by Jeremy S. Herman, CPA, Tax Partner with Plante Moran
The Tax Cuts and Jobs Act (TCJA), which passed just a few days before the close of 2017, is a significant piece of legislation and affects nearly everyone in the senior housing industry—no matter the size, specialty, market or corporate structure.
As with any tax change, what may seem simple on the surface tends to be much more complex upon closer examination. This complexity, while frustrating at times, can also provide a lot of opportunities for planning for senior housing entities.
This series of articles will summarize key areas of the law that could impact senior housing. This first installment covers a variety of topics, including new rules to help developers maximize deductions related to depreciation, as well as changes in how net operating losses can affect tax burdens. Most provisions apply to tax years ending after Dec. 31, 2017.
Significant changes are coming to depreciation rules, including an increase in bonus depreciation. Bonus depreciation is a tax incentive that allows a business to immediately deduct a large percentage of the purchase price of eligible business assets in the first year they are purchased, and the remaining cost can be deducted over several years using regular depreciation or Section 179 expensing.
Under the new law, bonus depreciation increases to 100% for qualified assets acquired after Sept. 27, 2017, through 2022, after which the bonus percentage decreases by 20% per year through 2026, until it reaches zero.
Generally speaking, assets with a recovery period of fewer than 20 years will be subject to 100% bonus depreciation under the new law. See table on Section 179 expensing and bonus depreciation. Of special note is the fact that used equipment is now eligible for bonus deprecation, which was previously not the case.
Certain exterior real estate improvements now eligible for Section 179 expensing include roofs, HVAC systems, fire protection and alarm systems, and security systems. Certain senior housing real estate businesses that elect out of interest expense limitations (see below) will be required to use ADS depreciation, and do not get any bonus depreciation. ADS requires 40, 30, and 20‐year depreciable lives as opposed to 39, 27.5, and 15 for nonresidential real property, residential rental property, and qualified improvement property, respectively.
There are key planning opportunities to be considered to make sure maximum deductions can be enjoyed.
2. Like‐kind exchanges
A like-kind exchange, also known as a 1031 exchange, is a transaction or series of transactions that allow for the disposal of an asset and the acquisition of another similar asset without generating a current tax liability from the sale of the first asset.
The major change to like‐kind exchanges is the complete repeal of personal property exchanges. The code section now refers exclusively to real estate assets, “Exchange of real property held for productive use or investment.” Personal property assets that can no longer be exchanged include intangibles, such as broadband spectrums, bed licenses, vehicles, machinery and equipment, artwork, and collectibles.
3. Net operating losses (NOLs)
While no one wants to have large losses, they do happen. Key changes under the new tax law will limit the ability to carryforward and use NOLs generated after Dec. 31, 2017, to 80% of taxable income. Therefore, the years of having large losses and not having to pay taxes for many years later are over—20% of your income will still be taxed, at the rate applicable to the entity or individual.
4. Domestic production activities deduction
This deduction refers to a valuable tax break for businesses that perform production activities in the United States such as construction of real property as well as the associated engineering or architectural services performed. The deduction is generally 9% of the smaller of your qualified production activities income or your adjusted gross income. This has been eliminated for tax years ending after Dec. 31, 2017.
Stay tuned for the next part of this series, addressing entity choice, business interest expense, and changes to meals and entertainment deductibility.
Plante Moran is headquartered in Southfield, Michigan, and is one of the nation’s largest certified public accounting and business advisory firms.