Construction Tax Planning: A Proactive Methodology to Accelerated Depreciation Planning

A properly designed and implemented Construction Tax Planning analysis will proactively identify additional tax savings related to new and / or planned construction projects. It should be duly noted that a Construction Tax Planning analysis should not be confused with a Cost Segregation analysis as there are several notable differences between a Cost Segregation analysis and a Construction Tax Planning analysis.

Cost Segregation Synopsis

A Cost Segregation analysis will methodically review property, plant and equipment and properly reclassify real property (e.g., property that is generally depreciated for tax return purposes over a period of either 27.5 years in the case of a commercial residential apartment buildings or 39 years in the case of a commercial office buildings) into personal property (e.g., property that is generally depreciated for tax return purposes over a period of either 3, 5, or 7 years) and land improvements (e.g., property that is generally depreciated for tax return purposes over a period of 15 years) by reviewing all of the structural components within the building structure (e.g., exterior walls, roof, windows, doors, etc.) and the building systems (e.g., lighting, HVAC, plumbing, electrical, escalators, elevators, fire-protection and alarm systems, security systems, gas distribution systems, etc.). In general, floor plans and blueprints are meticulously reviewed and site inspections are conducted to review the building envelope as part of an engineering based Cost Segregation analysis to ensure sustainable tax return filing positions per Circular 230.

Construction Tax Planning Synopsis

A Construction Tax Planning analysis utilizes a proactive “Pre-Design Phase” methodology to identifying, gathering, and documenting additional tax savings related to new and / or planned construction projects whether in connection to:

  • Constructing a New Building;
  • Adding a New Wing to an Existing Building; or
  • Renovating a Single Floor within an Existing Building.

Construction Tax Planning enables accelerated depreciation deductions through the recommendation of select materials and supplies to be utilized in the “Construction Phase” to ensure that the structural components will be classified as personal property as opposed to real property (e.g., requesting a design-build contractor to utilize modular internal walls to bifurcate office and / or conference room space in a commercial office building as opposed to permanently affixing these said internal walls to bifurcate office and / or conference room space within the floor configuration layout will enable the said structural components to be classified as personal property with a 5 year depreciable class life as opposed to real property with a 39 year depreciable class life).

Please reference the June 2017 Issue of CPA Magazine to continue reading this featured editorial article.

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