It what will go down as an historic week in U.S. history with the inauguration of Donald J. Trump to his second term as President of the United States, he made news at Davos at least for the commercial real estate industry.
Many have speculated that Trump would bring back 100% bonus depreciation in 2025 as he extends his 2017 Tax Cuts and Jobs Act. He confirmed this yesterday during his video presentation to the 3,000 attendess at Davos Switzerland where the WEF and global elites were meeting to plan our futures.
During the Q&A, Brian Moynihan ask President Trump a very broad economic question. As Trump was answering it, he made mention that he will be bringing back 100% deductibility in the first year – i.e. 100% bonus depreciation. You can hear his comments at the 30:35 mark of the video presentation. This will be great news for the commercial real estate industry. Of course he has to negoatiate this with the Democrats but this nearly got extended a year ago when Biden was President. It never made it to his desk for his signature as the Senate killed the bill. It’s different this time though. The Trump Tax Cuts are set to expire in 2025 and no one wants to be on the hook for a big tax increase. Additionally of course you have the leadership of Trump at the helm driving this instead of the much weaker Republican Congressmen and Senators. I’d be shocked if this doesn’t get approved. Not sure of the timing but I think from what I’ve heard it will be April perhaps before they get something done.
If you’re doing cost segregation studies right now for 2025 taxes, there’s no worries. When we do our studies, the results are the results and your tax advisor will apply them appropriately whether it’s 100% bonus depreciation or if it remains at 40% depreciation which is what the 2025 law current states.
It might be just a bit too early to fully assume that this will be the case for 2025 but you might want to start to run 2 scenarios with your pro-formas…one for 40% and the other at 100% bonus depreciation.
My hope is President Trump pushes to make bonus depreciation permanent. He wants America to get back to growth. The 100% bonus depreciation affects a lot more than just owners of commercial real estate. It would seem to me to be a no brainer that if you want to make American the growth engine of the world and have Trillions of dollars of capital investment find their way here, make this incentive permanent. No more 4-5 year shots for it to be renegotiated.
If you’d like to watch President Trump’s address to the attendees at Davos, the recording is below. He mentions 100% deductibilty at the 30:35 mark.
I recently received a call from a CPA with questions about oil service buildings and their tax treatment. There’s a common misconception that these buildings are 100% deductible, but that’s not entirely accurate. Many commercial real estate brokers market the supposed automatic bonus depreciation benefits of these properties, but the reality is more complex. Unlike convenience stores (C-stores) or tunnel car washes, oil service buildings face more challenging qualifications in order to claim it all as 15 year class life. We have not heard that the IRS is scrutinizing how owners are depreciating these buildings, but it would seem to be a pretty easy target given the assumptions many in the industry make about oil services buildings.
Understanding the Classification Nuances
Let’s start with the fact that commercial property is considered 39 year class life property meaning you get to depreciate it over 39 years. That amounts to 2.5% of the building cost per year is taken as a deduction (1/39). Oil service buildings might be able to be identified as 15 year class life and thus eligible for bonus depreciation. Bonus depreciation used to be 100% from Sept. 27, 2017 – Dec. 31, 2022. The law has it declining 20% each year until it is zeroed out by 2027. For 2024, bonus depreciation was 60%. (Congress will be considering reupping the Tax Cuts and Jobs Act which would bring back 100% bonus depreciation, but we won’t know that until later this year in 2025). Properly classifying oil service buildings under the 15-year class life rule isn’t as straightforward as it is for C-stores or tunnel car washes. Owners and their tax advisors should thoroughly understand the rules and ensure proper documentation to avoid potential IRS challenges.
For oil service buildings, the critical qualification is that 50% or more of the revenue must come specifically from petroleum sales. Oil of course is petroleum but the labor to change the oil is not. Oil service shops sell other services and products that further make it difficult to achieve that 50% petroleum sales threshold. It’s not uncommon to see these shops selling other fluids, filters, wiper blades etc. Brands such as Jiffy Lube are expanding beyond oil changes to provide other services. This seems like a smart move for the brand to capture more of the expenses Americans have with maintaining their cars. Jiffy Lube now has these beautiful, larger, modern MultiCare buildings. No doubt this is good for business but just note it’s likely going to make it very difficult to achieve that 50% petroleum sales qualification to claim the entire building as 15 year class life.
Claiming Depreciation: When It Works and When It Doesn’t
If an oil service building meets the qualifications, tax advisors can claim the entire property under the 15-year class life and apply the appropriate bonus depreciation. For example, if a $2.5 million building (with $500,000 allocated to land) was placed in service in 2024, the owner could claim 60% bonus depreciation on the $2 million building value, resulting in a $1.2 million deduction. This approach avoids the need for a cost segregation study.
However, if there’s any uncertainty in meeting the 50% revenue threshold and proving it with documentation, then conducting a cost segregation study is a likely a wise investment.
Why Cost Segregation Makes Sense
If you cannot achieve that 50% petroleum sales criteria, then a cost segregation study will almost always make sense. Oil service and multicare auto service buildings have a lot of 5 year and 15 year class life property. You should identify this property to maximize your deprecation. It’s also helpful to have this segmented in the event you have to replace some of this property over the normal course of operations of your business. It makes dispositions much easier which again will help you save money on your taxes. a cost segregation study can still provide substantial benefits. Many of these buildings will see 30, 35, 40% of the overall cost of the building reclassified to 5 and 15 year life providing the owner with a significant deduction in the year in which the cost segregation study is applied.
Looking ahead to buildings placed into service in 2025, bonus depreciation will be 40% unless Congress enacts changes. If lawmakers restore 100% bonus depreciation, property owners may be tempted to skip a study and claim 100% depreciation on these oil service buildings. At the end of the day, that’s a call that’s up to the owner and his/her advisors. We get a chance to evaluate a lot of these buildings as you might imagine. Most of the buildings do not hit the 50% threshold. It’s not us making that determination to try to get a study out of the owner. This analysis is done by the owner / operator and tax advisor and they usually can’t confidently say they hit 50%.
Avoiding Costly Mistakes
Incorrect depreciation claims can have serious consequences, and if the IRS decides to target owners of oil service buildings, they would be easy targets. If you own a building or if you are a tax advisor who has a client who owns one of these buildings, if they can’t confidently document that they hit the 50% petroleum sales qualification, then do the smart thing and have a cost segregation study done. You’ll sleep better at night knowing that you have the proper documentation and classifications of your building backed up by an experienced third-party cost segregation company.
The Bottom Line
If you want peace of mind and confidence in your depreciation strategy, a cost segregation study is a valuable tool. The cost of the study is minimal compared to the potential savings and security it provides. Don’t take unnecessary risks—ensure you’re depreciating your oil service building correctly to maximize your depreciation and tax benefits while complying with the law.
So you are excited to take advantage of bonus depreciation, but did you know that most states don’t fully conform with the federal bonus depreciation rules? Many states don’t allow any bonus depreciation to be able to be taken. Some states allow partial bonus depreciation to be taken.
Bloomberg has a comprehensive list of which states allow for bonus depreciation and which ones don’t. As always with anything with tax, please consult your own tax advisor to understand how bonus depreciation can benefit you on both a Federal and possibly state level when it comes to reducing income tax liability.
Many of us thought this was a done deal. In fact, I had thought for some time that Congress would extend 100% bonus depreciation. Part of me thinks they might eventually make it permanent as part of the tax code but there are many in Congress who like to have things like this to negotiate for other deals. If that’s the case, they probably won’t make this permanent.
The House of Representatives passed their bill about 10 weeks ago now. The Senate is still sitting on the Tax Relief for American Families and Workers Act. With all the wrangling going on over Ukraine, Israel and US border funding, things seems to be stuck in the Senate.
I’m so focused on commercial real estate that it hasn’t really dawned on me how this bill impacts other industries. Apparently this is a very big deal for American farmers and they also want this passed.
Most building owners who I know have opted, as they normally do, to extend their tax returns. This year it’s beneficial so they can see if they might end up getting a nice bump from 80% to 100% for their 2023 tax returns.
Anyone paying attention to Washington DC knows that our elected representatives have not put together a real budget. There is still lots to do when they get back to work 🙂 in early January. One of the things that has been floating around DC is the possible extension of the 100% bonus depreciation rule that was originally put into place by the Tax Cut and Jobs Act of 2017.
Many in commercial real estate and particularly the GPs who run the syndications for multi-family investments have become addicted to the 100% bonus depreciation rule. I like to call it the crack of real estate and tax. In 2023 it has moved to 80% bonus and in 2024 it’s scheduled to drop to 60% bonus depreciation.
Bonus depreciation comes in to play or all property with a class life of 20 years or less. When a cost segregation study is completed, the property that is normally all 39 year if commercial and 27.5 year if multi-family / residential investment, gets reclassified to it’s proper class lives which are 5, 7, 15, and/or 27.5 / 39 years. This allows for a much bigger deduction to be taken early in the life of the ownership of the property.
Build it in America Act is making its way through Congress. They are looking to extend 100% bonus depreciation through the end of 2025. Right now the law is that for buildings placed in service in 2023, the owner can take 80% bonus depreciation and then it’s slated to drop by 20 points each year until it’s zeroed out in 2027. This new bill allows for 100% bonus depreciation for ‘23, ‘24 and ‘25. No word what happens in 2026. I kind of figured they might extend this given the slowdown we are seeing in commercial real estate.
American Enterprise Institute has some details on what may be in the Build it in America Act which is dealing with tax reform to try to encourage more growth.
If you’d like a quote for cost segregation, I work all over the U.S. in all 50 states and represent Cost Segregation Services, Inc. We’ve successfully completed more than 40,000 engineering-based cost segregation studies over the past 20 years. We’ve studied all building types and classes in all 50 states. Give me a call at 864-276-1448
