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Archive for Bruce Johnson

Might You Be Eligible For An R&D Tax Credit?

Might You Be Eligible For An R&D Tax Credit?

R&D Tax Credits?  We’re a bottling plant, not a science lab.  I doubt we’re eligible…”

A common misconception is that the R&D Tax Credit is only available to businesses engaged in traditional scientific experimentation – pharmaceuticals, biomedical research, and the like.  However, the federal tax credit is intended to incentivize companies in a plethora of industries to develop new and improved products and processes.   This powerful, permanent, dollar-for-dollar reduction isn’t just for the so-called “white-coat industries.”

And it’s worth looking into… The credit provides improved cash flow, offering up to 10 cents in benefit for every qualifying dollar identified in a performed study.  It may be carried back one tax year and forward up to 20 years.

A business in almost any industry can be eligible, if it meets the Capstan Criteria:

1.       Research is happening to create or improve a business component.  (A “Business Component” is whatever the business is trying to develop, be it a product, process, technique, formula, etc.)

2.       The research is trying to eliminate uncertainty.  (How can we make this?  Can we even make this?)

3.       The research involves experimentation of some kind where different alternatives are evaluated.  (Scientific laboratory work, 3D modeling, architectural design, computerized simulations, etc.)

4.       The research is technological in nature.  (Keep in mind, that doesn’t mean that the final product is part of a technical field.  The fidget spinner, for example, is just a toy.  But researching the shiniest paint that won’t flake off the toy does require a technological analysis.)

Once eligible, a business can take Qualified Research Expenses (QRES), which are the costs involved in performing the research.  Wages, supplies/materials, cloud hosting, and third-party contractor fees can all be expensed using the R&D Tax Credit.

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Tax Savings In A Multi-Family Market With Cost Segregation

Tax Savings In A Multi-Family Market With Cost Segregation

The multifamily market remains very strong as an investment.  Along with providing the opportunity to earn rental income, multifamily projects offer a number of tax benefits to the thoughtful investor.  In fact, we’re finding that investors view the tax savings associated with cost segregation as a major reason to consider the multifamily sector.  Since 2018, one of the major drivers has been 100% bonus depreciation for both new and used assets having a shorter than 20-year MACRS class depreciation life.  Prior to the TCJA, you could only take bonus on new construction and renovation assets.  Getting bonus on acquisitions has had a huge impact on commercial real estate, especially the multi-family sector.        

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Inflation Reduction Act Signed Into Law, Extends And Expands Energy-Efficient Tax Incentives

Inflation Reduction Act Signed Into Law, Extends And Expands Energy-Efficient Tax Incentives

EPAct 179D and 45L have been part of the tax code since 2006.  The Inflation Reduction Act of 2022 (IRA) was signed into law August 16, 2022.  The Act includes several major updates to federal energy-efficiency tax incentives that may be of interest to Capstan clients.  The following provisions take effect 1/1/2023, unless otherwise indicated.   

EPAct 179D Tax Deduction

Created as part of the Energy Policy Act of 2005, the EPAct 179D tax deduction was made permanent by the Consolidated Appropriations Act of 2021 (CAA).  The federal deduction may be applied to ground-up energy-efficient construction projects as well as to energy-efficient retrofits.  179D applies to all types of energy-efficient commercial buildings (EECB) and to residential rental buildings that are a minimum of four stories high.  

Clauses in the IRA will increase and expand the utility of 179D as follows:  

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The Tax-Exempt Tenant: How To Treat Depreciable Assets

Tax-Exempt Tenants

It’s not your imagination – there are more and more non-profit tenants turning up in formerly retail spaces. At Capstan we are seeing many retail and office buildings bringing non-profit or government tenants into their properties. How does this impact the way depreciation rules are applied?

That’s a complicated question, and it’s a good thing that a picture – or a Capstan flowchart – is worth 1000 words. Before reading on, download your copy of our newest tool, the ADS Flowchart for Tax-Exempt Property.

Tax-Exempt property must be separated into two categories – there are rules in place for depreciating tax-exempt tangible property/land improvements and different rules in place for depreciating tax-exempt non-residential real estate. The Capstan flowchart is two-sided and color-coded, to clearly differentiate between tangible property and land improvements on the orange side, and non-residential real estate on the blue side.

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45L Tax Credit: A Key Strategy To Consider Before 9.15

45L: A Key Strategy To Consider Before 9.15

It’s easy to underestimate the 45L Tax Credit.  Over the years, the EPAct 179D Deduction has gotten a great deal of press, with 45L often presented as an afterthought, if at all.   However, this oft overlooked incentive brings tremendous benefit, and is a key strategy to consider as you plan for 9/15.   

The 45L credit is a federal tax credit that promotes the construction of energy efficient residential dwellings. The credit is available to builders, developers, and others who build homes for sale or lease.   This one-time incentive can pack quite a punch, with each eligible dwelling unit able to claim $2,000 in tax credits.  The credit can even be claimed retroactively for up to 3 years.

Single and multifamily homes up to 3 stories above grade are eligible for the 45L tax credit, including:

    • Assisted living facilities
    • Campus residential housing
    • For-lease apartment buildings
    • Condominiums
    • Tract and custom single-family homes

Dwelling units within each property are assessed individually.  It’s not an “all or nothing” proposition – some units may meet the criteria, and some may not.  The entire property doesn’t need to qualify.

Dwelling units that meet the following criteria may claim the credit: 

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IRS Issues New Cost Segregation Audit Techniques Guidelines (ATG)

BRUCE JOHNSON - Cost Segregation IRS Audit Technique Guidelines

On 6/1/2022 the IRS updated its Cost Segregation Audit Techniques Guideline (ATG) for the first time since 2017. On Page 1 of the Introduction, the ATG states that it is “…not intended as an official IRS pronouncement. Accordingly, it may not be cited as authority.”   

Nonetheless, the ATG is quite valuable as it takes readers into the mind of an IRS Examiner, spelling out exactly what he is looking for as he scrutinizes a report. The proactive and thoughtful reader can use this guidance to ensure best practices in his cost segregation studies.  

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 the subject of electrical distribution systems. This seems to imply that future auditors will be taking a close look at these subjects. Director of Engineering Ziv Carmel notes, “Capstan engineers always seek to comply with IRS guidelines regarding electrical load distribution and analysis. We also make certain to confirm land values with the client.” 

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Webinar Registration Wednesday, July 13th, 2022 (Free CPE) : Cost Segregation 201 On Commercial Real Estate Depreciation

Cost Seg 201: Current Commercial Real Estate Depreciation Strategies for 2021

Cost Seg 201: Current Commercial Real Estate Depreciation Strategies for 2021

REGISTER HERE FOR FREE CPE

The Coronavirus Aid, Relief, and Economic Security Act (CARES Act) corrected the recovery period of Qualified Improvement Property (QIP) to 15-year. This has tremendous implications and will play a large role in a modern comprehensive tax strategy. In this session we will examine the historical treatment of Qualified Property Categories and focus on the current status of QIP under the CARES Act. We will also explore other strategies that may be part of a comprehensive tax strategy and will discuss a strategic hierarchy for employing those strategies most successfully. Relevant Rev. Procs. and several real-life case studies will be reviewed.

Learning Objectives:
• Understand the history of Qualified Property Categories.
• Explain the implications of the CARES Act’s correction of QIP recovery period.
• Understand how to incorporate retroactive CARES Act changes into past returns.
• Understand the value of QIP as an indicator of Section 179-eligible property.
• Explain how strategies like Section 179 Expensing, Bonus Depreciation, the Tangible Property Regulations (TPRs) and Energy Incentives all contribute to a comprehensive tax strategy.
• Compare and contrast Bonus and Section 179.
• Use various tax strategies in a strategic manner to maximize savings.

A Change Is Coming: As Bonus Depreciation Prepares To Phase Down, Can Section 179 Expensing Step Up?

Section 179 Expensing Step Up

As they say, the only constant is change.

Many readers are aware that bonus depreciation rates are set to begin phasing down in 2023.  Beginning 1/1/2023, bonus will shift from 100% to 80%, and the rate will continue to decline by 20% annually through 2026.  In 2023, 80% of an asset’s cost may be written off using bonus.  Section 179 expensing, however, will continue to permit the immediate expense of 100% of the asset cost, and we expect to see the popularity of this incentive grow in the next year.  For the last several years both incentives were essentially equivalent, but with bonus rates soon to decline, Section 179 expensing may play a larger role in tax plans going forward.

Let’s review some major differences between these two incentives.  First, bonus depreciation permits the deduction of a percentage of a cost while Section 179 permits the expensing up to a set dollar amount.  (The 2022 Section 179 deduction limit is $1,080,000.)

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Top 10 Things You Should Know About Cost Segregation

Top 10 Things You Should Know About Cost Segregation

1. The concept is simple.  

Any given property contains a multitude of different assets, and each of them can be expected to have a different useful life.  For example, you can confidently expect marble flooring to last a lot longer than say, carpet tile.  The IRS provides guidelines that indicate how long different assets might last, using a system called MACRS (Modified Asset Cost Recovery System.)  The default MACRS class-life for an asset is 39 years.  If no cost segregation study is performed, all assets will depreciate over 39 years for commercial property or 27.5 years for residential.  Now that makes sense for marble flooring, but not for carpet tile.  Why should carpet tile just sit on the books, being depreciated over 39 long years?  

In a cost segregation study, engineers identify and quantify all building assets, and then assign each asset a cost.  These costs are then segregated into different categories according to their asset class lives.  Base building or “shell” assets remain 39-year assets, but many items can be moved into shorter-lived class lives:   

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Depreciation: How To Treat Tax-Exempt Non-Residential Real Estate

Depreciation: How To Treat Tax-Exempt Non-Residential Real Estate

Non-profit tenants are popping up all over, and CPAs are often confused about depreciation of these properties.  We’ve gotten so many questions lately… How do I treat this tax-exempt non-residential real estate?  MACRS or ADS?  What about the associated tax-exempt tangible property? What are the appropriate class lives? Is Bonus in play at all? What about QIP?

Our new Flowchart for Tax-Exempt Use Property can help guide users through the decision-making process.  The two-sided, color-coded layout makes it easy to distinguish non-exempt tangible property (orange side) and non-residential real estate (blue side).  Then it’s just a matter of answering the questions and following the prompts.  Like all our Tools, this Flowchart condenses a great deal of information and presents it in a straightforward, user-friendly manner.  Click here to download a copy of the new Flowchart for Tax-Exempt Use Property.

Plus, for more on this subject, check out our latest podcast episode – “Depreciation and the Non-Profit Tenant: What’s the Scoop?”  Click here to listen!

Have a question? Contact Bruce Johnson, Capstan Tax Strategies.

Value Of Cost Segregation Study: Multifamily Residential Property

Value Of Cost Segregation Study: Multifamily Residential Property

Renting is more popular than ever – the population of renters in U.S. cities has increased by over 30% since 2000. This has driven a commensurate increase in multifamily construction, and developers are striving to stand out from the pack. Current trends for attracting and retaining residents include time-savings services, flexible wellness zones, and pet-friendly amenities. These “extras” are attractive, but also add to a developer’s bottom line, and many seek out tax savings strategies to offset some of this initial investment.
Project MF is a 457,000SF rental community on the east coast. The facility consists of one four-story building, including 256 apartment units of various configurations. Of these, approximately half are standard apartment rentals, while the remaining units are fully furnished extended stay suites, available with month-to-month
leases. The developers of Project MF wanted to create a place tenants could live, work, exercise, and socialize, and were prepared to provide all the extras. With a depreciable basis exceeding $107M, the property includes a community lounge, conference rooms, café, fitness center, outdoor swimming pool, basement parking garage, and much more.

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Cost Segregation Is A Tax Planning Strategy

Cost Segregation Is A Tax Planning Strategy

What Is Cost Segregation?

Cost segregation is a tax planning strategy that can help real estate owners and tenants to accelerate depreciation deductions. Although standard depreciation occurs over a lengthy 39-year period, many assets within a structure–from plumbing and electrical fixtures to flooring–are not designed to last that long.

The ability to break out such assets for a five-year, seven-year, or 15-year recovery period helps accelerate depreciation, defer taxes, and improve cash flow.

Why Are Cost Segregation Studies Useful?

An engineering-driven cost segregation study can be useful at any point in the real estate cycle. Whether a property has been newly constructed, recently acquired, or undergone renovations or tenant improvements, a cost segregation study is likely to be a valuable depreciation tool. In certain cases, a look-back study can be appropriate.

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