It's Tax Time-Don't Miss Out on Large Deductions Available for Facility Improvements Completed in 2011


By Kathleen Petrucci

In an effort to get the economy moving again, the 2010 Tax Relief Act expanded enhanced depreciation incentives to include qualified real property. This is a big deal because, historically, taxpayers making real property improvements had to live with the general recovery period of 39 years. For dealers paying sometimes into the millions for facility upgrades, that’s a long time to recover your investment. The real property incentives available in 2011 will allow many dealers to recover a larger portion of the investment in the very first year and put much needed cash back in their pockets.

There are two qualified real property incentives that may be available to dealers that completed projects in 2011: “qualified leasehold improvements” and “qualified retail improvements.” Qualified leasehold improvements offer the biggest savings because they qualify for 100% bonus depreciation in 2011 (50% in 2012). Qualified retail improvements do not qualify for bonus depreciation, but they do qualify for a 15-year recovery period, versus the typical 39 years, and qualify for $250,000 of Section 179 expensing in 2011 (n/a in 2012). 

Qualified Leasehold Improvement

Qualified leasehold improvements are those made to the interior portion of a commercial building used exclusively by the lessee or sub-lessee (not common area) that is older than three years, and made pursuant to a lease. Improvements do not qualify if the lease is between related parties. This will disqualify many dealerships that have related-party leases or own the property.

Examples of improvements that will qualify include: heating, ventilation and air conditioning equipment, plumbing systems, doors, ceilings, nonload-bearing walls, security systems, and permanent lighting fixtures.

Examples of improvements that will not qualify include: the enlargement of the building, elevator or escalator, any structural component benefiting a common area, and the internal structural framework of the building.

Qualified Retail Improvement
Qualified retail improvements are those made to the interior portion of a commercial building that is older than three years, and made to the portion that is open to the general public and is used in the retail trade or business of selling tangible personal property to the general public.

Examples of improvements that will and will not qualify are the same as for qualified leasehold improvements.

A large portion of the costs for required facility upgrades should be qualified retail improvements and will also be qualified leasehold improvements if there is a nonrelated-party lease. If costs qualify under both, qualified leasehold treatment is the better option because of the 100% bonus depreciation deduction.

Qualified leasehold improvements with 100% bonus depreciation can oftentimes result in an 80% to 100% write-off for the entire cost of the improvements. That means for a dealer spending $1,400,000 on typical upgrades, a first-year write-off can range from $1,120,000 to $1,400,000!!

For dealers that own their building or are under a related-party lease, qualified retail improvements can still produce a good first-year write-off with the Section 179 expensing of $250,000. Additionally, the shorter 15-year life will provide additional accelerated deductions. It is also important to note that the use of a cost segregation study could greatly increase 2011 depreciation benefits by pulling out shorter-lived assets that would qualify for 100% bonus depreciation. Savings could increase as much as $400,000 to $500,000 for property reclassed a life of 20 years or less.

Keep in mind that there is a taxable income limitation for Section 179 expensing amounts, and that for qualified real property improvements, unused amounts cannot be carried forward to 2012.

If you would like to know more about construction incentives or other incentives that are available for tax year 2011 or after, please contact Kathy Petrucci.

© 2012 Schneider Downs. All rights-reserved. All content on this site is property of Schneider Downs unless otherwise noted and should not be used without written permission.

This advice is not intended or written to be used for, and it cannot be used for, the purpose of avoiding any federal tax penalties that may be imposed, or for promoting, marketing or recommending to another person, any tax related matter.

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