The Economic Stimulus Act of 2008 presents
Maximum Savings opportunities for CPA’s and Real Estate Owners & Developers when combined with a Cost Segregation Study

By Jeff Hiatt of Costsegs.com, LLC

Beyond the rebates most personal taxpayers received, the Economic Stimulus Act (Act) of 2008 provides substantial tax benefits for real estate owners and developers through the reintroduction of Bonus Depreciation.  Through the Act, 50% bonus depreciation is allowed on certain qualified property placed in service during 2008 only.

Types of property qualifying for the allowance are as follows:

1. Qualified Leasehold Improvements
2. Tangible Property (depreciated under 20 years by MACRS)
3. Off-The-Shelf Computer Software

Qualified Leasehold Improvements (QLI) are an excellent source of savings. For example, a developer spends $1,000,000 building out a tenant space during 2008.  Normally, most of these costs would be depreciated over 39 years as the 15-year QLI depreciation rule expired December 31, 2007.  Under the newly signed Act, a taxpayer is allowed to claim a depreciation deduction of 50% of the total expenditure of $1,000,000 in 2008. The remaining basis of the expenditure can be depreciated over 39 years.  By taking this additional deduction, a taxpayer saves over $200,000 in 2008 income taxes from the previous tax rules (savings assume a combined 40% Federal and State tax rate).

A cost segregation study performed on the remaining basis of $500,000 above will yield additional tax savings as assets reclassified from real property (39 year) to personal property (5 or 7 year) and land improvements (15 year) are eligible for the 50% bonus. An engineering based cost segregation study will yield the maximum benefits.  Some items eligible for accelerated and bonus depreciation include special millwork, electrical and mechanical connections, and certain types of flooring.

What Type of Tenant Lease Improvements Qualify?

1. Improvements made under a lease either by the landlord or the tenant
2. The improvements must be made to the interior of the current space - common areas, expanding the building, improving the internal structural framework, etc. do not qualify
3. The building must be at least 3 years old (in actual age, not ownership)
4. The improvements cannot be for a related party
5. Signed contract dates and in-service dates are a large factor in determining eligibility

Unlike Section 179 deductions that limit reducing a taxpayer’s income to zero, the bonus depreciation rules have no limitations and allow losses to be created enabling a taxpayer to carry-back losses and possibly receive refunds on taxes paid in prior years.