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How to use tax engineering to accelerate depreciation for new construction projects

Nov 15, 2018

When it comes to plumbing and process electrical power, the IRS distinguishes between building components and personal property — and the cost recovery period.

Building components have a recovery period of 39 years, while personal property, depending on its use, has a recovery period of either 5 or 7 years.

This means that being able to classify water lines, waste lines and process electrical power as personal property rather than building components will decrease their cost recovery periods and accelerate depreciation — saving you money.

In fact, for every $100,000 of cost or value moved from 39-year to 7-year depreciation, the first year after-tax net present-value benefit is about $17,000 for 2017 and nearly $24,000 for 2018.

So rather than finding out at the end of a construction project what you could have done to reclassify building components into personal property, there are tax engineering actions you can take now before getting started.

Water and waste lines

Plumbing components that are used to provide general building services (e.g., drains, valves, restroom plumbing fixtures and piping) are considered building components and thus have a 39-year depreciation.

However, plumbing connections that are used directly with machinery or equipment are considered personal property, just like the machinery/equipment itself.

So how can you decrease the amount of plumbing considered a building component?

Water and Waste Lines

The tax engineering here is pretty simple. By locating the restroom in the front of your building instead of in the back, you end up with 100% more 7-year process water and waste piping.

Process electrical power

With electrical power, it’s important to separate building components from personal property. When the process electrical power is shared with the general building lighting and receptacles, the distribution panels and the conduit and wire going back to the transformer are considered 39-year property.

However, if the process electrical power is kept separate from the general building lighting and receptacles, the distribution panels, conduits and wires are considered 7-year personal property.

Separating these components can save you thousands of dollars over the life of your construction project.

How to leverage tax engineering

Tax engineering is as simple as knowing what to look for and how building components can be reclassified.

It all starts with a cost-segregation study.

To find out how you can qualify for tax incentives, credits and deductions, engineers will review your preliminary construction drawings and make suggestions to improve your tax position.

Want to find out how much you can save with a cost-segregation study? Contact Wipfli to get started.

Or learn more on our web pages:

Cost segregation studies

Real estate tax review and appeals

Targeted tax strategies for real estate industry


Steven A. Barnes
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