Corporate Transparency Act

Are you ready for the Corporate Transparency Act (CTA)?

What is it?

The Corporate Transparency Act (CTA) is intended to provide law enforcement with beneficial ownership information for the purpose of detecting, preventing, and punishing terrorism, money laundering and other misconduct through business entities. This report will require information about the Business Entity, information for each of the Beneficial Owners of the company (any individual who has substantial direct or indirect control of the reporting company or who owns at least 25% of the ownership interests) as well as Company Applicants (the person or people filing on behalf of the entity).

What we know:

Effective January 1^st, 2024, every existing, amended, or new corporation, LLC or other entity registered through any state’s Secretary of State, including foreign entities doing business in a state MUST FILE specific reports with the Financial Crimes Enforcement Network (FinCEN).

Timeline: We are on top of this, and we are studying the code each week for updates to the timeline. There are no action items needed at this time, watch for more information from K&R next month!

Your success is our priority:

We are committed to going above and beyond to ensure your entities are compliant with the CTA. We value your time, and we believe the peace of mind we can offer through our continued education and diligence for compliance is invaluable.

For K&R to assist you with this federally mandated filing, we will need a commitment for the following:

All information must be provided promptly.

- There is very specific information that will be collected in order to successfully complete the reporting. Very shortly we will be sending in greater detail the exact documentation required for the entities, beneficial owners, and substantial control members. As a firm we have set a hard deadline of September 30th, 2024, for all submittal information. Our services may not be available after this date.

All Business Entities disclosed.

- We require that all entities are disclosed whether K&R has knowledge or record of them or not. Even if you are unsure of the filing requirements, we require all entities of record.

To see a PDF version of this blog post, follow the link below:

CORPORATE TRANSPARENCY ACT OF 2019

Tax Consequences of Selling a Rental Property

Introduction

Selling a rental property can have significant tax implications for property owners. In this blog post, we will explore:

how sales of rental properties are taxed
differentiate between short-term and long-term capital gains
discuss the concepts of depreciation and depreciation recapture
emphasize the importance of documenting selling expenses, and
introduce the concept of Section 1031 Exchanges.

The Primary Residence Exclusion Will Not Apply

The profit made from the sale of a rental property will almost always be taxable.

When the real estate being sold is the taxpayer’s primary residence, the primary residence exclusion allows homeowners to exclude a portion of the gains from the sale of their primary residence, if they meet the eligibility criteria. This exclusion is up to $250,000 for single filers and $500,000 for couples married filing jointing. However, this provision requires that the property must have been the taxpayer’s primary residence for two out of the last five years. Because a rental property is not a primary residence, the sale of real estate used as an investment does not meet this requirement.

In very rare circumstances, a taxpayer may live in a home for two or more years, move to another home and rent out their former primary residence, and then sell the former residence within three years. That timeframe may allow the taxpayer to exclude a portion of their gain from taxation. A qualified tax practitioner can assist in determining what portion of the profit is excludable.

Capital Gains

In the last section, we established that profits made from selling rental properties are taxable. Generally, the profit from the sale of a rental real property is a capital gain (see Depreciation Recapture below). The capital gains tax is the levy on the profit that an investor makes when an investment is sold. This distinction is important because investments held for longer than one year are taxed at preferential rates.

The classification of capital gains as either short-term or long-term is determined by the holding period of the asset. If the property is held for one year or less before selling, it is considered a short-term capital gain. Short-term capital gains are taxed at the taxpayer’s ordinary income tax rates. On the other hand, if the property is held for more than one year, it qualifies as a long-term capital gain. Long-term capital gains generally benefit from preferential tax rates, which are lower than ordinary income tax rates.

Capital gains tax rates vary depending on the taxpayer’s income and filing status. As of the current tax year, there are three main tax brackets for long-term capital gains: 0%, 15%, and 20%. The rate applied depends on the taxpayer’s taxable income.

2023 Long-Term Capital Gains Tax Rates
Taxable Income		Rate
Single	Married Filing Jointly
Up to $44,625	Up to $89,250	0%
$44,626 to $492,300	$89,251 to $553,850	15%
Over $492,300	Over $553,850	20%

Depreciation Recapture

When operating a rental property, the owner is allowed to claim depreciation deductions on the property. Depreciation spreads the cost of an asset over its expected lifespan. This is attractive because it lowers the taxable income earned from the property.

However, when selling a rental property, the depreciation claimed over the years can trigger depreciation recapture.

Depreciation recapture requires the taxpayer to pay taxes on the accumulated depreciation at the higher rate of up to 25%, rather than the capital gains rate. Accumulated depreciation is the sum of all depreciation claimed on tax returns from the first year the property was rented to the year it was sold. The rationale behind depreciation recapture is that while you have been able to deduct the depreciation expenses from your taxable income over time, the IRS wants to ensure that you pay taxes on the portion of the property’s value that was depreciated.

Depreciation recapture is limited to the smaller of the realized gain on the sale or the accumulated depreciation of the asset. In other words, if the amount of accumulated depreciation is higher than the gain from the sale, you only include the realized gain in the recapture calculation.

It’s important to note that not all rental property sales trigger depreciation recapture. If you sell your property at a loss, there is no recapture since there is no gain to be taxed. Additionally, if you engage in a like-kind exchange under Section 1031 of the Internal Revenue Code, you can defer the recapture tax by rolling over the gain into a new qualifying property.

Section 1031 Exchanges

Section 1031 of the Internal Revenue Code provides an opportunity for rental property owners to defer capital gains taxes by engaging in a like-kind exchange. This exchange allows the taxpayer to reinvest the proceeds from the sale of the rental property into another qualifying property, deferring the tax liability until a future sale. Understanding the rules and requirements of Section 1031 Exchanges can provide a valuable tax planning strategy for rental property owners. To learn more, check out our post on Section 1031 Exchanges.

Caution: Impact of Cost Segregations

Cost segregation is a process of identifying assets that are personal property that can be depreciated more quickly than their corresponding real property. While residential rental buildings must be depreciated over 27.5 years, assets like wiring, flooring, plumbing, appliances, fixtures, and air conditioners can be depreciated in just 5 to 7 years. By capturing depreciation earlier in the life of the property, owners can free up cash and use it for their operating and investment needs now.

Cost segregation is a powerful tax planning tool, as we discussed in a previous blog post. When selling a rental property that was depreciated using a cost segregation study, however, depreciation previously taken on non-real estate assets such as wiring will be recaptured as ordinary income. Furthermore, those assets cannot be part of a Section 1031 Exchange. So, while cost segregations can be a great option for tax deferment, it is important to be aware of the potential impact on the tax created by the sale of the property. A qualified tax professional can help you determine the tax consequences of your particular circumstances.

Selling Expenses

To accurately calculate the gains from selling a rental property, it is crucial to document all relevant selling expenses. This includes expenses such as renovations, repairs, realtor commissions, advertising costs, and closing costs. Proper documentation can save thousands of dollars in taxes.

Conclusion

Selling a rental property has significant tax consequences that every property owner should be aware of. Rental properties do not qualify for the primary residence exclusion, and depreciation recapture can impact the tax liability upon selling. Understanding the concepts of depreciation, capital gains rates, and deductible selling expenses is crucial for accurately reporting the transaction and minimizing tax liability.

For those looking to continue investing in real estate, exploring the possibilities offered by Section 1031 Exchanges can provide a valuable tax deferral strategy.

By staying informed and understanding the tax implications of selling a rental property, you can make informed decisions, maximize tax benefits, and ensure compliance with applicable tax laws. Selling a rental property can be a complex process, but with the right knowledge and guidance, you can navigate the tax consequences and make the most of your investment endeavors.

How Cost Segregation Studies Benefit Medical and Dental Practices

Introduction

For medical and dental practices seeking ways to minimize tax liability and increase cash flow, cost segregation studies offer a valuable strategy. By accelerating depreciation deductions, cost segregation studies can help medical practices optimize their tax savings and improve their financial position. In this blog post, we will explore how cost segregation studies can be used by medical practices to unlock significant tax benefits. We will discuss the concept of cost segregation, its benefits, the process involved, and specific considerations for medical practices.

Understanding Cost Segregation

Cost segregation is a tax planning strategy that involves the allocation and reclassification of assets within a commercial property. Rather than treating the entire property as a single asset, cost segregation breaks it down into individual components, such as building structures, land improvements, equipment, and fixtures. By identifying assets with shorter depreciable lives, cost segregation allows for accelerated depreciation deductions, resulting in substantial tax savings.

Benefits of Cost Segregation for Medical and Dental Practices

Medical practices can reap several benefits from conducting cost segregation:

Increased Cash Flow: By accelerating depreciation deductions, cost segregation studies provide medical practices with significant upfront tax savings. These savings can be reinvested in the practice, facilitating growth, and improving cash flow.
Improved Financial Planning: With a clearer understanding of the value and depreciation timelines of individual assets, medical practices can better forecast their future expenses, allocate resources effectively, and make informed financial decisions.
Enhanced Return on Investment (ROI): Cost segregation studies can help medical practices optimize their ROI by identifying assets that qualify for accelerated depreciation. This allows for higher tax deductions in the earlier years of ownership, resulting in improved financial returns.

Considerations for Medical and Dental Practices

Medical practices should keep the following considerations in mind when considering this tax-deferment strategy:

Compliance and Documentation: It is crucial to maintain proper documentation and adhere to IRS guidelines when conducting a cost segregation study. Engaging a qualified cost segregation specialist can ensure compliance with the necessary regulations.
Building Renovations and Expansions: Medical practices undergoing building renovations or expansions can capitalize on cost segregation studies to identify and segregate assets associated with these improvements, unlocking additional tax savings.
Leasehold Improvements: For practices operating in leased spaces, there may still be opportunities to use a cost segregation to accelerate the rate of depreciation of leasehold improvements.

Expert Guidance

Given the technical nature of cost segregation studies, medical practices should consider consulting with experienced tax professionals and cost segregation specialists. These professionals possess the necessary expertise to perform accurate asset classifications, navigate tax regulations, and maximize the tax benefits.

Conclusion

Cost segregation studies present medical practices with a powerful tax planning tool to optimize their financial position. By accelerating depreciation deductions and identifying eligible assets, medical and dental practices can enhance cash flow, improve financial planning, and achieve a higher return on investment. If you have any questions about this or other tax saving strategies, call our office at 480-294-4967.

Can I deduct my clothing on my tax return?

As a taxpayer looking to save money, you may wonder if you can claim deductions for clothing and uniforms on your tax returns. The answer is: it depends.

Before you take that deduction, you should consider the nature of the clothing, the job you have, and the type of business you operate. In this blog post, we will explore the rules and regulations surrounding the deduction of clothing and uniforms for tax purposes.

Deductible Clothing and Uniforms

If you are a self-employed individual or work for a company that requires you to wear uniforms or specific clothing, you may be eligible to claim a tax deduction for your work-related clothing expenses. However, there are some conditions that need to be met to qualify for the deduction.

The first condition is that the clothing or uniform must be required for your job. For example, if you work as a police officer, the uniform you wear is required for the job, and therefore, is tax deductible. The same is true for other professions that require a specific uniform or clothing, such as healthcare workers that are required to wear scrubs or other specialized clothing.

The second condition is that the clothing must not be suitable for everyday wear. If the clothing or uniform you wear to work can be worn outside of work, it may not qualify for a tax deduction. For example, if you work as a realtor and wear a blazer and heels for work, those clothes would not be tax-deductible because they are suitable for everyday wear.

The third condition is that the clothing or uniform must not be reimbursed by your employer. If your employer provides you with a uniform or reimburses you for the cost of the uniform, you cannot claim a tax deduction for that expense.

Lastly, the cost of the clothing or uniform must be reasonable and necessary. You cannot claim a deduction for clothing that is overly expensive or unnecessary for your job. A $4,000 Louis Vuitton purse comes to mind.

Non-Deductible Clothing and Uniforms

Unfortunately, if your work-related clothing does not meet the conditions outlined above, you cannot claim a tax deduction. Clothing that is not required for your job, clothing that is suitable for everyday wear, clothing whose costs were reimbursed by your employer, and clothing that is unnecessarily expensive does not qualify for a tax deduction.

The most common type of non-deductible clothing we encounter as tax advisors is business wear. If you work in an office and wear business casual or even business professional clothing to work, those clothes are not tax-deductible because they are suitable for everyday wear. If you are a business owner, it is important to avoid charging everyday clothing to your business bank account or credit card. Doing so will cause confusion at tax time, and mixing business and personal accounts could even result in piercing the corporate veil which shields you from personal liability.

Conclusion

In conclusion, deducting clothing and uniforms from your taxes can be a complex issue. While it is possible to claim a deduction in certain situations, there are also strict limitations and rules to consider. It’s important to keep accurate records of your expenses, and to consult with a tax professional if you’re unsure about whether a particular deduction is allowed.

Do I have to issue a 1099?

The IRS has created several forms in the 1099 series, but this article focuses on the 1099-NEC because it is applicable for so many of our clients. Form 1099-NEC (nonemployee compensation) is an Internal Revenue Service (IRS) form for businesses to report payments made to parties that are not employees. One copy will be provided to the contractor, and one will be submitted to the IRS. One of the most common questions we receive is, “Do I have to issue a 1099?”

If you are unsure about whether you should issue a 1099, ask yourself the following questions:

Who am I paying?

First, this form is not required for personal payments, so you should only issue one for payments you made in the course of a trade or business.

Furthermore, the recipient should be a freelancer or contractor, not an employee that you provide a form W-2. Someone is considered an independent contractor if they are self-employed or contracted to perform work to another business as a nonemployee. This distinction is important because you do not have to withhold income taxes or withhold and pay employer Medicare and Social Security taxes from an independent contractor’s payments.

What if I’m paying a business?

Form 1099 is issued to all “persons” but corporations. Persons include individuals, sole proprietorships, partnerships, and most limited liability companies (LLCs). If an LLC has made an election to be taxed as an S corporation, then no 1099 is required.

In addition, if you pay an attorney, you should provide them with a 1099 even if their business is incorporated.

How much am I paying?

You are not required to provide a 1099 to someone that you paid a de minimis amount. The threshold for reporting is $600.

For example, if your business hired a painter and paid them $1,300, you should issue them a 1099. If your business hired a janitorial service to clean your office and paid them $400 per month, you should provide them with a 1099 because the total of the payments in one year of $4,800 is higher than $600.

How did I pay?

In the total you report on the 1099, you should only include payments made by cash, check, ACH transfer, or other direct means. Payments by credit card or through third-party transaction networks will be reported by the financial institution on Form 1099-K, so you should not include them. Going forward, payment platforms such as Venmo will also be required to issue 1099-Ks.

The Importance of the W-9

Every contractor that you work with should provide a completed W-9 before they provide any services.

A W-9 is an IRS form used by businesses to gather tax information from external parties. The information provided on Form W-9, such as the taxpayer identification number, is essential for completing Form 1099.

Importantly, if the payee fails to furnish his or her taxpayer identification number (TIN), they are subject to backup withholding at a 28% rate. If you do not collect and pay backup withholding from affected payees as required, you may become liable for any uncollected amount. Therefore, we recommend always collecting a W-9 before the contractor begins providing services.

Conclusion

Issuing 1099-NECs when required is critical to keeping your business in compliance with the IRS. The due date for payers to complete the Form 1099-NEC is January 31, so it is important to collect your W-9s and track your payments throughout the year. If you have further questions about 1099-NEC reporting requirements, please reach out to our office at 480-294-4967.

Captive Insurance

When businesses grow and become more profitable, owners may look for strategies to build cash reserves for the unknown future. Forming a captive insurance company, also called an 831(b) Plan, is one strategy for businesses with excess cash to lower their tax bill in the current year while providing flexibility in future years.

A captive insurance company is a wholly owned subsidiary insurer formed to provide risk mitigation services for its parent company. For example, an S-corporation purchasing captive insurance would form a separate C-corporation. That C-Corp would be called the “reinsurance company.” The reinsurance company can be owned by the business, or its ownership can mirror that of the business. It can even be owned by a trust depending on the circumstances. Regardless of the particulars of ownership, the flow of cash remains the same. The S-corporation pays premiums to the reinsurance company, and the premiums are tax-deductible to the S-corporation.

Most businesses carry some insurance through a traditional insurance provider, but the reinsurance company offers protection against risks that are not sufficiently reduced by other policies. Insurable risks include audit, litigation, and cyber-attacks. The risks being addressed by the plan must be fortuitous in nature, not ordinary business risks.

The deductibility of premiums paid to the reinsurance company is the first part of the tax planning strategy. But after the expiration of the 12-month policy, the investor has a range of options for the remaining funds that were not paid in administrative fees or claims:

The owners of the reinsurance company can leave the excess reserves in the reinsurance company to grow through conservative investments such as bonds. The investment income earned is taxed at the captive insurance company level at the federal corporate tax rate of 21% plus applicable state tax rate.
The reinsurance company may distribute the funds as taxable qualified dividends. The distributions will be taxed at the long-term capital gains rate (currently 15 or 20%).
The reinsurance company may lend up to 65% of the funds to the operating company. The funds may be used to invest in or expand the business. Importantly, interest on the loan must be paid at the IRS prescribed applicable federal rate (AFR) to the reinsurance company.

Captive insurance plans can be a powerful planning and tax deferment tool for businesses with excess cash reserves. In fact, the National Association of Insurance Commissioners (NAIC) estimates that about 90% of Fortune 500 companies today have captive subsidiaries. However, small and midsized businesses can often benefit as well.

Since the Treasury Regulations surrounding reinsurance companies is extremely complex, we always recommend working with a qualified administrator, such as SRA 831(b) ADMIN and an accounting firm that understands the rules around the small captive insurance company rules. SRA generally recommends that businesses have at least $100,000 to commit to the reinsurance company.

If you are interested in exploring a captive insurance plan for your business, please call our office at 480-392-6801 to discuss your situation with a Tax Manager.

Client Gifts

Many business owners like to express their appreciation to clients and referral sources with gifts, especially around the holidays. Understanding IRS rules around gifts can help you show your generosity without creating any surprises at tax time.

$25 Limit

Businesses may not deduct more than $25 for business gifts made to the same person. For example, if you purchased a $75 gift basket for a major referral source, only $25 would be deductible on the tax return. The $25 limit does not include shipping costs, sales tax, gift wrapping, or engravings that do not add substantial value.

Of course, this dollar limit is to prevent unreasonable business expenses, but it is interesting to note that the amount has not been updated since 1962.

Bright Idea

Since the $25 limit is per person, you may deduct a larger gift if the recipient is a business with multiple employees. For example, if one of your clients has five employees, you could give a fruit and cheese basket costing up to $125 and deduct the full expense. Similarly, you could give individual gifts to key contacts within one company.

Be Wary of Entertainment

When selecting gift, be careful of gifts that could be considered entertainment. The Tax Cuts and Jobs Act eliminated the deduction for entertainment expenses as of January 1, 2018. Examples of entertainment include tickets to a sporting events and concerts.

Bright Idea

Instead of providing gifts that could be considered entertainment, consider taking the client to a meal. Business meals at restaurants remain 100% deductible in 2022 (rather than the normal rate of 50%). A meal can provide the same opportunity to connect with a contact as entertainment without the sticky tax rules. Furthermore, meals are not subject to the same low dollar limitation as gifts.

Small, Branded Gifts

Branded items that cost less than $4—think pens, chap sticks, or calendars—are considered advertising rather than gifts. Generally, you don’t need to record who you gave them to because they will not count against the $25 per person annual limit.

The holidays provide a great opportunity to tangibly express your appreciation for clients and contacts. Who doesn’t love to receive a thoughtful box of chocolates or bottle of wine? If you have any questions about the IRS rules surrounding client gifts or any other deductions, reach out to our office at 480-392-6801.

“I filed an extension. Why do I have to pay penalties now?”

This is one of the most frequently asked questions we receive around the extended October deadline! In the spring, we just as frequently hear, “I have an extension. Why do I need to make an estimated payment?”

Unfortunately, even though an extension grants you additional time to file, it does not give you additional time to pay the tax due. That means that penalties and interest accrue on the amount of tax owed from the filing deadline until you pay the tax. We agree: this policy is confusing. We’ll discuss a few strategies on how to avoid these costs.

How can I avoid paying penalties and interest?

There are a few steps you can take to minimize the likelihood of paying penalties and interest.

First of all, if you receive a W-2, speak with your payroll administrator to adjust your withholdings to ensure that you are remitting the appropriate tax payment throughout the year. It is important to consider adjustments for life events such as changing the number of dependents you claim when one of your children begins supporting themselves.

However, withholding correctly becomes complicated for people with multiple income sources and business owners. We recommend reviewing the year-to-date financial statements for your business on an ongoing basis so that you have a good estimate of your taxable income. For our accounting and advisory services clients, we send monthly financial statements so that the data is always timely.

Do I really have to pay this?

Even with planning, surprises can come up. Larger-than-expected capital gains can result in a big tax bill since they typically do not have tax withheld. Waiting on a necessary document such as a Schedule K-1 prepared by another firm can make it impossible to know what income may be flowing from that business until the Schedule K-1 is received.

Generally, the penalties and interest assessed by the IRS must be paid. The IRS calculates the Failure to Pay Penalty based on how long your overdue taxes remain unpaid. The Failure to Pay Penalty is 0.5% of the unpaid taxes for each month or part of a month the tax remains unpaid. Importantly, the IRS applies full monthly charges even if you pay your tax in full before the month ends. They do not pro-rate the penalty. However, the penalty will not exceed 25% of your unpaid taxes.

In rare cases, you may qualify for penalty relief if you tried to comply with tax laws but were unable due to circumstances beyond your control.

Estimated Payments

If your return has been started prior to the April deadline, our tax team may reach out to you about making estimated payments. By making an estimated payment, you can avoid the Failure to Pay penalty. Your tax team will make their best estimate of the amount you owe and can even process the payments to the federal and state governments on your behalf with your authorization.

If a good estimate of the amount owed is not available due to missing information, a good place to start is ensuring that you pay as much tax for the current tax year and you did for the previous year. However, if you expect to receive a refund, no action is required.

The best way to avoid unnecessary penalties and interest around the extended deadline is to regularly communicate with your accounting firm. If you are interested in learning more about our tax planning or business advisory services, call our office at 480-294-4967 to set up a consultation.

Business Owners: Are you deducting your health insurance premiums?

With the high cost of healthcare coverage, self-employed taxpayers may find relief by taking advantage of tax deductions for health insurance premiums.

Self-employed taxpayers include sole proprietors, members of LLCs, partners, and owners of S-corporations.

Who is not eligible?

You may not take the deduction if you were eligible to participate in an employer-subsidized plan. This includes plans sponsored by your spouse’s employer. A subsidized plan is one where the employer pays a portion of the premium.

However, eligibility is determined on a month-by month basis, so even if you were covered by an employer-subsidized plan for part of the year, you may take the deduction for the remainder of the year. For example, someone who is an employee for the first six months of the year and then becomes a self-employed consultant for the final six months of the year can deduct their health insurance premiums paid from July to December.

What is included in the deduction?

The deduction includes premiums for insurance coverage for the self-employed individual, their spouse, and their dependents. While medical insurance premiums are typically the largest dollar amount, premiums for dental insurance and long-term care insurance may also be deductible. And even if you don’t itemize other deductions, you can still deduct self-employed health insurance if you meet the requirements.

Importantly, the amount of the deduction cannot exceed the earned income you collect from your business. But if you have sufficient profit, you can deduct the full amount of the premiums.

Special reporting requirements govern this deduction for S-corp shareholders who own more than 2% of the company, so we recommend talking with a tax professional. If you have questions about this deduction or want to explore other tax-saving opportunities, call our office at 480-392-6801 to schedule your tax planning meeting.

Cost Segregation Studies for Rental Real Estate

Introduction

Last week we discussed how Section 179 depreciation generates upfront cashflow for businesses by deducting the full cost of an asset in the year it is purchased. And while the tangible property we discussed had a useful life for tax purposes of 5 to 7 years, the life for residential rental real estate is far longer: 27.5 years.

For obvious reasons, owners of residential rental real estate are eager to utilize the tax benefit from their purchase more quickly. Cost segregation is a process of identifying assets that are personal property that can be depreciated more quickly than their corresponding real property. While residential rental buildings must be depreciated over 27.5 years, assets like wiring, flooring, plumbing, appliances, fixtures, and air conditioners can be depreciated in just 5 to 7 years. By capturing depreciation earlier in the life of the property, owners can free up cash and use it for their operating and investment needs now.

Projected Tax Savings

The tax savings generated by a cost segregation study depend upon the price of the rental property. Typically, the higher the cost the property, the greater the benefit of a cost seg will be. For a $500,000 rental property, depreciation expense under the straight-line method would be just $13,940 in the first year. However, our in-house cost segregation method that classifies assets and utilizes bonus depreciation yields a depreciation expense of $168,364—a difference of over $150,000.

If the tax loss on the rental is limited due to your income level, the loss will carry forward into future years. That means that you could earn money from your rental property for years before paying income taxes on it.

Impact of the TCJA

Changes to the tax law in the Tax Cuts and Jobs Act of 2017 fueled the efficacy of cost segregation studies. For certain assets, bonus depreciation was increased from 50% of the cost of the asset to 100%. Therefore, the cost of many building fixtures can be completely depreciated in the first year.

The 100% deduction for bonus depreciation applies to property acquired and placed in service after September 27, 2017, and before January 1, 2023. Beginning in 2023, the rate of bonus depreciation will be gradually phased out, unless Congress passes a law to extend it.

Conclusion

If you invest in real estate, we encourage you to schedule a consultation to discuss your most tax-efficient option. We can assist with the allocation of real assets and personal property, and we have contacts for cost segregation firms for very large projects. We ask that clients provide a copy of the settlement statement from the purchase of their rental property.

To schedule your appointment, call our office at 480-392-6801.