2019 Year-End Tax Guide

THE MARCUM 2019 YEAR-END TAX GUIDE | www.marcumllp.com

GUIDANCE ON MAKING OR REVOKING BONUS DEPRECIATION ELECTIONS The IRS has issued guidance that allows taxpayers to make a late bonus depreciation election, or to revoke an election, for certain property acquired after September 27, 2017. Under TCJA, taxpayers can: Elect out of 100% bonus depreciation; n Elect to take 50% bonus depreciation (instead of 100%) for qualified property acquired after September 27, 2017, and placed in service during the tax year that includes September 28, 2017; or n Elect to deduct bonus depreciation for any specified plant that is planted or grafted after September 27, 2017, and before 2027. Taxpayers that failed to make these elections for the tax year that includes September 28, 2017, can make late elections by filing an amended return or a Form 3115 for a limited period of time. If elections were made, taxpayers can revoke The TCJA limits the rehabilitation tax credit for certified historic structures for amounts paid or incurred after 2017. Although the credit for certified historic structures remains at 20%, it must be claimed ratably over a five-year period beginning in the taxable year in which the qualified rehabilitated structure is placed in service. The TCJA includes a transition rule that applies to all properties (whether historic, or not) owned or leased by the taxpayer as of December 31, 2017, if the 24-month period selected by the taxpayer to cover expenses by the credit (or the 60-month period, if applicable, under the statute) begins no later than 180 days after date of enactment of the TCJA. Because of the net present value of the tax credit being spread over five years and the lower corporate income tax rate, the value of the rehabilitation credit has been reduced for many investors. The above summarizes some of the many challenges faced by real estate businesses under the new law. the elections under the same terms. Changes to Rehabilitation Credit

In the case of a partnership business, the election must be made on the partnership’s return, not on the partner’s return. If the election is made, the electing RPTB must depreciate its nonresidential real property, residential real property and qualified improvement property using the alternative depreciation system (ADS). The electing RPTB will not be able to claim bonus depreciation under section 168(k). The change in use rules must be used to compute depreciation for assets placed in service in prior years (to change the method of depreciation from MACRS to ADS). There is a safe harbor rule for REITs. DEPRECIATION Businesses may take 100 percent bonus depreciation on qualified property both acquired and placed in service after September 27, 2017, and before January 1, 2023. Full bonus depreciation is phased down by 20 percent each year for property placed in service after December 31, 2022, and before January 1, 2027. So what is Qualified Property? Under TCJA, qualified property is defined as tangible personal property with a recovery period of 20 years or less. TCJA eliminates the requirement that the original use of the qualified property begin with the taxpayer. This “new to you” rule for the inclusion of used property is a significant, and favorable, change from previous bonus depreciation rules. The bonus depreciation rules for qualified improvement property (QIP) took a less favorable turn due to a drafting error. The act removed QIP from the definition of qualified property for bonus depreciation purposes, but the intent was to make QIP bonus-eligible by virtue of a 15-year recovery period. In the end, the 15-year recovery period for QIP (as well as the 20-year alternative depreciation system (ADS) recovery period) was omitted from the final legislation. TCJA increases the maximum amount of assets a taxpayer may expense under section 179 to $1 million. TCJA expands the definition of section 179 property to include any of the following improvements made to nonresidential real property: roofs; heating, ventilation and air-conditioning property; fire protection and alarm systems; and security systems, as long as the improvements are placed in service after the date the building was first placed in service. This was not available to real estate entities in the past.

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