Entre Real Estate broker Mike Gazzola realized a net tax savings of $94,000 from a 41,000-square-foot flex building he and investor partners purchased in 2016.
"We received more than half of that savings in Year 1 and the remainder over the next four years. With the new tax codes, commercial property owners and tenants can see even more immediate savings," said Gazzola.
The 2017 Tax Cuts & Jobs Act (TCJA) and 2020 CARES Act allow for 100% bonus depreciation immediate write off of new and used components with a tax life less than 20 years for assets placed in service between Sept. 28, 2017 and Dec. 31, 2022.
Paragon International has been doing this type of work for 35 years, and we've never experienced this allowable and immediate tax depreciation relief for businesses. Of course, we're in an unfortunate and unique situation right now with the global pandemic. These two acts give companies an opportunity to put money back in their pockets quickly, especially now when cash flow may be tight.
"From a planning standpoint, the sooner an owner or tenant can engage a firm that specializes in cost segregation and fixed asset management, the better it will be for a couple of reasons," said Stuart Frankenthal, president and CEO of Northbrook-based Jass Realty Co., LLC.
• Spaces can be inspected now without disruption to employees or concern with distancing challenges
• Office owners and tenants are renovating their space to accommodate distancing, adding barriers and expanding or reducing their existing footprints
Companies increase cash flow immediately because 100% bonus depreciation can be taken against income tax liabilities by applying it to estimated quarterly tax payments calculations. They do not need to file amended tax returns or wait until filing their returns at the end of the year. A simple form can be filed with the estimated quarterly tax payment. That's huge. It's money in one's pocket -- immediately.
Examples of qualifying bonus depreciation assets include flooring, data/computer wiring and computer-related equipment.
For manufacturers it can include manufacturing equipment, connections to that equipment such as air, exhaust fans, duct work and electrical wiring. For the hospitality and entertainment industries, it can include custom lighting, fixtures, built-in cabinetry, and removable walls.
So what are some first steps?
1. Understanding your fixed assets is a great place to start
2. Using a dedicated software solution, such as Sage Fixed Assets, can save time and money (Paragon has been a Sage Fixed Assets certified partner for 25 years)
3. Allocate the purchase price or segregate the construction costs between depreciable and non-depreciable assets
"Accelerating depreciation on qualified improvement property (QIP) from 39 years to either 15 years or 100% first-year depreciation has a direct and positive impact on a company's cash flow," said Ann Donie, CPA, product owner for Sage Fixed Assets. "The recent CARES Act included this tax law change and made it retroactive, effective for QIP assets placed in service in 2018 and later."
The value of having Sage's fixed assets solution is that large quantities of assets can be identified, grouped, and mass edited. Spreadsheets do not easily support making bulk changes to recalculate tax depreciation.
As an example, Paragon helped a nationally-recognized restaurant client update tax depreciation schedules, saving over $5 million in taxes by updating the QIP from 39 years to 15 using a feature in their Sage Fixed Assets--Depreciation application.
In these trying times, finding sources of increased business cash flow are critical because of reduced revenues.
Entre Real Estate can attest to that. "Do you want to pay more to the government or put some of that money in your pocket? The choice is yours," said Gazzola.
•Rick Swarts is founder and CEO of Paragon International, Inc. a Schaumburg-based fixed asset tax savings and management company founded in June 1985.