Last Minute Tax Deductions for 2017: Cost Segregation
Your books may be closed for the year, but it is not too late for 2017 tax planning. Cost segregation studies are a great strategy for those institutions looking to capitalize on the tax reform bill.
For 2017, most C Corporations are paying a 34% or 35% marginal federal tax rate and many higher income S Corporations shareholders may be paying federal rates in excess of 40%. The tax reform bill brings significant tax savings. Starting in 2018, C Corporations will be paying a flat federal tax rate of 21% and many S Corporation shareholders will be eligible for the new Section 199A deduction of up to 20% of taxable income.
The tax rate differential between 2017 and 2018 creates an unprecedented tax planning opportunity. If institutions are able to accelerate tax deductions or defer taxable income, there can be real, permanent tax savings resulting for the differences in tax rates. For example, accelerating $1 million in tax deductions into 2017 from future tax years could save institutions up to $140,000 on the rate differential.
A cost segregation study on existing locations is one of the best ways to generate significant additional deductions for 2017. A cost segregation study identifies building assets which can be depreciated at a faster rate by shortening the depreciable lives for tax purposes.
Through on-site inspections and a detailed engineering analysis, it is possible to take a new or existing building that is depreciating for tax purposes over 39 years and break out the individual building components so that items such as cabinetry, wiring, flooring, and landscaping can be depreciated over 5, 7, or 15 years. Any additional depreciation resulting from these shorter tax lives can be caught up and taken as an immediate deduction on your 2017 tax return.
Advantages of cost segregation can include:
- Accelerated tax deductions on your 2017 return
- No impact on your book depreciation expense
- Minimal disruption to your staff
Cost segregation studies take time to complete so it will likely be necessary to extend your 2017 tax return to take advantage of this planning opportunity. But for institutions that have built branches in the last 10 to 15 years, completing a cost segregation study could be well worth the additional time.
CLA’s Federal Tax Solution’s team routinely completes cost segregation studies for financial institutions around the country. We are here to help you determine if this opportunity may be right for you.
Please contact us for additional information.
Amanda Garnett is a principal in the financial institutions practice of CliftonLarsonAllen (CLA) from Peoria, Illinois. She currently leads the firm’s Midwest financial institution tax team and serves institutions ranging in size from $15 million to $3.5 billion in total assets. In addition to tax compliance, Amanda assists clients in the areas of tax consulting, mergers and acquisitions, and regulatory reporting. She also routinely teaches courses for banking associations across the country.
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