January 2008 Technical Update
Bonus Depreciation Is Still Available
Didn’t bonus depreciation apply to assets constructed after September 10, 2001 and placed in service before January 1, 2005? It’s 2008, why do I need to know about that? The reason is that you may be missing out on significant tax savings from Bonus Depreciation that can be unlocked for the 2007 tax return through a retroactive cost segregation study.
The timeframe for placing assets in service has expired, but that does not mean it is not available for your use. The regulations state that the Bonus Depreciation provision is not an election. So unless you specifically opted out of Bonus Depreciation, you are by default still eligible. Because you originally classified your assets as 27.5- or 39-year property, you did not have any property that could take advantage of the Bonus Depreciation provision; until now. Contact us to see how much bonus depreciation you have locked up waiting to increase your bottom line.
According to §168(k), newly constructed 5-, 7-, and 15-year MACRS property qualifies for an additional 30% depreciation deduction in the first year if the property was constructed after September 10, 2001 and placed in service before May 6, 2003. The additional 50% depreciation deduction in the first year applies to property constructed after May 5, 2003 and placed in service before January 1, 2005.
Let’s use the example of an office building constructed for $10 million and placed in service on July 1, 2004 to see how bonus depreciation can be unlocked. The property didn’t receive a cost segregation study when constructed and is being depreciated using the 39-year straight line method. The accumulated depreciation through December 31, 2006 would be approximately $631,000. The building owner performs a cost segregation study in January 2008 for the 2007 tax return which results in a reclassification of property as shown below.
| MACRS Property Cost |
Cost Basis |
Relative Percentage |
| 5-Year Property (Personal Property) | $700,000 | 7% |
| 15-Year Property (Land Improvements) | $1,000,000 | 10% |
| 39-Year Property (Building) | $8,300,000 | 83% |
|
Total Costs: |
$10,000,000 | 100% |
Applying 50% bonus
depreciation to the 5- and 15-year property, we have a new accumulated
depreciation through December 31, 2006 of roughly $1,738,000. That’s a
depreciation catch-up adjustment of $1,107,000 which will be captured on a
Form 3115 – Change In Accounting Method in the current tax year without
having to file an amended return. This is on top of the deprecation for
2007, which would be $292,000.
Call us today to discuss the specifications of your project and review a
free projection of savings.