NEW DEPRECIATION OPTIONS FOR LANDLORDS AND BUSINESS OWNERS

Glenn Bailey,  CPA

Recent legislative changes offer new opportunities for tax deductions on new capital assets purchased and placed into service during 2010 or 2011. If you are considering investing in new assets for your business or have improvements to make to your business real estate, you should consider these benefits in determining whether to make your purchases now or later.

The Small Business Jobs Act of 2010 has raised the cap on the value of assets that can be expensed in the year of purchase. This is commonly referred to as “Sec. 179 expense” after the Internal Revenue Code section that authorizes this treatment.  For 2010 and 2011, qualified assets up to a total of $500,000 may be expensed. This amount begins to phase out when $2,000,000 worth of qualified assets are placed in service during a tax year. Legislators looking to provide tax benefits to small businesses frequently tinker with this threshold.  In 2012, this limit is scheduled to drop to $25,000 of qualified assets eligible for expensing. It is possible that this limit will be changed again before it drops in 2012, but the current limit is about twice as high as it had ever been previously.

New for 2010 and 2011 is the ability to take Sec. 179 expense on certain kinds of real property, including rental property. Eligible items are:  “qualified leasehold improvement property”, “qualified restaurant property” and “qualified retail improvement property.”  Up to $250,000 of improvements can be deducted as part of the $500,000 total expense limit. This is a more generous expensing allowance than has ever previously existed since this section of law was adopted in 1958. There are a variety of restrictions on what constitutes qualified property.  Some of these include the limitation on leases between related parties, improvements made to buildings that have been used for business less than 3 years, and items that are structural components, elevators or escalators, heating/AC units or any improvement that increases the size of the building.  This could be a major tax benefit for a landlord looking to acquire a new tenant or other eligible business owners interested in improving their property.

As with most tax law these days, the eligibility rules here can be complicated.  Proper planning with your tax advisor can eliminate unfavorable surprises down the road, and allow an accurate assessment of the tax savings that may be available.

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