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THE JOBS GROWTH TAX RECONCILIATION ACT OF 2003
December 3, 2003

HOW A COST SEGREGATION ANALYSIS CAN ENHANCE BONUS DEPRECIATION

“The Jobs Growth Tax Reconciliation Act of 2003” has augmented the tax incentives contained in “The Job Creation and Workers Assistance Act of 2002”. The changes give the taxpayer further capital cost recovery benefits for qualifying property. By applying a cost segregation analysis to qualifying property, a taxpayer can further enhance depreciation benefits.

BONUS DEPRECIATION TAX PROVISIONS

Sec. 201 Increases and Extends Bonus Depreciation

The 2003 Act provides an additional first-year depreciation deduction equal to 50-percent of the adjusted basis of qualified property, effective for taxable years ending after May 5, 2003. Qualified property is defined in the same manner as for purposes of the 30-percent additional first-year depreciation deduction provided by the Job Creation and Workers Assistance Act of 2002, except that the applicable time period for personal property and Machinery & Equipment acquisitions or contract-construction (or self construction) of the property is modified. In general, in order to qualify for the 50-percent additional depreciation deduction, the property must be acquired or placed-in-service after May 5, 2003, and before January 1, 2005. Property does not qualify if it was constructed/acquired pursuant to a binding written contract in effect before May 6, 2003. Property for which the 50-percent additional first-year depreciation deduction is claimed is not eligible for the 30-percent additional first-year depreciation deduction.

Eligible property must meet these requirements:

Must be subject to regular MACRS depreciation rules, and applies to original use assets only. One of the following must apply:

1. Must have a depreciation life of 20 years or less (see IRS Publication 946 for lists of lives for property — this includes equipment, computers and peripherals, office equipment, and many other types of property businesses commonly buy), or

2. Must be "water utility property", or

3. Must be computer software that is normally depreciated (as opposed to "amortized"), or

4. Must be leasehold improvement property (improvements made to commercial real estate that are placed into service more than 3 years after the building itself was first placed into service).

Qualified Leasehold Improvements — Qualified leasehold improvements means any improvement, which is section 1250 property, to an interior portion of a building that is nonresidential real property, if:

(i) The improvement is made under or pursuant to a lease by the lessee (or any sublessee) of the interior portion, or by the lessor of that interior portion;

(ii) The interior portion of the building is to be occupied exclusively by the lessee (or any sublessee) of that portion; and

(iii) The improvement is placed-in-service more than 3 years after the date the building was first placed-in-service by any person.

Certain Improvements Not Included — Qualified leasehold improvement property does not include any improvement for which the expenditure is attributable to the following:

(i) The enlargement of the building

(ii) Any elevator or escalator

(iii) Any structural component benefiting a common area

(iv) The internal structural framework of the building.

The 2003 Act allows taxpayers to significantly increase their first-year depreciation deductions for qualifying assets. The remaining tax basis is then depreciated or amortized over the number of years specified by the existing MACRS recovery period. (Modified Accelerated Cost Recovery System).

THE BENEFIT OF PERFORMING A COST SEGREGATION ANALYSIS

For the tax payer who is building new facilities or improving owned or leased facilities, and meets the guidelines of these new rules, it will make more sense than ever to maximize these deductions with a cost segregation analysis. Tax savings through reclassification are possible by finding shorter-lived assets, with a Class Life under 20 years, and qualify for the bonus depreciation. In addition, shortening up lives that would otherwise be 39 or 27.5 to 3, 5, 7, 15 or 20 years some with accelerated depreciation methods prescribed, also produce significant benefit for the U.S. Taxpayer. Examples of shorter-lived assets include:

• Electrical and plumbing in support of non-building equipment;

• Wallpaper, carpeting, vinyl flooring, etc.

• Plumbing or HVAC in support of equipment. Example: Restaurants / kitchens / Servers

• Land Improvements: asphalt paving, site drainage, landscaping, etc.

One of the most beneficial categories of reclass asset types are land improvements. They are categorized in Revenue Procedure 87-57’s Asset Class 00.3. This gives them a Class Life of 20 years, which makes them eligible for the 50% bonus depreciation write-off. Frequently the cost basis of land improvements is contained in construction trade accounts that are categorized as 39-year lives for tax and not qualified for this shorter-lived treatment. These same assets should be booked for tax depreciation purposes as 15-year 150% DB MACRS assets.

The opportunity to reclassify assets from I.R.C. Section 1250 to 1245 property originated during the early days of the Investment Tax Credit (ITC). The new “act” is comparable or better in many respects. Capital Cost Recovery Services involves finding and supporting these otherwise hidden or process related assets buried in overall trades accounts. It requires in-depth knowledge of engineering, construction and appraisal as well as tax expertise. Contact us for more information — call Cal Fugitt @ (415)-264-6079 or email us.

For additional information on the 2003 Act, click the links below:

http://www.irs.gov/businesses/small/article/0,,id=110431,00.html

http://www.irs.gov/pub/irs-regs/td9091.pdf

Note: Readers should consult with their tax accountant or advisor and review the 2003 Act in detail. Cost Tech Consulting is a Capital Cost Recovery firm specializing in providing engineering and appraisal services related to Cost Segregation, purchase price allocation, property records review and depreciation consulting.