On Thursday, November 16th Congress passed H.R. 1 the “Tax Cuts and Jobs Act”. The House passed the bill along party lines with all Democrats and 13 Republicans in opposition for a final vote of 227-205.
The passage of the Bill from the House is just one step in the Republican majorities goal of tax reform. The next step is for the Senate to vote on their version prior to moving forward with reconciliation. While the House version moved forward with very little drama, the Senate will have much less room to negotiate. With only a two-seat majority the Senate has very little room to negotiate.
As with any large scale tax and government policy change, there are varying opinions on the changes included in the bill. At this point, we will not cover all of the changes, or the controversies with this bill. However, we do want to provide an update as to how this bill would affect depreciation and Historic Tax Credits if it were to be passed in its current form.
Historic Tax Credit
Under current law, a taxpayer can take advantage of a tax credit of up to 20 percent of qualified rehabilitation expenditures in connection with the rehabilitation of a qualified building. Under the “Tax Cuts and Jobs Act,” this portion of the tax code will be repealed. This will effectively do away with the ability for taxpayers to take advantage of the Rehabilitation Tax Credit.
There is relief for projects that are currently underway. Congress included a “Transition Rule” which allows for taxpayers to still take advantage of Historic Tax Credits if on a building that is (1) owned or leased by the taxpayer at all times after Dec. 31, 2017, and (2) with respect to which the 24-month period selected by the taxpayer begins not later than the end of the 180-day period beginning on the date of the enactment of the Act. In other words projects currently under development would be able to still access tax credits to complete their project.
Depreciation and Cost Segregation
Under current law certain property with a life of fewer than 20 years, as well as eligible real property, can take advantage of “bonus deprecation”. Bonus Depreciation was first enacted after 9-11 as an economic stimulus and has wavered between 30% and 50% for years (with a short period of 100% in 2011). The PATH Act of 2015 extended bonus depreciation through the end of 2019. Under this current law, taxpayers can write off 50% of eligible improvements in 2017, 40% in 2018, and 30% in 2019. In order to qualify the property must be qualifying new property.
The “Tax Cut and Jobs Act” would increase bonus depreciation to 100% until January 1st, 2023. Additionally, the new Act, if enacted, would make used property eligible for bonus depreciation. This means that a taxpayer purchasing a used property, could complete a Cost Segregation study and take a bonus on all of the used personal property and land improvements associated with the purchase. This would greatly increase the benefits associated with a Cost Segregation analysis.
Increased 179 Expensing
The PATH Act of 2015 recently increased 179 Expensing to $500,000 with a phase-out at $2 million. Under the proposed Act, 179 Expensing would be increased to $5 million with a phase-out occurring at $20 million. Additionally, 179 expensing would be expanded to include “qualified energy efficient heating and air-conditioning property”. This property would be defined as 1250 property where (1) depreciation is eligible (2) which is part of a building’s heating, cooling, ventilation, or hot water system, and (3) which is within the scope of ASHRAE Standard 90.1-2007 or any successor.
Implementation of any tax reform changes is still a long way off. As mentioned earlier, the Senate still needs to weigh in on their proposed changes. However, if any of these changes are enacted it will make cost segregation and other analyses more valuable in the future. Any taxpayers currently expanding, renovating, or acquiring properties should consider cost segregation even in the current environment.
If you have any questions about this or other proposed changes please contact your McGuire Sponsel representative to discuss further.