Over the past several months, Congress and the IRS promulgated tax provisions, extending tax savings opportunities that benefit real property owners and clarifying new rules regarding the Foreign Investment Real Property Tax Act (“FIRPTA”). Some of these provisions allow taxpayers to accelerate deductions or claim tax credits. Most of the extensions applied to provisions in the Protecting Americans from Tax Hikes Act of 2015 (“PATH Act”), passed on December 18, 2015. Additionally, on February 17, 2016, the IRS issued regulations addressing changes to FIRPTA made by the PATH Act.
Below are provisions affecting real property:
Section 179 Deduction
The PATH Act permanently set the IRC Section 179 expensing limitation at $500K, with a $2M overall investment limit before phase-out begins. These figures are indexed to inflation starting in 2016. The PATH Act also allows air conditioning and heating units to be included as IRC Section 179 property. Finally, prior to 2016, only $250K of qualified real property may be expensed. After 2015, that limitation is eliminated.
Bonus depreciation provides a second method for taking an immediate deduction for asset acquisitions. The bonus depreciation percentage is 50% for property placed in service during 2015 through 2017, then phases down, with 40% deductible for assets acquired in 2018 and 30% deductible for assets acquired in 2019. The Act modified bonus depreciation to include qualified improvement property; defined as any improvement to an interior portion of nonresidential real property placed into service after the building was first placed into service and which does not involve 1) enlargements, 2) elevators/escalators, and 3) internal structural framework.
Revenue Procedure 2015-56
Restaurants and retailers undertake remodeling projects to remain competitive and to improve the customer experience. Rev. Proc. 2015-56 creates a safe harbor for deducting costs incurred to refresh or remodel a restaurant or storefront. This safe harbor, which does not apply to the initial buildout, allows qualified taxpayers to deduct 75% of qualified remodel/refresh expenditures in the current year and depreciate the remaining 25% over the life of the asset. To qualify for the safe harbor, the taxpayer must have applicable financial statements (usually audited financial statements) and the remodeling cannot result in a betterment, restoration, or an adaptation of more than 20% of the total square footage of the qualified building.
Although the requirement that the entity have an audited financial statement will preclude most taxpayers from using the safe harbor, the issuance by the IRS of this safe harbor further supports taxpayers expensing of “repair and refresh” projects.
Energy Efficient Commercial Building Tax Deduction
The PATH Act extended a tax incentive for creating energy-efficient buildings, with the above-the-line deduction for energy-efficient improvements to lighting, heating, cooling, ventilation and hot water systems in commercial buildings now running through 2016. The deduction is $.30 to $1.80 per square foot, depending on technology and amount of energy reduction. The maximum $1.80 per square foot deduction is available if the improvements reduce the building’s total energy and power costs by 50% or more in comparison to standard building measurements. Thus, if the taxpayer makes improvements to a 100,000 square foot commercial building that qualifies for a $1.80 per square foot deduction, the taxpayer’s above-the-line deduction will be $180K.
On February 17, 2016, the IRS issued regulations reflecting changes made to FIRPTA by the PATH Act. The PATH Act increased the withholding rate imposed on the transferee when a foreign person disposes of a USRPI from 10% to 15%. However, the Act retained the 10% withholding rate for a disposition of property that is acquired by the transferee for use as a residence and the amount realized on the transfer is greater than $300K, but less than $1M.
If you have any questions regarding these provisions, please contact your SLD Tax Advisor.