or replacing roofing materials on buildings.
Businesses that use their book capitalization policies for tax often capitalize more costs than they’re required to under the tax law, and this significantly delays the deduction for these costs. For instance, when a business repairs a building, it often capitalizes and depreciates the repair costs in the same manner it would for the building itself. That means the business will recover depreciation deductions over a period of up to 39 years. Yet these expenses are, in some cases, immediately deductible for tax purposes.
A thorough review of repair and maintenance expenses can often uncover capitalized assets that should originally have been expensed for tax purposes. The current tax law allows taxpayers to change their method of accounting for certain properties, and with that change eligible expenses previously capitalized may be deducted in the current tax year.
It’s important to note that the IRS has raised repair and maintenance expenses to Tier 1 status, which means the agency will scrutinize them carefully. If you’re considering taking advantage of these deductions, you should talk to your accountant to determine whether the expense would qualify.Tegan Long has more than six years of experience providing tax planning and compliance services to a wide variety of businesses, specializing in construction companies and financial institutions. She can be reached at (360) 685-2276 or firstname.lastname@example.org.