Most businesses think that real estate laws only affect businesses actively engaged in acquiring, selling or operating real estate. But changes to the real estate tax code will have far-reaching effects on information reporting, depreciation of assets and more for any business that owns or rents property.
Smart Business sat down with tax attorneys Glenn A. Fuller and Stanley E. Heyman of Jackson DeMarco Tidus Peckenpaugh to ask how recent changes to the tax code relating to real estate can affect businesses not in the real estate field.
You indicated that recent changes to the tax laws would likely affect many businesses not traditionally interested in real estate. Can you give an example?
A perfect example is the Small Business Job Act of 2010. A seemingly innocuous provision of this act as of Jan. 1, 2011, requires generally any business that receives rental income from real estate as being considered to be engaged in the trade or business of renting property. What this means as a practical matter is that for these businesses, if they make payments of $600 or more to any service provider while earning rental income, the business owner will be required to file with the Internal Revenue Service and the service provider IRS Form 1099.
As you can imagine, there have been many of us in the tax community who have raised concerns that this new information reporting rule will be extremely onerous for businesses, and there is a strong movement underway in Congress to try to repeal this provision. For now, though, all businesses should be aware of this law even if such rental activity is tangential to their core business.
Have there been any other recent changes to the federal tax laws involving real estate that could affect non-real-estate companies that businesses should know about?
Yes. Just touching upon a couple of items, as part of the recent spate of legislation intended to stimulate economic activity, the Tax Relief, Unemployment Insurance, Pre-Authorization and Job Creation Act of 2010 has a temporary provision that allows businesses to fully depreciate certain assets the year they are placed in service (bonus depreciation). In addition, certain qualified restaurant and retail improvements can now be depreciated over a 15-year period. There are also other recent favorable Federal tax law changes but they are beyond the scope of this discussion.
What does this mean for businesses?
Bonus depreciation is essentially the ability for a business to fully write off the cost of certain assets in the same year that they are placed in service and allows businesses to promptly recover the cost of their investments. In addition, the ability to depreciate qualified restaurant and retail improvements over a 15-year period allows businesses to recapture the cost of their investments more quickly. It is the hope that these depreciation provisions will stimulate investment in qualifying property and help spur the economy.
What types of businesses would benefit?
The rule is generally designed to help all businesses; however, of these provisions there are only some that are available for qualifying restaurant and retail businesses. The tax laws can be very complex and businesses should consult with their tax adviser for more details, as these rules are only available for certain types of what we call ‘personal property.’ Since many of these personal property assets are intertwined with other assets, any business needs to be aware of what can be depreciated on an accelerated basis and what needs to be depreciated over a longer period of time.
Can you give an example of the type of property that you’re referring to?
Consider, for instance, an office building. In general, you see the walls and other structural parts of the office building being depreciated over a 39-year recovery period. Other assets that comprise the office complex can be eligible for depreciation on a quicker scale and may even be available for bonus depreciation. These are items such as wiring, computer systems and even landscaping.
How long will these tax strategies be available to businesses that would like to take advantage of them?
Well, that’s the kicker. The bonus depreciation rules are scheduled to expire at the end of this year, and qualified restaurant and retail improvements must be placed in service before the end of 2011. As such, we are encouraging our business clients who are considering making these types of investments to do so by the end of this year. It is also worth noting that the State of California has not adopted these favorable depreciation provisions for state income tax purposes.
Glenn A. Fuller is a shareholder and member of the Real Estate Practice Group and the Tax and Estate Planning Practice Group at Jackson DeMarco Tidus Peckenpaugh. Reach him at firstname.lastname@example.org. Stanley E. Heyman is a shareholder and member of the Tax and Estate Planning Practice Group at Jackson DeMarco Tidus Peckenpaugh. Reach him at email@example.com.