ARE YOU LEAVING MONEY ON THE TABLE WHEN RENOVATING?
When you undertake demolition or renovate a building to tear out lighting, HVAC units, and other components, they are abandoned or retired from the building. As such, their book value can be treated as a business deduction. The tangible personal property within the structure (or a part of it) allows for the remaining depreciable value (or basis) to be written off when the asset is retired, provided the personal property is no longer in service and was not purchased with the intent to demolish. This must be identified and valued prior to demolition.
Important: Consider these tax strategies before any demolition and/or renovation is completed or you may lose this opportunity.
When you re-light a building, you create both an opportunity for the Energy Tax Deductions (179D) and a Disposition Study. Excess lighting (eliminated with the new energy-efficient system) can be depreciated faster than the typical 39 years for an office building or 27.5 years for a multi-family dwelling; therefore, you maximize your tax strategies and save money.
WHAT CAN BE ABANDONED?
These Units of Property (UOP) may include lighting systems, HVAC systems or components, or building envelope components. Onsite is the only firm that has always broken down the smaller units within the property regardless of depreciable class-life. What this means is that property owners who are eligible for energy deductions such as 179D can substantially increase the benefit by including this abandonment in the current year.
When assets are retired or removed, they are taken off a company’s books (when you re-light a facility, you essentially remove the old lighting). The Onsite Team enables you to calculate the value of these retired assets and provides all of the necessary documentation needed to claim these tax deductions. Onsite is unique in this regard. In addition to the Disposition Study, we also provide Cost Segregation and 179D Energy Studies which greatly increase the benefits over an individual project. It is our unique
blend of these services that allow our clients to take advantage of multiple federal tax deductions adding hundreds of thousands of dollars back into the bottom line.
EXAMPLE: Client acquires an office building for $5M. Three years later the client spends $1M to remodel the second floor. The Onsite Team’s Engineers perform a Disposition Study and identifies $320,000 of qualified assets that were removed during the remodel. This might include things like lighting, drywall, doors, floor coverings, electrical, acoustical ceilings, and more. (or toilets) Client claims $320,000 of additional deductions on the current return. Assuming their state and Federal Tax rate is 30%, the client’s net tax savings are an additional $96,000.
WHY CAN WE DO THIS?
Recent changes to tax regulations have allowed us to dispose of individual building components where previously the IRS viewed a building as a single unit of property (UOP). The new regulations as issued in IRS Code 1.168(i)-8 allows a property owner to dispose of a smaller UOP provided that a detailed cost segregation report has properly broken down individualized UOP within the larger unit. The IRS now requires property owners to depreciate 9 separate Units of Property within their Real property:
- Building Structure (including only walls, windows, doors, concrete & roof)
- HVAC System(s)
- Plumbing System
- Electrical System
- Fire Suppression & Alarm
- Gas Distributions System
(*and any other system identified in future published guidance)
- What was the value of the building (less the land) when it was acquired?
- What year was it acquired
- Copy of the depreciation schedule on their taxes.
- We will provide you with a price for the Cost Segregation study and expected tax
- What work is being proposed for the building
- Price for Abandonment and documentation to file with your taxes.