As tax time approaches, businesses in the real estate and construction sectors will have to reconcile a challenging 2009. However, several pieces of legislation were signed into law over the course of the year that can provide some assistance, particularly to the residential construction industry. Before starting on your 2009 tax return, you should be aware of the following provisions.
With the recently passed law extending the carryback period to five years for net operating losses, companies and individuals are looking for ways to maximize their available tax refunds. Accelerating tax deductions into 2009 through a cost segregation study can greatly enhance the available refunds.
Cost segregation studies can be performed on new and old buildings to determine what portion of the building may be classified as personal property. Once a portion of a building is classified as personal property it can be depreciated over a much shorter tax life. When studies are done on buildings that have previously been placed in service, you can catch-up the depreciation on the reclassified personal property. This can result in significant deductions in the year the study is completed.
Cost segregation studies are one of the best ways for owners of real estate to put immediate cash in their pockets. By accelerating depreciation and, as a result, deferring federal and state income taxes, cost segregation studies are becoming increasingly popular as a method of generating tax savings and improving cash flow. Recent provisions in the American Recovery and Reinvestment Act of 2009 will have a tremendous impact on the benefits available to commercial property owners from cost segregation studies.
Are you missing valuable income tax benefits?
A common misconception is that commercial real estate can only be depreciated over 39 years, but the reality is that the depreciable life of a building may actually be determined by how the building is used. If you are still depreciating your property over 39 years, you may be missing a valuable and often overlooked income tax benefit.
Through the use of a cost segregation study, you may be able to enhance your cash flow today by lowering your income taxes and recovering some of your real estate investment in as little as five years.
On February 17, 2009, President Obama signed into law the American Recovery and Reinvestment Act of 2009 (“the Recovery Act”), which contains nearly $800 billion in economic stimulus spending and tax relief, much of which is targeted to help businesses in the current economic climate.
KEY PROVISIONS
Debt foreclosures, reductions and restructurings can create unexpected income tax consequences from Cancellation of Indebtedness (COD) income — whether in a solvent, insolvent, or bankruptcy workout situation. While these consequences can reduce the cash on hand you need for future deals and operations, there are tax planning opportunities available to corporations, partnerships and sole proprietors to defer or even eliminate such income tax liabilities and maximize your cash flow.
Solvent taxpayers can explore options for accelerating losses and Net Operating Loss Carrybacks. Under certain circumstances, debt may be contributed to partnerships in exchange for equity. Insolvent taxpayers and taxpayers entering Bankruptcy pursuant to Chapter 11 may eliminate COD Income in exchange for reducing certain tax attributes, such as Net Operating Loss Carryforwards, basis of depreciable assets, etc.
In order to help small businesses quickly recover the cost of certain capital expenses, small business taxpayers may elect to write off the cost of these expenses in the year of acquisition in lieu of recovering these costs over time through depreciation. As part of the Economic Stimulus Act of 2008, Congress temporarily increased the amount that small businesses could write off for capital expenditures incurred in 2008 to $250,000 and increased the phase-out threshold for 2008 to $800,000. The American Recovery and Reinvestment Act of 2009 (“the Recovery Act”), signed by President Obama on February 17, 2009, extends these temporary increases for capital expenditures incurred in 2009.
Residential and commercial foreclosures continue to make headlines during this period of economic uncertainty. Although the federal government has made several efforts to curb residential foreclosures, there seems to be no end in sight. According to Realtytrac.com‘s October 2008 U.S. Foreclosure Market Report, foreclosure filings nationwide were up 5% from the previous month and 25% from October 2007.
Historically, foreclosed properties were difficult for the average person to purchase, largely due to the relatively limited number of properties available. However, with the recent rise in foreclosures, numerous Web sites, including RealtyTrac.com and Foreclosures.com, have been developed to assist potential investors.
A major boost to owners of real estate was extended with the passing in February of the American Recovery and Reinvestment Act of 2009. The new Act extends increases in depreciation of capital expenditures in 2009 for 50% Bonus Depreciation on new qualified property and $250,000 for Section 179 expensing. These provisions make cost segregation studies one of the very best ways for owners of real estate to put immediate cash dollars in their pockets.
