Author: Howard Tax Prep LLC

Cost segregation breaks your real property into its components, some of which you can depreciate much faster than the typical 27.5 years for a residential rental or 39 years for nonresidential real estate.

When you buy real property, you typically break it into two assets for depreciation purposes:

• land, which is non-depreciable; and
• building (residential is 27.5-year property; nonresidential is 39-year property).

With a cost segregation study, you make your property much more than a building on land. Here’s what’s possible with a cost segregation study:

• land, which is non-depreciable
• 5-year property
• 7-year property
• 15-year property
• for the remainder, 27.5-year property or 39-year property, depending on building use

With a cost segregation study, you front-load your depreciation deductions and take them sooner, but you’ll take the same total depreciation amount over the lifetime of the property.

Tax reform under the Tax Cuts and Jobs Act boosted bonus depreciation from 50 percent to 100 percent, and this new law also allows bonus depreciation on qualifying used property. Cost segregation is made to take advantage of these new law changes.

And you can apply cost segregation to rentals and offices you have had for 10 years or that you are buying tomorrow.

However, if the passive activity loss rules affect your ability to take immediate rental losses, you’ll need to run the numbers to see if you can benefit, and also identify what you could do to benefit even more.

Tax reform in one of its “not beneficial to you” new law sections took away your ability to do a like-kind exchange for non-real property. Therefore, if you do a cost segregation and then later use a like-kind exchange on that property, you’ll have taxable gain attributable to everything that’s not land or 27.5-year or 39-year property.

We recently saw a cost study on a new $400,000 property purchased this year. The study enabled a speed-up of $50,000 of deductions to this year’s tax return. For this taxpayer, who was in a combined federal and state income tax bracket of 40 percent, this put $20,000 in his pocket this year.

Although we’ve given you the basics, this is not an all inclusive article. Should you have questions, or need business tax preparation, business entity creation, business insurance, or business compliance assistance please contact us online, or call our office at 855-743-5765. Make sure to join our newsletter for more tips on reducing taxes, and increasing your wealth.

Reprinted Issue Number: Tax Reform Tax Tip 2018-149

Eligible employers who provide paid family and medical leave to their employees during tax years 2018 and 2019 might qualify for a new business tax credit. This new employer credit for family and medical leave is part of tax reform legislation passed in December 2017. Here are some facts about the credit to help employers find out if they might be able to claim it.

To be eligible, an employer must:

• Have a written policy that meets several requirements, as detailed in Notice 2018-71.
• Provide:
  • At least two weeks of paid family and medical leave to full-time employees.
  • A prorated amount of paid leave for part-time employees.
  • Provide pay for leave that is at least 50 percent of the wages normally paid to that employee.

The credit applies to these dates:

• It is available for wages paid in taxable years beginning after Dec. 31, 2017, and before Jan. 1, 2020.

The amount of the credit:

• The credit is generally equal to 12.5 to 25 percent of paid family and medical leave for qualifying employees.

Here’s what kind of leave qualifies:

• The leave can be for any or all of the reasons specified in the Family and Medical Leave Act:
  • Birth of an employee’s child.
  • Care for the child.
  • Placement of a child with the employee for adoption or foster care.
  • To care for the employee’s spouse, child, or parent who has a serious health condition.
  • A serious health condition that makes the employee unable to perform the functions of his or her position.
  • Any qualifying exigency due to an employee’s spouse, child, or parent being on covered active duty – or having been notified of an impending call or order to covered active duty – in the Armed Forces.
  • To care for a service member who is the employee’s spouse, child, parent, or next of kin.
• However, leave paid by a state or local government, or that is required to be provided by state or local law, does not count toward the 50 percent.

Some employers are eligible to claim the credit retroactively to the beginning of their taxable year:

• • Normally employers can only claim the credit based on eligible leave taken after their new or amended policy goes into effect.
  • Read Notice 2018-71 for a description of special rules for when an employer can claim the credit retroactively.

Although we’ve given you the basics, this is not an all inclusive article. Should you have questions, or need business tax preparation, business entity creation, business insurance, or business compliance assistance please contact us online, or call our office at 855-743-5765. Make sure to join our newsletter for more tips on reducing taxes, and increasing your wealth.

The IRS, in its new proposed Section 199A regulations, defines when a rental property qualifies for the 20 percent tax deduction under new tax code Section 199A.

One part of the good news on this clarification is that it does not require that we learn any new regulations or rules. Existing rules govern. The existing rules require that you know when your rental is a tax law–defined rental business and when it is not. For the new 20 percent tax deduction under Section 199A, you want rentals that the tax law deems businesses.

You may find the idea of a rental property as a business strange because you report the rental on Schedule E of your Form 1040. But you will be happy to know that Schedule E rentals are often businesses for purposes of not only the Section 199A tax deduction but also additional tax code sections, giving you even juicier tax benefits.

Under the proposed regulations, you have two ways for the IRS to treat your rental activity as a business for the Section 199A deduction:

1. The rental property qualifies as a trade or business under tax code Section 162.
2. You rent the property to a “commonly controlled” trade or business.

Your rental qualifying as a Section 162 trade or business gets you other important tax benefits:

• Tax-favored Section 1231 treatment
• Business use of an office in your home (and, if it’s treated as a principal office, related business deductions for traveling to and from your rental properties)
• Business (versus investment) treatment of meetings, seminars, and conventions

If your rental activity doesn’t qualify as a Section 162 trade or business, it will qualify for the 20 percent Section 199A tax deduction if you rent it to a commonly controlled trade or business. Although we’ve given you the basics, this is not an all inclusive article. Should you have questions, or need business tax preparation, business entity creation, business insurance, or business compliance assistance please contact us online, or call our office at 855-743-5765. Make sure to join our newsletter for more tips on reducing taxes, and increasing your wealth..