A Publication of WTVP

Commercial property owners and tenants don't have much time left to consider taking advantage of an accelerated depreciation provision in the newly enacted U.S. Jobs and Growth Tax Relief Reconciliation Act of 2003 that could result in significant tax savings on property acquisitions and leasehold improvements.

Rather than depreciating newly acquired equipment and tenant improvements on a straight-line basis, the new law allows 50 percent of eligible costs to be depreciated in the first year, with the other half to be depreciated over the normal depreciation schedule.

Encouraging Investment

The depreciation benefit is intended to encourage immediate new investment. Property must be acquired or constructed after May 5, 2003, and placed in service before January 1, 2005.

The bonus is available only in buildings that are at least three years old; therefore, existing buildings gain an advantage over new buildings. For property acquisitions to be eligible, there can't be a binding contract for acquisition or construction of the property before May 6, 2003.

While the bonus applies to several categories of property, two are of particular interest to building owners and tenants. The first is newly acquired property with a depreciation period of 20 years or less, a category that includes many kinds of equipment, interior decoration, landscaping, and carpeting. A benefit of particular interest for most owners involves leasehold improvements.

Without the bonus, leasehold improvements are typically depreciated over 39 years, resulting in an annual deduction of about 2.56 percent of costs per year. While regular depreciation deductions must be pro-rated to reflect that a property may have been in service only for a portion of a tax year, the 50 percent bonus depreciation for tenant improvements is available in full even if that property is placed in service on the last day of the year.

Compare an existing building owner who spends $500,000 on tenant improvements to a new building owner who does the same. Assume both the bonus and a full year of regular straight-line depreciation are available for 2004.

The owner of the existing building can claim an accelerated deduction in 2004 of as much as $256,410, while the owner of the new building receives only a $12,820 deduction. The owner of the new building, who can't take the accelerated depreciation, ends up paying as much as $87,500 more in federal income tax for 2004 if both owners are in the 35 percent tax bracket.

What Isn't Covered

Landlords and owners should also be aware the leasehold benefit doesn't cover building expansions, structural repairs, or improvements to common areas such as lobbies, nor does it apply to owner-occupied space. With these caveats in mind, the benefit of accelerated depreciation for tenant improvements and certain other property is certainly important enough to warrant the attention of every commercial property owner.

As with all tax matters, it's important to seek the advice of your CPA or tax attorney. IBI