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What is Needed to Compute Depreciation?
There are three key elements used to factor depreciation: Basis, Class Life, and Placed in Service Date.
What is Basis?
In terms of a Cost Segregation Study, the basis is the original cost of the property including cash payments, borrowed money to purchase, value of any items traded for purchase, and value of any bartered services.
What is Adjusted Basis?
A basis will increase with any major improvements made to the property and will decrease by
the amount of depreciation deductions identified in a Cost Segregation Study. This adjusted basis would be used to measure gains and losses when the property is sold.
What is Class Life?
Class life is the amount of years an asset can be depreciated. Typically, an entire building would would have a class life of either 39 years for commercial and industrial property or 27.5 years for residential rental property. During a Cost Segregation Study, personal property assets are identified and given a different class life of 5, 7 or 15 years.
Why is the Placed in Service Date Important?
This signifies the date when the building is ready to be used. You can begin to depreciate the asset once it is ready to be used, regardless if you are actually using yet.
Can Land Be Depreciated?
No, land can never be depreciated. One of the steps in a Cost Segregation Study is to separate building improvements from the land based on the property tax assessment. After that, elements within the building can be further recategorized.
What is Bonus Depreciation?
Bonus depreciation is a tax deduction that allows businesses to deduct a large percentage of the purchase price of eligible assets in the first year of service.
Is Bonus Depreciation Decreasing?
The short answer, yes. Under the Tax Cuts and Jobs Act (TCJA), bonus depreciation for personal property in non-residential buildings placed into service in 2022 was set at 100%. This year it is set at 80% and it will continue to decrease each year moving forward until it sunsets in 2027.
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