Tax Deductions (Depreciation Tax Tips)
Tax deductions reduce your taxable income, thus indirectly reducing your federal income taxes. (Tax credits, such as the Low Income Houston Tax Credit, directly reduce federal income taxes). Depreciation can be an excellent source for increasing tax deductions. While the thought of reading about depreciation may seem as dull as watching paint dry, fine-tuning a depreciation schedule has the power of a force-5 hurricane.
Although the tax deductions available from depreciation are substantial, depreciation often receives as much attention as what to eat for dinner. This article address depreciation as a tax deduction for both real estate and personal property.
Real estate depreciation is the main non-cash tax deduction for both real estate investors and small business owners. Real estate depreciation schedules are often derived by simply separating long-life property (27.5 years for rental residential and 39 years for commercial) from land. In some cases, a few other items are separated. This method of determining a depreciation schedule is analogous to using a machete when the task requires a scalpel. Precise research and analysis can isolate up to 130 real estate components that can be isolated from the long-life portion of the building.
Increasing tax deductions by fine-tuning the depreciation schedule is a process called cost segregation. By identifying and valuing up to 130 short-life components, it is possible to increase annual depreciation by 50-100% in the first 5-7 years of ownership. These short-life items are depreciated over 5, 7, or 15 years. All of this equates to higher tax deductions.
Cost segregation can be used to increase tax deductions both for recently acquired (or built) properties and for those that have been owned for years (starting 1/1/1987 and later). For properties that have been owned for more than one year, it is possible to effect a tax deduction windfall by “catching up” previously under-reported depreciation. This does not require filing amended tax returns.
Fixed asset schedules (which detail business personal property) can be reviewed and fine-tuned to generate tax deductions. The prospect of reviewing a 50-100+ page fixed asset schedule may be as inviting as a trip to the dentist; however, experience shows the tax deductions gained are worth the effort. (Of course, you can hire a consultant if you don’t want to do the work internally.)
Tax deduction opportunities in the fixed asset listing include items added in error, items which have been sold or thrown away and items with an excessive depreciation life. Items added in error include repairs, maintenances, and operating expenses. While some repairs should be capitalized (if they extend the life of a component), a careful look often results in items that can be expensed. Maintenance should not typically be capitalized. Operating expenses should be not capitalized but are sometimes included on the fixed asset listing due to clerical error.
Fixed assets schedules often include items that should have been written off when they were sold or thrown away. At many companies, there is not an effective systematic process to update the fixed asset schedule when an item is lost, thrown away or sold.
The depreciation life assigned to some items is longer than the appropriate. For these items, it is possible to increase tax deductions by catching-up under-reported depreciation without filing any amended tax returns.
Depreciation may seem dull and arcane; however, it is a rich and powerful source to increase tax deductions. These tax deductions will allow you to keep more of your income and fully comply with federal law.
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Cost segregation produces tax deductions and reduces federal income taxes across the country and in every size market. Below are just a few examples of cities where cost segregation generates meaningful tax deductions.
City:
- Miami FL
- Phoenix, AZ
- Dallas/Ft. Worth, TX
- New Orleans, LA
- Washington, DC
- Los Angeles, CA
- San Francisco, CA
- Atlanta, GA
- Orlando, FL
- New York, NY
- Chattanooga, TN
- Buffalo, NY
- Harrisburg, PA
- Akron, OH
- Portland, OR
- Albany, NY
- Des Moines, IA
- Durham, NC
- New Haven, CT
- Tulsa, OK
- Oxnard, CA
- Baton Rouge, LA
- Manchester, NH
- Jackson, MS
- Pittsburgh, PA
- McAllen, TX
- Knoxville, TN
- Santa Rosa, CA
- Greenville, SC
- Omaha, NE
Cost segregation produces tax deductions for virtually all property types, including the following:
Property Type:
- Nursing home
- Lumber storage
- Department store
- Shopping center
- Country club
- Tennis club
- Airplane hangar
- Regional mall
- Student housing
- Shopping mall
Almost every industry, including the following, can generate cost-efficient tax deductions by using cost segregation.
Industry:
- Machinery manufacturing
- Textile product mills
- Transportation equipment manufacturing
- Frozen food manufacturing
- Wood product manufacturing
- Beverage and tobacco product manufacturing
- Furniture manufacturing
- Furniture stores
- Electrical component manufacturing
- Warehousing and storage
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