by Craig R. Tobin
Wipfli is an IMA Member
On the topic of tax engineering, we last discussed reclassifying water lines, waste lines and process electrical power from building components to personal property in order to decrease the cost-recovery period and accelerate depreciation. But for new construction projects, there are four more areas where you can increase savings through tax engineering.
In our previous blog, we revealed that the IRS classifies building components with a 39-year recovery period and personal property with a 5- or 7-year recovery period, depending on the property’s use. This is a prime reason why you should consider leveraging tax engineering to add more to your bottom line. Here’s how:
- Craneways and Supports
General foundations, footings and exterior walls are all considered building components with 39-year recovery periods. This means that if you attach your craneway to enlarged building columns, only the supports and the crane are considered 7-year property. However, if the craneway is supported separately from the building columns, the entire craneway is considered 7-year property.
- Pedestal-Mounted Cable Access Way
The IRS does not consider computer flooring a 39-year building component, since it’s installed over an existing floor to accommodate special equipment, and because removing the floor does not result in extensive renovations or a loss of functionality.
However, terminology is an important facet of tax engineering. Because a typical floor is a 39-year building component, it’s vital to define what is actually the “floor.” We want to describe an item based on its function, so in the case of computer flooring, using the term “pedestal-mounted cable access way” identifies the item as a function and a piece of personal property.
- Component Attachment
Another permanent-versus-removable consideration of tax engineering is how components are attached to the interior building partitions. Decorative panels that are glued to the wall, and thus unable to be removed without damaging it, are treated as a 39-year building component. Decorative panels that are screwed or hung with Z-clips, making them removable and reusable, are considered 7-year personal property.
- Environmental Enclosures
Enclosures that are constructed to control a particular environment, such as a clean room or cold storage, should always be constructed within the building as a stand-alone use structure. A totally stand-alone enclosure qualifies as 7-year property, whereas one incorporated into the building comes with a 39-year recovery period, so we advise never including the building’s roof deck, steel supports or exterior walls as part of the structure.
How to Apply Tax Engineering to Your Construction Project
In our previous blog on tax engineering, we mentioned that for every $100,000 of cost or value moved from 39-year to 7-year depreciation, the first year after-tax net present-value benefit is about $17,000 for 2017 and nearly $24,000 for 2018. Since there are quite a few ways to reclassify building components into personal property, performing a cost-segregation study is essential.
With a cost-segregation study, you can:
- Accelerate depreciation
- Increase current tax deductions
- Defer income tax
- Increase cash flow
During the planning phase of your construction project, engineers will review your preliminary drawings and make suggestions to improve your tax position.
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