Tax breaks can ease the pain of remodeling during 2013

Publish Date: 
Apr 15, 2013
By Mark E. Battersby

Legislation extends certain benefits for businesses through Dec. 31.

REMEMBER the Fiscal Cliff tax bill? The American Taxpayer Relief Act, as it’s otherwise known, renewed a number of important tax breaks used by retailers to reduce out-of-pocket expenditures required to keep their business premises fresh and attractive. These renewed provisions, along with several tax breaks that never disappeared, can greatly reduce the cost of remodeling, sprucing-up and/or fixing up a store.

The new law allows 50 percent bonus depreciation for property placed in service through 2013.

Buildings and other capital assets are generally depreciated and written off over 39 years. Those same tax rules contain a special 15-year, straight-line depreciation writeoff for what lawmakers call “leasehold” improvements, restaurant property and retail improvements.

The American Taxpayer Relief Act extended, through 2013, the Tax Code’s Sec. 179 first-year expensing writeoff. That means the higher expensing limits in effect since 2011 were extended to Dec. 31, 2013. So a powersports dealer can expense or immediately deduct up to $500,000 of expenditures in 2013, subject to a phase-out if total capital expenditures exceed $2 million.

Dealers with expenditures for qualified real property, such as land and whatever is erected on it (including the already-mentioned leasehold and retail improvement property) can elect to claim Sec. 179 expensing treatment for such expenditures.

The tax break that allows profitable retailers to write-off large capital expenditures immediately – rather than over time -– has long been used as an economic stimulus. Today, the new law allows 50 percent bonus depreciation for property placed in service through 2013.

To be eligible for bonus depreciation, property must be depreciable under the standard MACRS system and have a recovery period of less than 20 years. Code Sec. 179 first-year expensing remains a viable alternative especially for small businesses. Property qualifying for the Sec. 179 writeoff may be either used or new in contrast to the bonus depreciation requirement that the taxpayer be the “first to use.”

Because a building’s “components” could be depreciated over a smaller number of years, depreciating the components individually usually yielded substantially higher depreciation writeoffs, especially when compared to depreciating the building as a whole. There were perceptions that so-called “component” depreciation was often used in an abusive manner, so it was ended in the mid-1980s. 

However, recent court rulings, most notably the landmark Hospital Corporation of America case, validated another strategy for increasing depreciation: cost segregation.  Unlike component depreication which focused on a building’s systems, cost segregation focuses on land and interior improvements which have a shorter depreciation period and/or economic life.

Land improvements which can be segregated, include items such as paving, curbs, sidewalks, signs and landscaping.  Interior improvements, all of which have shorter depreciable lives, include carpet, vinyl tile, signs, wall coverings and certain electrical and plumbing equipment. (continued)