Six Year-end Tax Planning Questions for Real Estate and Construction Businesses

December 16, 2019

The Tax Cuts and Jobs Act (“TCJA”) has been in place two years; however, many real estate companies are still navigating the tax impacts of this new law. By taking appropriate measures, there are opportunities to maximize your benefits and minimize your tax liability.

Here are six key questions to consider in your year-end tax planning process. Follow the links for more information.

1. Is the company maximizing tax depreciation and expensing deductions?

This could include items such as:

  • Review of expenditures to determine opportunities for expensing repairs & maintenance
  • De minimis expensing – The IRS has established more definitive bright line tests for maximum dollar amounts that taxpayers can rely on when expensing certain business property purchases.
  • Partial dispositions – Partial dispositions are used when a building repair is required to be capitalized, such as a roof. The original roof can be partially disposed in the same tax year.
  • Qualified Improvement Property — QIP is a type of improvement to the interior of a building asset required to be capitalized. After January 1, 2018, QIP must be capitalized as 39 year property. We are still waiting for a technical correction to the law to restore the original 15-year life for these assets. QIP can be segregated with a cost segregation study to capture a portion of the asset in shorter class lives.
  • Cost segregation study – Cost segregation is a strategic cash tax planning tool that allows property owners to increase their cash flow through the acceleration of depreciation deductions and deferral of tax payments.
  • Section 179 expensing – The TCJA makes some important changes to the deduction amount businesses can claim under section 179 and what kind of property is eligible for the deduction. This year, the limitation went up to $1,020,000 million and the investment phase-out now begins at $2,550,000 million and is completely phased out when $3,570,000 of 179 eligible assets have been placed in service for the tax year. Watch the video to hear Dawn Polin, a senior manager with the Credits & Accounting Methods Team, explain the current rules and walk through specific examples.

2. Does the company have realized gains or potential gains that can be deferred?

The newly created Opportunity Zones program is a tax incentive that provides investors with an opportunity to defer recognition of gains on sales of assets, permanently reduce a portion of the deferred gain to be recognized and permanently exempt any future gain with respect to reinvested proceeds if the investment meets certain criteria. Can your company reinvest gains in a Qualified Opportunity Zone Fund or defer gains with a section 1031 exchange? What about operating in a Qualified Opportunity Zone? Check out this webinar for more information on the new investment vehicle.

3. Is the company maximizing business interest expense deduction?

Important changes have been made with respect to the deductibility of business interest expense for tax years beginning after December 31, 2017. For further guidance, read “Planning for the New Business Interest Expense Deduction Limitation” and learn more about:

  • Interest excluded from IRC section 163(J) deduction limitations.
  • How to elect a real property trade or business exemption to avoid these limitations.
  • When to make the election.
  • If interest is limited, what is the impact of carryover excess interest from 2018.

4. Is the partnership prepared for reporting capital accounts on tax basis?

The IRS has just released a notice that provides temporary relief from a requirement that partnerships must report all partner capital accounts on a tax basis. Partnerships can continue for one more year to use several alternative methods for reporting partner capital accounts.  However, for tax years beginning in 2020, all partnerships are expected to use the tax basis for capital accounts. Reporting all partnerships on the same method may be useful to the IRS, but will require many partnerships to apply extra efforts to calculate and report on a tax basis.  One further note: in 2018, the IRS required partnerships to report tax basis information for partners with negative tax basis capital accounts, and Rev. Proc. 2019-32 provided additional time until March 15, 2020, to report these amounts. This same requirement to report negative tax capital accounts of partners continues to apply for 2019 returns.

5. Has the partnership updated its operating agreement to incorporate the Centralized Partnership Audit Regime (“CPAR”)?

Three years ago, Congress passed the Bipartisan Budget Act (“BBA”) that established a new partnership audit regime and entirely repealed the partnership audit rules under the Tax Equity and Fiscal Responsibility Act. These changes could have a big impact to your business, so you may want to consider who is the partnership representative and is the arrangement for his/her service documented, and can the partnership elect out of CPAR? What about the new approach to reporting errors and corrections? Read further about these changes in Anne Oliver’s article or for further guidance, listen to the “Overview of the Partnership Audit Rules”

6. Is your company taking advantage of the change in accounting methods?

New definitions of small business under TCJA allow for companies to review the method of accounting which they use to report income for tax purposes. Can the company benefit from the simplified accounting methods for tax purposes? Have you considered §451(b) or (c) if the company uses the accrual method? If not, read “TCJA Changes to §451” for more details.

Deciphering the implications of accounting method changes can be complicated. To add to tax changes, Generally Accepted Accounting Principles (“GAAP”) have also recently changed around revenue recognition. Did your company make a GAAP accounting method change for revenue recognition? If you’re not sure, listen to Michael Hoose explain further in this webinar. For further details on all of the significant changes in the accounting methods, Ron Wainwright breaks it down in this webinar.

There are many things to consider when going through the tax planning process, and we have the experts who can help you navigate through all of these changes. Allow us to guide you forward in making the right decisions for your business. Consider contacting your Cherry Bekaert representative today.