Many businesses have long-term assets on their balance sheets. For an asset to be considered long-term it needs to be held on a company’s balance sheet for more than a year and cannot be intended for sale. Examples of long-term assets include physical assets such as property, plant and equipment (PP&E) – machines, buildings, office equipment, vehicles, fixtures, land, computers, etc. These are all tangible assets. However, there are some intangible assets that are considered long-term such as goodwill, patents, research and development, and copyrights.
When a business has long-term assets, there are many tax benefits potentially available. Some of these include:
Depreciation:
- Businesses can currently depreciate property and take deductions over the life of the asset.
- There are certain depreciation methods available to take a deduction of 50% or 100% of the purchase price up front. However, there are only certain types of assets that qualify.
- Personal property such as furniture and equipment, land improvements, or certain building improvements may also qualify for 50% bonus depreciation or 100% Section 179 expensing (up to $510,000 for 2017, subject to a phase out if total acquisitions for the year exceed $2.03 million). This can be applied to the tax year that such assets are acquired and put into service.
- Keep in mind there are many complicated rules as to how depreciation can be applied. For example, the cost of land is not depreciable, but the cost of improvements to land is depreciable.
What the proposed tax bills could mean for depreciation methods:
- Tax bills have been issued that would allow 100% full expensing for property purchases other than real estate made after Sept 27, 2017 and before January 1, 2023 .
- Excludes property used by a regulated public activity or in a real property trade or business
- The current Senate Tax Bill reduces depreciable life of buildings from 39 or 27.5 years to 25 years, which would mean faster deductions for real estate investment.
Like-Kind Exchanges:
- Provide for a variety of business strategies to limit an entity’s tax liability.
- Allows taxpayers to reduce or eliminate a current tax liability on the sale of an asset if an asset of the same class is purchased to replace it.
- In a like-kind exchange, owners defer taxable gains that they typically pay on sale of a property. For example, real estate professionals often have large gains on sales of rental properties. They are able to purchase replacement properties to avoid paying taxes on the gains in the year that the property is sold. This can lead to thousands or millions of dollars in tax savings on major sales.
What the proposed tax bills could mean for like-kind exchanges:
- The tax bills are proposing to limit like-kind exchanges to only real property.
Current New York Tax Credits available for purchasing and/or developing property:
- The NY Investment Credit is a NY credit for purchasing manufacturing and production property, retail enterprise property, waste treatment property, pollution control property, research and development property, or qualified film production property. This is a tax credit for a portion of the price of property purchased.
- There are other NY credits available for purchasing and developing property in certain areas. These credits include Brownfield, New Markets, Economic Transformation, NY Empowerment Zone.
Non-Income Tax Considerations:
- Real estate reassessments – Real estate taxes may change if a property is purchased for a different price than the previous assessment.
- Certain states or localities have additional taxes on personal property owned, or charge transfer taxes when property is purchased. It is important to consider these for major purchases so you are not surprised by additional filing requirements or taxes imposed.
Other Tax Planning Ideas:
- It may be better to purchase property late 2017 instead of early 2018 to accelerate deductions or credits by a full year.
There are additional limits and considerations to keep in mind under all of these strategies. As the government continues to work on finalizing a tax bill, all we can do is theorize on what we think may happen. Once a final tax bill is pushed out, I am sure there will be many other tax planning implications to understand. We will keep you posted on new developments. In the meantime please contact a member of our tax team today to learn more about current tax savings strategies for purchasing long-term assets.
