Top Year-End Tax Planning Tip #2: Cost Recovery of Capital Improvement
Generous tax breaks are available for taxpayers who have made 2020 asset additions. Accelerated depreciation is a beneficial tool for taxpayers related to the timing of income and deductions. Property placed in service during 2020 that has a useful life of 20 years or less will generally be able to be fully depreciated in the current tax year. If your business has a need for additional assets, consider making the acquisitions before year-end.
100 percent first-year bonus depreciation is available for qualifying property placed in service in the 2020 tax year. To be eligible for bonus depreciation, qualifying property can be new (first-time use) or used tangible property. Any qualifying property acquired and placed in service after September 27, 2017 and before January 1, 2023 is eligible for bonus depreciation. In addition, buyers of heavy SUVs used solely for business can write off the full cost, thanks to bonus depreciation. SUVs must have a gross weight rating over 6,000 pounds. Further, the bonus depreciation deduction will decrease in future years as follows:
- 80 percent for property placed in service after December 31, 2022 and before January 1, 2024
- 60 percent for property placed in service after December 31, 2023 and before January 1, 2025
- 40 percent for property placed in service after December 31, 2024 and before January 1, 2026
- 20 percent for property placed in service after December 31, 2025 and before January 1, 2027
Code Section 179 property includes new or used tangible personal property that is purchased to use in an active trade or business. Under the enhanced expensing, for 2020, businesses can expense up to $1,040,000 in qualifying expenditures with no reduction unless expenditures exceed $2,590,000. Note that the amount expensed cannot exceed the business’ taxable income. Bonus depreciation does not have this limitation.
Qualified Improvement Property
Due to an error in the Tax Cuts and Jobs Act (TCJA), qualified improvements to property were not eligible to be immediately written off with accelerated depreciation. The CARES Act has corrected this error and is allowing taxpayers to amend 2018 and 2019 tax returns to claim this write off, generating potential refunds.
Cost Segregation Studies
Cost segregation is a tax planning tool that allows taxpayers to accelerate depreciation deductions and defer income taxes. Real property is depreciated over either 27.5 or 39 years. A cost segregation study will identify all property-related costs that can be depreciated over 5, 7, or 15 years. Under the current depreciation rules, these costs can be fully written off in the year placed in service.
In our communications since the November election, BMSS has noted that uncertainty exists as to what the tax environment might be in 2021, and the impact that may have on 2020 year-end planning. A Biden administration has indicated that higher tax rates for certain taxpayers (corporations and higher income individuals) might be proposed. Enactment of any such legislation will, of course, require the action of Congress, which may or may not be receptive to any Biden administration proposals. Congressional intent is even more difficult to predict before the Georgia Senate runoff votes in January 2021. This uncertainty makes the decisions of taxpayers as to the timing of asset acquisitions, and whether to utilize bonus depreciation or Section 179 expensing, an even greater challenge than normal for this 2020 year-end.