50% Bonus Depreciation Tax Benefit for New Construction in 2008
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New income tax provisions, recently enacted, significantly enhance the tax benefits available upon purchase or construction of new business assets including real estate. It’s some of the most generous tax legislation you’re likely to see and it’s generally available only in 2008.
To help pull the economy out of potential recession, the old “bonus depreciation” rules of several years ago have been revived for one more year. The original bonus depreciation provisions were enacted in the wake of 9/11 to boost the flagging economy at the time.
The essence of the new rules is the allowance for the immediate write-off of 50% of the cost of certain new property purchased or constructed in 2008. Business assets with a depreciable life of 20 years or less qualify for bonus depreciation. This includes virtually all new business equipment and furnishings as well as a significant portion of the cost of new real estate facilities.
The benefit of the new rules is best illustrated by way of example. Assume the construction of new mini-storage facilities at a cost of $5 million. With careful segregation of construction costs, a prototypical cost allocation might be something like the following.
Cost
179 Depreciation
Bonus Depreciation
Regular Depreciation
Total Depreciation
Land
10% 500,000
-
-
-
-
Land Improvements
35% 1,1750,000
-
875,000
44,000
919,000
Personal & other 5 yr property
15% 750,000
250,000
250,000
50,000
550,000
Self Storage Facilities
40% 2,000,000
-
-
49,000
49,000
Total Allowable 1 year depreciation
-
-
-
-
1,518,000
In this example, approximately 30% of the entire cost of the facilities can be written off right away. The first year tax savings is approximately $530,000 for someone in the top federal tax bracket. Bonus depreciation and the newly enhanced ‘section 179 expensing’ rules (described below) are leveraged to achieve this result.
Enclosed is a list of some real estate cost categories that qualify for this 50% bonus depreciation tax benefit. The following are the basic requirements pertinent to this new tax benefit.
The property must be used in business or rental activities.
It must be new property, i.e., original use of the property must commence with the taxpayer.
It must have a depreciable life of 20 years or less.
It must be purchased in 2008 and placed in service in 2008.
However, there’s a major exception to the rule that the property must be placed in service in 2008 in the case of property that has a construction period exceeding one year and a cost in excess of $1 million. Such property will still qualify for bonus depreciation of construction is started in 2008 and the property is placed in service no later than December 31, 2009. In this case, bonus depreciation only applies to costs incurred on or before December, 31, 2008; so, for construction projects that will span the 2008/2009 dateline, it’s good to spend heavily in those
Categories that qualify for bonus depreciation in 2008 and delay to 2009 spending on those categories that don't qualify.
Leasehold improvements to commercial property qualify for bonus depreciation.
The cost of off-the-self- software also qualifies.
“Small business expensing”/section 179, has been around for a long time. Prior to 2008, a business could write-off up to $128,000 per year of the cost of business equipment & furnishings (tangible personal property). This allowance, however, was phased out, dollar for dollar to the extent such expenditures exceeded $510,000. Both new and used properties qualify for section 179 expensing. The Economic Stimulus Act of 2008 temporarily increases the amount that may be expensed from $128,000 up to $250,000. The threshold at which the deduction begins to get phased out is increased from $510,000 to $800,000.
The maximum first year depreciation allowable on passenger automobiles and light trucks was formerly, $3,060. The effect of the new rules is to temporarily increase the limitation up to $11,060 for vehicles purchased in 2008.
Assets Qualifying for 50% Bonus Depreciation
Virtually all new business and rental property equipment & furnishings qualify for the first year 50% write off. Additionally, the following cost categories of newly constructed real estate also qualify for immediate write-off. (Please note that this is just a partial list of qualifying costs. Many other cost categories will also qualify for bonus depreciation based on the circumstances of the particular construction project).
Improvements to commercial or residential rental property outside the footprint of the building structure, i.e., depreciable land improvements, including the following-
Sidewalks
Roads
Parking lots
Curbing and striping
Landscaping & shrubbery
Fencing
Exterior lighting
Signage
Irrigation systems
Leveling & grading
General Site conditions
Carpeting and floor covers.
Window Covers.
Doors tailored to specialized needs.
Exterior ornamentation.
HVAC & Air conditioning units installed to meet specialized temperature or humidity requirements.
Specialized lighting including lighting to illuminate the exterior of a building.
Removable wall partitions that do not bear structural load. Movable partition systems consisting of ceiling and glazed rail height partitions used to divide floor space into offices, rooms and work areas.
Components of electrical and water distribution systems installed and maintained in connection with an apartment complex or commercial property.
Soft costs allocable to land improvements and other nonstructural costs.
Electrical distribution systems serve dual purposes. They provide power of the general needs of the building and also for equipment within the building. Therefore, their cost can be allocated between these two depreciable asset categories based on relative electrical loads. To the extent allocable to purposes other than the general needs of the building, the cost of the system for bonus depreciation. The same would be true of water distribution systems. Electrical distribution systems consist of circuit breakers, transformers, power panels, switchboards, motor control centers, wiring, conduit, mechanical piping and outlets.
Reinforced concrete floor designed for special business needs.
Raised floors installed over an existing floor.
Generators and emergency power systems.
Handrails & banisters to assist the handicapped.
Crown molding for ceilings, ornate wall paneling systems, lattice work for walls and ceilings, lattice millwork, and décor window treatment.
Strippable vinyl wall coverings.
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