Depreciationand

Expense Deductions

After Tax Cuts & Jobs Act

Depreciation changes made by TCJA

✓Bonus Depreciation

- Written Binding Contract vs. Substantial Construction

(see Depreciation Accelerator)

✓Qualified Improvement Property (QIP) under the TCJA

✓Interest Deduction Limitation (see ADS vs. MACRS

decision tree)

✓Section 179 Expensing

✓State and Local Deductions

✓Like-Kind Exchanges

✓Bipartisan Budget Act of 2018 (179D and 45L)

Bonus Depreciation Under the TCJA

✓TCJA increases bonus to 100% for properties placed-in-service

between 9/28/2017 – 12/31/2022

▪ Applicable to new Construction/Renovation

▪ Acquisitions now eligible – qualifying assets no longer have

to be new, just “new to you”

✓After 2022, bonus rates will gradually decline

Bonus Depreciation Rates Under the TCJA

Year Bonus Value

9/28/2017-

12/31/2017

100% (50%

election)

1/1/2018 –

12/31/2022

100%

2023 80%

2024 60%

2025 40%

2026 20%

Bonus Depreciation Under the TCJA –Crucial Date

✓TCJA Established a Mid-Year Bonus Rate Split

▪ 9/27/2017 is the crucial day that will determine bonus rates

✓The IRS has not yet issued further guidance for TCJA

Note: If the law applies according to guidance issued in 2010 when a mid-year rate split last occurred (Reg. 1.168(k)-1(b)(4) and Revenue Procedure 2011-26)

▪ As such, the following content is subject to change as the IRS

issues new guidance

Bonus Under the TCJA -- Written Binding ContractTCJA Bonus eligibility in 2017 is contingent on a written binding

contract signed after 9/27/17:

If a written binding contract for the acquisition of property is in effect prior to 9/28/17, the property is not considered acquired after the date the contract is entered into (Act Sec. 13201(h)(1) of the TCJA).

Consequently, property subject to a binding written contract entered into before 9/28/17 is not eligible for the 100-percent rate and is subject to a 40-percent rate if placed in service in 2018 and a 30-percent rate if placed in service in 2019. The 50-percent rate applies if such property is placed in service in 2017.

Bonus Under the TCJA – Acquisitions of Real Estate

WBC for Purchase of

Property Signed BEFORE

9/28/17

WBC for Purchase of

Property

Signed ON or AFTER

9/28/17

▪ Considered to have been

acquired before TCJA

▪ Therefore, PATH Act Rules must

apply and acquired assets would

not be eligible for Bonus

▪ Acquired under TCJA, so TCJA

Bonus rules apply

▪ 100% Bonus

▪ Assets must have MACRS

class lives of 20-years or less

Controlled by Date of the Written Binding Contract (WBC)

Multifamily Case Study

✓Company A plans to purchase a 300-unit garden style

multifamily property as part of a 1031 exchange

✓WBC signed 10/15/2017

✓Acquisition went through 12/31/17

✓$35M -- 15% of that cost is land

✓Cost Seg Study

20% is moved to 5-yr

5% is moved to 15-yr

Multifamily Case Study

WBC signed AFTER 9/27/2017 – TCJA Rules Apply

- 100% Bonus on 5 and 15-year assets

Multifamily Case Study However, if the WBC had been signed on 8/1/2017

PATH Act rules would apply

NO bonus on these acquired assets -- huge impact on tax savings

Shopping Center Example

✓Client B purchases a 25K SF neighborhood shopping center

✓WBC signed 9/1/2017

Note: Before TCJA takes effect, so PATH rules apply

✓Sale goes through on 3/15/2018 for $10M

▪ 20% is land, so basis is $8M

✓Cost Seg Study Results

15% moved to 5-yr

10% to 15-yr

Shopping Center Example

In this scenario, PATH rules apply – no Bonus

Shopping Center Example

What if the WBC had been signed 10/1/2017 and TCJA rules would

apply -- how would the results differ?

Bonus Under the TCJA – New Construction/Renovation

✓Driven by date “substantial construction” begun -- but how do we define

“substantial”?

▪ No bright line definition in the code but…

▪ “In general, manufacture, construction, or production of property begins when physical work of a significant nature begins. Physical work does not include preliminary activities such as planning or designing, securing financing, exploring, or researching.”

▪ PLUS -- IRS Safe Harbor Option: Physical work of a significant nature will not be considered to begin before the taxpayer incurs (in the case of an accrual basis taxpayer) or pays (in the case of a cash basis taxpayer) more than 10 percent of the total cost of the property.

Bonus Under TCJA – New Construction/Renovation

Construction Begun

Before 9/28/17

Construction Begun

On or After 9/27/17*

PATH Act Rules Apply

• Pre-existing phase-down

rulesPlaced-in-Service by 12/31/17:

50% Bonus

Placed-in-Service by 12/31/18:

40% Bonus

Placed-in-Service by 12/31/19:

30% Bonus

• Also applies to new spend

on renovations post-

acquisition

TCJA Rules Apply

• 100% Bonus

• Acquired assets are eligible

Regardless of when contract was initially signed (Reg 1.168(k)-1(b)(4)(iii)(A))

Driven by Date “Substantial” Construction Began

Tenant Build Out Example

✓Tenant C is fitting out a floor of a high-rise office building

✓Total cost of renovations is $2M

✓Construction began 9/15/2017 and had barely begun by 9/27/2017

Therefore substantial construction began after 9/27/2017 – TCJA rules apply

✓Placed-in-service 8/1/2018

✓25% moved to 5-yr, 65% to QIP, 10% in 39-year (structural)

Tenant Build Out Example

In this scenario, significant construction began after 9/27/2017, so

TCJA rules apply with 100% Bonus

Tenant Fit Out Example What if substantial construction began before 9/27/2017?

PATH Act rules would apply – since placed-in-service in 2018, only 40% Bonus

according to pre-existing phase down rules

Mixed Use Development Example

✓Third phase of a three phase project – total spent $17M

✓Construction begun 6/1/2017

✓Placed-in-service 1/31/2018

✓Substantial construction began before 9/27/2017 – PATH Act

Rules apply even though placed-in-service after 9/27/2017

✓Bonus rate driven by Substantial Construction Date, not

placed-in-service date

✓15% moved to 5-yr, 10% to 15-yr

Mixed Use Development Example

PATH Act rules apply – 40% Bonus

Mixed Use Development Example

What if construction did not begin until after 9/27/2017?

TCJA Rules would apply – 100% Bonus

Bonus Depreciation Under the TCJA –Summary

✓Great time to reconsider cost segregation studies on acquired

properties

▪ Original use of property need not have commenced with the

current taxpayer

▪ Bonus boosted to 100%

✓Be clear on relevant dates –

✓If elect-out of interest deduction limitation, must use ADS

depreciation which is generally NOT bonus-eligible

Qualified Improvement Property THEN: QIP-PATH

✓Established as a new property category under the PATH Act

✓Defined as any improvement to an interior portion of a

building which is nonresidential real property if the

improvement is placed-in-service after the date the building

was placed-in-service

✓Restrictions associated with QLI, QRI, and QRIP did not apply

▪ No “Three-Year Rule”

▪ Did not have to be made pursuant to a lease

✓QIP classified as 39-year after Bonus (other three categories

classified as 15-year SL, not Bonus-eligible)

Qualified Improvement Property after TCJA

✓Any improvement to an interior portion of a building which is

nonresidential real property if the improvement is placed-in-

service after the date the building was first placed-in-service by

any taxpayer.

✓Replaces the separate categories of QLI, QRI, QRIP

✓Classification based on assumption that QIP placed-in-service

after 12/31/2017 supposed to have a 15-year SL recovery period as

intended by Congress (P.L. 115-97).

▪ Requires a technical correction

Restaurant with QIP Example

✓Restaurant D leases its facility and entire building is used for

meal preparation and consumption

✓Major renovations to the interior and some land improvements

– $3M

✓Renovated space placed-in-service 12/31/2017

▪ Placed-in-service before TCJA took effect on 1/1/2018, so using

Qualified Property Categories as defined by the PATH Act

▪ Placed-in-service date determines which QIP definition is used

Restaurant with QIP Example

$3M breaks down as follows:

- 10% is land improvements – 15-yr with Bonus

- 90% is QRP and also classifiable as QIP – 50% Bonus, 15-yr

after Bonus

Restaurant with QIP Example

Manufacturing Facility with QIP Example

✓Manufacturing facility acquires a new location at a cost of $1M

✓WBC signed 8/1/2017 – pre-TCJA – PATH rules apply – no bonus on acquisitions

✓Placed-in-service 12/31/2017

✓1/1/2018 –begin full scale renovations – replaced windows, doors, new HVAC, built a mezzanine – total spend $2M

✓Placed-in-service 7/15/2018

▪ QIP is determined by placed-in-service date – post-TCJA, so QIP is 15-year (assuming a technical correction is made to definition of QIP – if none then

QIP is 39yr)

Manufacturing Facility with QIP Example

The $2M renovation spend breaks down as follows:

- 5% land improvements – 15-yr and 100% Bonus

- 30% structural and external improvements – excluded from QIP – all must

be 39-yr

- 65% assets eligible for QIP

- Of the 65%, 30% are 7-year assets

Manufacturing Facility with QIP Example

Technical correction is made: QIP is 15-year and therefore eligible for

Bonus

Placeholder for EoB with 15-yr QIP and Bonus

1

5

QIP Under the TCJA – Summary

✓Under PATH Act, easy to meet definition of QIP, but QIP was

long-lived 39-year after Bonus

▪ To depreciate using shorter 15-year life, asset had to meet

additional qualifications to be considered QLI/QRI/QRIP

✓However, the “new” QIP-TCJA has the shorter 15-year class life,

without the associated restrictions

▪ This is another big plus – further enhances the value of a

traditional cost segregation study

NO• An electing real property trade or

business is any real estate

development, redevelopment,

construction, reconstruction,

acquisition, conversion, rental,

operation, management, leasing, or

brokerage trade or business.

• An electing farming business is any

trade or business involving the

cultivation of land or the raising or

harvesting of any agricultural or

horticultural commodity. It also

includes a trade or business of

operating a nursery or sod farm, or

the raising or harvesting of trees

bearing fruit, nuts, or other crops, or

ornamental trees

ADS vs. MACRS Decision Tree

Are Your 3-Year

Average Annual

Gross Receipts More

Than $25M?

Are You Voluntarily*

Making an ADS

Election?

MACR

S(Bonus)

ADS(No

Bonus*)

NO

Are You Electing Out

of the Business

Interest Limitation?

[Subject to Eligibility]Do Any of the

Mandatory ADS

Descriptions Apply?

NOYES

YES

Interest Deduction

Limitation of 30%

Applies.

YES

NO

YES

• Tangible property used

predominantly outside of the United

States during the tax year;

• Tax-exempt use property;

• Tax-exempt bond-financed property;

• Property imported from a foreign

country for which an Executive Order

is in effect because the country

maintains trade restrictions or

engages in other discriminatory acts

(Code Sec. 168(g)(1))

• Listed property with 50% or less

qualified business use

• Property used predominantly in a

farming business if it is placed-in-

service in a year an election not to

apply UNICAP rules to certain

farming costs

Taxpayers making a

voluntary ADS election

may still be eligible for

Bonus depreciation.

See IRC Sec.

168(k)(2)(D)

*

MACRS vs ADS Decision Tree

Interest Deduction Limitation

✓Effective 1/1/18, TCJA limited the amount of

“business interest” a taxpayer may deduct in any tax

year

✓The limitation is an amount of business interest

equal to the sum of

- The business interest income of the taxpayer for the tax

year;

- 30% of “adjusted taxable income” of the taxpayer for the

tax year (which cannot be a negative amount), and;

- The “floor plan financing interest” of the taxpayer for the

tax year.

Interest Deduction Limitation

✓The 30% limit applies only to net business interest

expense (i.e., the excess of business interest expense over

business interest income) and is based on the taxpayer’s

“adjusted taxable income”.

✓For tax years beginning after 12/31/17 and before 1/1/22,

“adjusted taxable income” is computed without regard to

deductions allowable for depreciation, amortization,

depletion, or business interest expense (similar to

EBITDA).

✓For tax years beginning after 12/31/21, adjusted taxable

income will include deductions for depreciation and

amortization, but not business interest expense.

Interest Deduction Limitation

✓The TCJA exempted certain small businesses from

the business interest limitation in the event that they

meet the $25 million gross receipts test

✓This test is satisfied if the taxpayer has average

annual gross receipts of less than $25 million for the

three previous taxable years (or such shorter period

in which the taxpayer was in existence)

✓Hopefully, the IRS will provide guidance with respect

to the impact of related parties on the gross receipts

test

Interest Deduction Limitation

If annual gross receipts average MORE than $25M, taxpayers

operating a “real property trade or business” may

irrevocably elect to opt out of the business interest

limitation.

The consequence of such an election is that all of the

taxpayer’s residential rental property, nonresidential real

property and QIP used in such real property trade or

business must be depreciated using the alternative

depreciation system (ADS).

Interest Deduction Limitation

A real property trade or business is “any real property

development, redevelopment, construction, reconstruction,,

acquisition, conversion, rental, operation, management,

leasing or brokerage trade or business.”

If the taxpayer elects out, the taxpayer MUST depreciate real

property using ADS (Alternative Depreciation System)

Interest Deduction Limitation – ADS

✓ADS recovery periods are

- 40 years for nonresidential property,

- 30 years for residential rental property, and

- 20 years for qualified QIP

✓As compared to MACRS recovery periods of

- 39 years for nonresidential property,

- 27.5 years for residential rental property, and

- 15 years for QIP

Interest Deduction Limitation – ADS

✓ADS classes are longer-lived, and properties depreciated with

ADS are generally not bonus-eligible

✓Taxpayer should consider ramifications of electing out

Section 179 Expensing – Pre-TCJA

✓Entity-level election

✓Permits the full purchase price of a qualifying asset to be written

off completely in the year of purchase

✓ Qualifying assets included:

business equipment

computers

business related vehicles, etc.

✓Section 179 election encourages businesses to invest in their

own growth

Section 179 Expensing Under the TCJA

Effective 1/1/2018, the TCJA expanded eligible assets to include

the following improvements to nonresidential building

systems placed-in-service after the building was placed-in-

service:

- Qualified Improvement Property (QIP)

- Roofs

- HVAC

- Fire protection and alarm systems

- Security systems

Section 179 Expensing Under the TCJA

✓Increased the dollar limitation of the election from $510,000

to $1 million

✓Eliminated the exclusion of tangible personal property used

in connection with lodging facilities (i.e. hotels)

✓Assets may be new or used

Section 179 Expensing Under the TCJA – Summary

✓Demonstrates advantage of cost segregation study

- The newly included improvements can be carved out during a

cost segregation study – adds even more value

- Limitation on the election is increased by almost 50%

- For the first time, assets used in hotels, motels, and

dormitories are eligible for expensing under Section 179

- No authority to take Sec. 179 on a Schedule E!

Like-Kind Exchanges Under the TCJA

✓Section 1031 real estate like-kind exchanges are preserved

and will continue to be eligible for tax deferral

✓Effective 1/1/2018, like-kind personal property exchanges

are no longer permissible

Bipartisan Budget Act of 2018: Section 179D

Reinstated for 2017 only

Extended the most recent rules for application

Up to $1.80/ square foot of deduction benefit

For new construction and renovation work

Three areas of construction:

- Interior lighting

- HVAC

- Building envelope

Bipartisan Budget Act of 2018: Section 45L

Reinstated for 2017 only

Extended the most recent rules for application

$2,000 tax credit per dwelling unit

For new and renovation work to:

- Single family homes

- Multifamily three up to three stories

Bonus, Section 179 and the repair regulations

✓The same property may be depreciable under both bonus and Section

179 and expensed under the repair regulations

✓Repair regulations require a more complex analysis of expenditures,

including requiring determination of unit of property and whether an

expenditure can be expensed or must be capitalized

Bonus, Section 179 and the repair regulations

✓Unlike section 179 expensing, taxpayers do not need net income to take

bonus depreciation deductions

✓But taxpayers must take the new net operating loss (NOL) limitations –

as well as the new limitation on losses of noncorporate taxpayers – into

account

✓Bonus depreciation is not limited to smaller businesses or capped at a

certain dollar level as under section 179

Impact of the new depreciation rules on the repair regulations

✓The current depreciation rules are very generous-----100% bonus and

Section 179’s application to nonresidential real property such as roofs,

heating, ventilation, and air-conditioning property, fire protection and

alarm systems, and security systems

✓Determination whether an expenditure is a repair and maintenance

expense as opposed to an expenditure that must be a capitalized under

the repair regulations may be a less crucial determination for many

taxpayers in 2018

Impact of the new depreciation rules on the repair regulations

✓Identifying a unit of property as required under the repair regulations

will still be important

✓Ability to fully depreciate an expenditure by utilizing the 100% bonus

depreciation or Section 179 reduces the risk of taking an invalid position

by expensing the activity as a repair and maintenance item

De minimis safe harbor election?

Making a de minimis safe harbor election remains a viable option for many taxpayers

Under the repair regulations, a taxpayer may elect to apply a de minimis safe harbor to amounts paid to acquire or produce tangible property to the extent such amounts are deducted for financial accounting purposes or in keeping books and records.

If the taxpayer has an applicable financial statement (AFS), the taxpayer may use this safe harbor to deduct amounts paid for tangible property up to $5,000 per invoice or item (as substantiated by invoice)

If the taxpayer does not have an AFS, the taxpayer may use the safe harbor to deduct amounts up to $2,500 per invoice or item (as substantiated by invoice).

De minimis safe harbor election?

The de minimis safe harbor election eliminates the burden of determining

whether every small-dollar expenditure for the acquisition or production

of property is properly deductible or capitalizable

If a taxpayer elects to use the de minimis safe harbor, the taxpayer does

not have to capitalize the cost of qualifying de minimis acquisitions or

improvements.

Deduction versus capitalization

The final tangibles regulations synthesize existing case law and prior

administrative rules into a framework to help taxpayers determine

whether a cost is deductible as a repair and maintenance expense or must

be capitalized because it is an improvement

If the amounts are not paid or incurred for an improvement to tangible

property as determined under the final tangibles regulations, then the

amounts generally are deductible as repairs and maintenance

Improvements that must be capitalized

✓A unit of tangible property is improved only if the amounts paid are:

- For a betterment to the unit of property; or

- To restore the unit of property; or

- To adapt the unit of property to a new or different use.

Impact of depreciation expense on the Section 199A deduction

✓One potential limit on the Section 199A deduction is the taxable income limitation.

✓The 199A deduction is the lower of 20% of qualified business income (QBI) or taxable income, if taxable income is less than QBI

✓If a taxpayer’s taxable income is less than his or her QBI, then the deduction is the lesser of 20% of either QBI or taxable income.

✓Thus when a taxpayer is eligible for the Section 199A deduction, maximizing depreciation expense could result in a reduction, or elimination altogether, of the Section 199A deduction because taxable income might be negative due to the very large depreciation expense deduction