Those who self-construct their own properties and qualify under the Small Business Rules for 263A might be able to EXPENSE much of their indirect / soft costs to develop, finance and construct the building. This can often be between 10-30% of the cost of the overall project. It’s a game changer. Everyone I know capitalizes these costs because that has been the norm, but it’s been available for expensing since 1/1/2018 due to the Tax Cuts and Jobs Act.

Let’s say you build a new $1,000,000 office warehouse. What if instead of capitalizing those indirect and soft costs across various class lives if you do cost segregation (5, 15, 39 year) you could just expense those and take the deduction right now. It’s has a dramatically different tax impact saving you tens of thousands in income taxes. It also is not subject to recapture tax.

If you meeting the qualifications as a Small Business owner and this is a self-constructed asset, it will be worth it for you to reach out and get an estimate of the costs for the study and the tax savings you’d be looking at if you apply this to your building.

What costs are eligible?

  • Construction interest
  • Engineering and achitectural fees
  • Portions of soft costs and permits
  • Portions of building permits
  • Other development costs

Might you qualify?

  • Property built since 2018
  • Self-constructed asset (owned during construction)
  • Small business taxpayer (gross receipts under $30MM/Year)
  • Not a syndicate (there may be exceptions – let’s discuss)

Most people are not aware of this because it was only instituted with the Tax Cuts and Jobs Act back during Trump’s first term. This applies to buildings constructed since 1-1-18.

BTW, we can do a look-back study on properties you have developed and still own going back to 1-1-18. Our team will take care of drafting the Change of Accounting Form 3115 and do the negative 481(a) calculation. Your tax advisor would then sign off.

For self-constructed assets, it might be that you are operating your business out of the property. It could be that you are an investor having a property built and you’re hanging on to it. The study works on tenant improvements and building expansions as well. If the construction costs are $250,000+, it’s likely the cost benefit will be in your favor. Take a look. Reach out. I’d be happy to talk with you and get you the information you need to talk with your tax advisors.

Constructing buildings is not cheap these days. I know many have a difficult time of making the numbers work. If you could expense 10-30% of the project right away in year 1, I would think your financials on the project would suddenly look a whole lot better.