10. 179 Expensing May Play a Larger Role in 2023 and Beyond:

With 100% bonus rates set to phase down starting in 2023 (see #3 below), Section 179 Expensing may step up.  With a larger deduction of $1.08M for TY 2022, and the ability to immediately expense the full cost of an asset, Section 179 Expensing may soon carry more weight in a comprehensive tax plan. There are several nuances to be aware of – including potential state-specific limitations – but we anticipate more strategic bonus/179 Expensing interplay moving forward. 

9. New Audit Technique Guideline (ATG) Points Focus in New Directions:

In June of this year the IRS released an updated version of the Cost Segregation Audit Technique Guideline for the first time since 2017. By examining the ATG, taxpayers can anticipate what Examiners will focus on in the unlikely event of an audit. The 2022 update points out two new areas of focus – the importance of identifying land values is stressed, and an entire new chapter is added on electrical distribution systems. 

8. Rise of the Non-Profit Tenant:

We’re seeing many retail and office buildings bringing non-profit or government tenants into their properties. This trend may have a huge impact on the way depreciation rules are applied in those properties. The good news is that – depending on circumstances – the taxpayer might not be locked into ADS class lives. This topic is very nuanced, so we covered it in both a feature article and an episode of our podcast, Capstan Live! 

7. 754 Step-Ups – Don’t Miss the Opportunity:

The 754 step-up is notoriously complicated, and it’s easy to overlook the inherent cost seg potential while dealing with all the moving parts. It’s important to remember that the new basis and service date seen in a step-up may tee up an excellent cost seg opportunity.  

6. PAD Elections Remain a Lucrative, But Time-Sensitive Strategy:

The Tangible Property Regulations (TPRs) have not gotten much press lately, with attention focused on newer legislation (see items 1-4 on this list.)  However, the TPRs are very much still in play, and work well in tandem with other tax strategies. If you’re thinking renovation, you must think TPRs. In addition to guiding taxpayers though expense and capitalization decisions, the TPRs permit the immediate write off of the remaining depreciable basis of a retired asset. This Partial Disposition Election (PAD) can be quite powerful, but it can only be taken in the year in which the retired asset was taken out of service.  

5. The R&D Tax Credit is Underclaimed:

Only about 20% of all eligible businesses claim R&D Tax Credits. Many owners just assume they aren’t eligible, but the Credit is more expansive than ever. There are so many common misconceptions about the Credit that are not, in fact, dealbreakers:

• We’re not a “scientific” company. You don’t need to be. Any company in any industry may qualify if they meet the requirements. White coats aren’t mandatory. 
• We didn’t invent something new. Not a problem. If you’re working on improving some product or process that already exists, that qualifies for the Credit.  

• Our research wasn’t successful. That’s okay. Here’s a silver lining – even if activity was ultimately unsuccessful, it may still qualify for the Credit. 
• Too late – we already filed. No worries. The Credit can be claimed retroactively for several years by amending your return.

This hugely powerful, dollar-for-dollar credit goes unclaimed far too often.  

4. TCJA Provision to Amortize R&D Expenses Faces Major Resistance:

This information is so new, we haven’t even written about it yet. In the past, taxpayers could immediately deduct R&D expenses to reduce their taxable income. However, the Tax Cuts and Jobs Act included a provision requiring amortization of said expenses over five years. The provision took effect this year, and on November 4th, hundreds of CFOs petitioned lawmakers for its repeal, stating that it will “thwart innovation” and cost American jobs. There is bipartisan support for returning to immediate deductibility, and we anticipate the matter will be addressed when Congress meets in the upcoming lame duck session. We’ll keep you posted.  

3. Goodbye, 100% Bonus Depreciation:

This is a big one. Taxpayers have been fortunate enough to enjoy 100% bonus rates since the TCJA took effect in 2018. This incentive has been a tremendous source of benefit and boosted the utility of the cost segregation study. Beginning in 2023, bonus rates will drop 20% annually through 2026. It’s important to note that cost seg studies will continue to bring benefit at any bonus rate, but when possible, we encourage clients to place properties in service before end of year, to capture the higher rate of depreciation.  

2. The Inflation Reduction Act (IRA) of 2022 Transforms 45L Tax Credit:

The 45L Tax Credit will be looking quite different in 2023 and beyond. It was extended for 10 years by the IRA, and Energy Star and Zero Energy Ready Home Standards are the new criteria. The height requirement has been eliminated, and the maximum credit per dwelling unit boosted to a potential $5000. We’re waiting for more clarity on how this will all play out, but in the meantime, have a listen to the most recent episode of Capstan Live! to get a high-level overview.  

1. The Inflation Reduction Act (IRA) of 2022 Transforms EPAct 179D:

The IRA is changing the game and the 179D Deduction is virtually unrecognizable. Everything has changed – eligibility, calculation, maximums, and more. Plus, the deduction now resets every three years for commercial buildings, and an alternative method of eligibility has been established for energy retrofit projects. Additional IRS guidance is expected to flesh out the new program, and we’ll keep you posted.