As we approach the end of 2024, year-end tax planning is at the forefront of every accountant's agenda. With changing tax regulations and incentives, staying informed about the latest updates is crucial for optimizing client outcomes.
Bonus depreciation: phasing down, but still relevant
Bonus depreciation is an additional first-year tax deduction that affords many taxpayers significant cash tax savings early on and supports future tax planning strategies. Under the Tax Cuts and Jobs Act, the bonus is applicable to both acquired and newly constructed assets placed into service after Sept. 28, 2017. While the rate of bonus depreciation continues to phase down, it remains a critical tool for accelerating deductions on qualified property. Unless there is some legislative change, the scheduled phase-down period, presents both opportunities and challenges for 2024:
- 2024: 60%
- 2025: 40%
- 2026: 20%
- Fully eliminated by 2027.
Accountants may want to ensure their clients maximize current-year benefits and advise them on the timing of asset acquisitions and in-service dates, particularly for significant purchases, in order to take advantage of the higher bonus depreciation rates before they decline further.
Qualified property includes assets with a MACRS recovery period of 20 years or less, such as decorative lighting and Qualified Improvement Property. Notably, QIP applies to nonstructural, interior improvements made after the building is first placed in service by the taxpayer and remains a key focus area.
Tangible property regulations: the repairs vs. capitalization debate
The tangible property regulations provide guidance for costs incurred to acquire, produce or improve tangible property. Issued in 2013, these regulations are critical to a client's capitalization, depreciation and expensing procedures for fixed assets. Proper classification of expenditures under TPRs can result in significant tax savings. Accountants should conduct a detailed annual review of their clients' capitalization policies, fixed-asset accounts and current-year expenditures to identify items eligible for expense treatment or the case of assets permanently removed from service, an evaluation and correct calculation of the partial asset disposition (which must be taken in the tax year of disposition). Some of the best practices include:
- Repairs: Expenses meeting the "routine maintenance" or "de minimis safe harbor" criteria can be expensed immediately, reducing taxable income.
- Improvements: Many capitalized items may be eligible for expensing and/bonus depreciation.
- Dispositions: Current year partial and/or entire asset dispositions are being accounted for. It is important that the client addresses this write-off opportunity in the current year as dispositions cannot be retroactively corrected.
Accountants should revisit prior-year classifications for possible adjustments, especially under the 5-year automatic change rule for Form 3115.
Cost segregation: accelerate depreciation with detailed analysis
Cost segregation studies continue to be a cornerstone of tax strategy for businesses with substantial real estate investments. These studies reclassify components of a building into shorter-lived assets, allowing for accelerated depreciation.
Many decorative interior finishes and special purpose electrical and mechanical assets may be depreciated over five and seven years with land improvements, or 15 years instead of 27.5 or 39 years for buildings.
Today, cost segregation studies are becoming more complex but increasingly rewarding, particularly for projects involving Qualified Improvement Property. For clients who own nonresidential properties, significant deductions can be recognized when they are performing interior improvements and renovations. Based on thousands of studies, a large portion of our client's building improvement capex qualifies as QIP.
A thorough review of capitalized assets can identify opportunities for reclassification and ensure compliance with updated regulations. Close consideration should be given to the scope of a study to address the detail not only needed to support assets eligible for accelerated depreciation but also to serve as a reference document to support TPR activities during the ownership period.
Energy tax incentives: leverage enhanced deductions and credits
The Inflation Reduction Act significantly enhances energy tax incentives, including Sections 179D and 45L, making them a focal point for businesses investing in energy-efficient properties. Energy-efficient buildings and homes offer lucrative opportunities for tax savings:
Section 179D (commercial buildings):
- Section 179D now offers deductions up to $5.00 per square foot if prevailing wage and apprenticeship requirements are met, or if construction began prior to Jan. 29, 2023.
- For projects that do not meet the PWA requirements, deductions range from $0.50 to $1.00 per square foot.
- Expanded eligibility allows tax-exempt entities to allocate deductions to design firms.
Section 45L (residential properties):
- Credits of $500 to $5,000 per unit for energy-efficient homes certified under Energy Star or Zero Energy Ready Home standards.
- Applicable to single-family homes and multifamily projects, with no limitation on the number of stories post-IRA.
Accountants should ensure compliance with certification standards and explore these incentives to offset construction and renovation costs.
SALT updates and trends: stay ahead of state-level changes
State and local tax developments continue to reshape compliance requirements:
- Increasing movement toward flat tax rates;
- Adjustments to net operating loss limitations, including caps in Illinois and California;
- Expansion of digital economy taxation; and,
- Enhanced sin taxes, such as Maryland's increased tobacco tax and California's firearms excise tax.
As states adapt to economic pressures, accountants should monitor legislative changes that may impact client liabilities or planning strategies.
Year-end action items for accountants
To prepare clients for the year ahead and ensure they are well-positioned, accountants should consider the following steps:
- Review capitalization policies: Update client policies to align with current regulations and optimize expense classifications.
- Assess past and current capitalized items: Identify opportunities to reclassify assets or apply safe harbor elections.
- Conduct fixed asset reviews: Look for partial asset disposition opportunities, especially for underutilized or retired assets.
- Leverage Form 3115: File for permissible accounting method changes where beneficial.
- Plan for 2025 capex: Discuss the implications of future capital expenditures, particularly as bonus depreciation phases out.
The 2024 tax environment is rich with opportunities but demands diligence from accountants to navigate effectively. As always, proactive planning and thorough documentation remain essential for compliance and maximizing benefits. For specialized assistance, consider consulting experts in cost segregation, energy tax credits and TPR applications to enhance the overall strategy.
