As the end of this tax year looms, it is time to have an in-depth conversation with your tax planner about how to characterize all the expenses you incurred in running your business or managing your investment properties. The tax code makes some very complex distinctions between expenditures, and by doing the homework about which tax regulations apply to each dollar spent, you can give to yourself some really great tax benefits.
And, if you have sold any property (or a business) in the current tax year, it is imperative that an in-depth review of your entire property portfolio be done to see what expenditures can be used to offset any taxes due. It is probable that you have tax benefits about which you are unaware.
Get Professional Help When Panning for Tax Benefit Gold
Do not spend your time trying to research all this yourself. You have a business to run, property to lease or a renovation project to oversee. Put your tax planner to work doing what he does best, digging through the tax codes to find those hidden nuggets that can bring you tax savings. For those who are untrained, depreciation rules, “repair regs” and other rules are a shifting sand beneath the taxpayer’s feet. On the other hand, a proactive tax planner familiar with these statutes can guide you to the stepping stones that will take you safely across the tax code stream and to greater tax benefits.
Question #1: Where does Congress stand on depreciation rules?
This is actually a series of questions: What are the depreciation rules this year? Has Congress made any changes that could apply to my business? Are there tax benefits that are expiring, but could be extended in the eleventh hour? How can I best take advantage of existing rules?
The first step is to review all the expenditures on your books, to separate out those that are fully depreciable this year, and those that will have to be depreciated over several years. Then examine the tax code for the current rules that apply. Not identifying for this year what is now available to you can mean loss of tens of thousands of dollars in tax benefit.
For instance, consider Section 179 of the tax code. In past tax years, the benefits were massive, providing a maximum instant depreciation deduction for eligible new and used assets allowed under Section 179 of up to $500,000. This limit applied to deductions for new or used computer equipment, off-the-shelf software, new or used office furniture, and new or used machinery and equipment. The $500,000 limit also applied to new or used heavy long-bed pickups and new or used heavy vans used over 50% for business. Unfortunately, the rules have changed and the maximum Section 179 deduction for 2015 now falls back to $25,000, and excludes off-the-shelf software.
We also need to dig into Section 263 of the tax code. New rules, known as “repair regs,” have been in effect since 2014, and apply to expenditures that involve buying, building or bettering business property and equipment. These regulations are complex, but there are nuggets of tax benefit gold within them, if you know where to look, and how to group your expenditures. This is especially true for the construction and real estate industry.
Another area of interest is “bonus depreciation” which Congress may choose to retroactively revive early in 2016 for the 2015 tax year. From 2010 to 2014, the tax code offered a 50% bonus in depreciation in the year of purchase for qualified new (not used) equipment and software. This bonus depreciation deduction was added to any allowable Section 179 deduction for such a capital investment.
Question #2: Do any of these depreciation benefits apply to my real estate property expenditures?
Real property expenditures are usually ineligible for the instant deprecation offered through Section 179. However, there was an exception for “qualified real property” that your business placed in service in tax years that began in 2010-2014. Specifically, your business could claim a Section 179 deduction of up to $250,000 for the following types of real estate property expenditures:
- Interiors of leased nonresidential buildings.
- Restaurant buildings.
- Interiors of retail buildings.
Currently, no Section 179 deduction is allowed for real property expenditures in tax years beginning in 2015. But, Congress may restore all or a portion of the $250,000 Section 179 deduction for 2015. Your tax planner will stay on top of that for you to see if Congress chooses to extend these rules for use this year.
Question #3: If I sold a property in 2015, which expenses incurred on other properties can I use to offset my capital gains tax bill?
Work with your tax planner to manage your property portfolio as a unit. Review your 2015 expenditures to determine how to best position them to reduce your tax bill. In my experience, too many property owners have tunnel vision when they manage their property investments, viewing each property as independent of the others. That can be a huge mistake and cause you to miss out on eligible tax savings.
Here is a suggestion to keep in mind: If it is going to take a dollar’s worth of work to get fifty cents worth of tax benefit, think twice about doing it. You are likely much better off to spend the time looking for benefits that return multiple dollars per dollar spent filling out paperwork and digging up past records to identify those expenditures that can give you greater tax benefit.
- Examine all expenditures for the current tax year, and properly characterize each one to maximize your tax benefits by implementing appropriately the various depreciation and other tax deduction and credit rules.
- Examine expenditures that are scheduled for early 2016 to see which might usefully be moved into December to take advantage of tax breaks.
- Keep an ear tuned to news out of Washington about tax benefits that have expired, but have a high likelihood of getting extended.
By working closely with your tax planner, you may still be able to take advantage of laws that will generate for yourself a great amount of tax benefit for 2015. At the same time, you will set a solid foundation for greater financial prosperity as you move into the coming year.