Building Up Tax Awareness Can Help Contractors with Their Customers

Erin Horman, CPA, Tax Senior Manager   email
January 2011

Construction firms are all looking for ways to differentiate themselves and add value for their customers and prospects. While firms don't need to become tax experts, possessing some tax knowledge to point out potential savings to customers can be a value-added service. Below are some of the tax savings ideas that could be valuable to your customers.

Cost Segregation Analysis

Typically real property, such as a building, is depreciated over 27½ or 39 years. A cost segregation analysis breaks out property with shorter depreciation lives, such as carpeting, from the overall cost of the building and land improvements. Identifying property with shorter depreciable lives allows for quicker depreciation for tax purposes and the use of the Section 179 expensing and bonus depreciation. A cost segregation analysis does not change the total cost of the building; however, it does modify how quickly your customer can benefit from the building expense. You can provide additional value by having someone on your staff who is qualified to do a cost segregation analysis.

Increased Section 179 Expensing

Section 179 is an incentive in the tax code designed to encourage businesses to buy equipment and invest in their companies. For the tax years 2010 and 2011, the Section 179 expensing limitation has been increased to $500,000. This limitation is reduced by the total amount of Section 179 property purchased and placed into service during the tax years 2010 or 2011 that exceeds $2,000,000 (the investment limitation).

Property that qualifies for this expensing is tangible property (other than buildings and land improvements) used in the active conduct of a trade or business. The property breakdown identified in cost segregation may be attractive for Section 179 expensing.

It is important to work with your tax accountant when addressing Section 179 as there are other limitations that might apply based on the income and nature of the activity.

Expanded Section 179 Expensing

For 2010 and 2011, there are new rules that further expand the definition of qualified property for expensing under Section 179 to include the following types of real property: qualified leasehold improvement property, qualified restaurant property and qualified retail improvement property. The maximum amount of real property that may be expensed in these special categories is $250,000 within the total allowed for Section 179 of $500,000. Under this new provision, many items that previously did not qualify for immediate expensing may now qualify, but you need to become familiar with the details of these new Section 179 real property rules.

Bonus First-Year Depreciation

For property placed into service between January 1, 2010, and September 8, 2010, taxpayers may take a first-year bonus deduction of 50 percent of the adjusted basis of most new qualified tangible personal property, such as cabinets and light fixtures. Based on a recent law change, for qualified property placed in service after September 8, 2010, and before December 31, 2011, the bonus depreciation is now 100 percent of the cost. The new tax bill allows for businesses to write off 100 percent of the cost of qualified property. In 2012, the 50 percent bonus depreciation deduction returns.

Below is a summary of the changes and timeline for the  bonus first-year depreciation:

This is where a cost segregation analysis again might be beneficial as it would break out assets with shorter depreciable lives that would then qualify for bonus depreciation. There are several requirements that must be satisfied for the property to be eligible for the 50 or 100 percent bonus depreciation. The main requirement is that the original use of the property must begin with the taxpayer. (Essentially it must be new property, and most property that qualifies for Section 179 expensing also qualifies for bonus depreciation.)

Energy Efficient Commercial Building Property Deduction

A special deduction is allowed for the costs related to an energy efficient commercial building property placed into service after December 31, 2005 and before January 1, 2014. This property must be installed as part of: the interior lighting system; the heating, cooling, ventilation, or hot water systems (HVAC); or the building envelope. It may be installed in a newly constructed building or as part of the renovation or rehabilitation of an existing building. The property must be certified as being installed as part of a plan designed to reduce the total annual energy and power costs of the building by 50% or more in comparison to a reference building. You can add further value to your customers by having someone on your staff qualified to make that certification.

The available deduction is up to $1.80 times the square footage of the building. There is no limit on overall additions or qualifying expenses, and there is no dollar cap for qualifying deductions.

Finally, as an added benefit to your company, if your customer is a government entity (and thus not subject to tax) you as the designer/contractor of the project could be entitled to claim this special deduction. This deduction represents a permanent tax benefit to you as the designer of the project.

The above items can provide significant tax savings for building owners. Encourage your customers and prospects to contact their tax advisers to see how they might benefit from these opportunities.

For more information, please contact Erin Horman at 262/754-9400 or ehorman@kolbco.com.