With the signing into law of the Tax Cuts and Jobs Act (the “Act”), Congress has enacted the biggest tax reform law in thirty years, one that will make fundamental changes in the taxation of businesses, particularly those who own real estate.

LOWER TAX RATES

For tax years that begin after Dec. 31, 2017, the corporate tax rate, which had been at graduated rates as high as 35%, is reduced to a flat 21% rate. Similarly, pass-through businesses (e.g., sole proprietorships, partnerships, LLCs and S-corps) may be able enjoy lowered tax rates through a deduction of up to 20% of their business income. However the pass-through provisions are complicated and the rate reductions are limited for “specified service trades or businesses” (e.g., businesses that involve performance of services in the fields of health, law, consulting, athletics, financial services and brokerage services).

For most real estate investors, the typical tax planning strategies to push income into future tax years and pull deductions into the current year have added value beyond the time value of money. With lower tax rates for 2018 and onward, shifting deductions into 2017 generates permanent tax savings due to the tax rate arbitrage.

ICS Tax Note: For real estate owners, there are numerous planning techniques to accelerate deductions into 2017, which include cost segregation, the §179D energy efficient commercial building deduction, capital to expense studies, retirement studies, and many more. By making a change in accounting method, taxpayers can retroactively take advantage of these planning ideas without amending. ICS Tax can perform a free analysis to determine what opportunities are available for you.

BONUS DEPRECIATION

In general, taxpayers will want to accelerate the purchase of depreciable assets to take advantage of the 100% bonus depreciation provision included in the Act for property placed in service after Sept. 27, 2017. The bonus rates begin to phase out after 2022 and are fully phased out by 2027. Also note that, under the Act, used property qualifies for bonus depreciation. Accelerating the purchase of qualifying property will offset income taxable at the 2017 higher tax rates.

ICS Tax Note: While most Tax Reform provisions apply to tax years beginning in 2018, the bonus depreciation provision is unique in that it applies after Sept. 27, 2017.

ICS Tax Note: With 100% bonus depreciation and its application to used property, Cost Segregation studies have added importance for used buildings purchased in 2018 and beyond.

§179 EXPENSE ELECTION

The act increased the maximum amount a taxpayer may expense under §179 to $1 million and increased the phase-out threshold to $2.5 million. These amounts will be indexed for inflation after 2018.

The act also expanded the definition of §179 property to include certain depreciable tangible personal property used predominantly to furnish lodging or in connection with furnishing lodging. It also expanded the definition of qualified real property eligible for §179 expensing to include any of the following improvements to nonresidential real property: roofs, HVAC property, fire protection and alarm systems, and security systems.

ICS Tax Note: For significant renovation projects, many taxpayers will benefit from Cost Segregation to maximize the benefits of the increased §179 Expense Election.

QUALIFIED IMPROVEMENT PROPERTY

Prior to the Act, three types of building improvements—qualified leasehold improvement property, qualified restaurant property and qualified retail improvement property—had a 15-year recovery period and were depreciated using the straight-line method. For years after Dec. 31, 2017, the Act replaces these categories with a revamped qualified improvement property classification. The legislative intent was to depreciate these over 15 years using the straight-line method and be eligible for bonus depreciation. However, the necessary language was not included in the final tax reform and, absent a technical correction, qualified improvement property is depreciated over 39 years and is ineligible for bonus depreciation.

“Qualified improvement property” is any improvement to an interior portion of a building that is nonresidential real property if the improvement is placed in service after the date the building was first placed in service except for any improvement for which the expenditure is attributable to (1) enlargement of the building, (2) any elevator or escalator, or (3) the internal structural framework of the building.

ICS Tax Note: Presuming a technical correction is made, most taxpayers benefit from the expanded definition of qualified improvement property. However, it is more restrictive in its exclusion of restaurant buildings and some restaurant improvements. For example, the definition of qualified restaurant property prior to the Act did not exclude building enlargements.

§1031 LIKE-KIND EXCHANGES

Generally effective for transfers after Dec. 31, 2017, §1031 like-kind exchanges are limited to transfers of real property not held primarily for sale. However, under a transition rule, the crackdown does not apply to exchanges of personal property if the taxpayer either disposed of the relinquished property or acquired the replacement property on or before Dec. 31, 2017.

HISTORIC TAX CREDIT

The Act modifies the Historic Tax Credit for years after Dec. 31, 2017. A 20% credit still applies with respect to a certified historic structure (i.e., any building that is listed in the National Register), but it must be taken ratably over 5 years. The 10% credit for qualified rehabilitation expenditures with respect to a pre-1936 building is repealed.

OTHER PROVISIONS

The Act has provisions that limit the deductibility of interest expense, changes to ADS lives, and many others. Please consult the full text of the Act for further detail.

HOW WE CAN HELP

ICS provides numerous strategies that can maximize the savings with tax reform. For a free evaluation, please contact an ICS Tax representative.

ABOUT ICS TAX, LLC

ICS Tax, LLC (ICS) is a consulting firm providing innovative tax planning strategies. ICS collaborates with taxpayers and their tax professionals to identify credits and incentives that reduce tax liabilities and increase profitability. ICS provides nationwide service through its Twin Cities headquarters as well as its offices located in Cleveland, Los Angeles, New York, Boston, Columbus, and Sioux Falls.

Author: Alexander Bagne, JD, CPA, MBA, CCSP. Contributing Authors: Mike Piper, LEED AP and Kevin Johnson, LEED AP

Updated: 1/3/2018