If you’re a business owner and you’ve been thinking about replacing your commercial roof, the Tax Cuts and Jobs Act of 2017 (TCJA) passed in December 2017 could make it easier to do so. The TCJA creates certain advantages for commercial real estate owners under its expansion of the IRS tax code.
Section 179 Expensing
As we mentioned in our recent blog, commercial roofs are now classified as an expense, so it’s a good time to take advantage of the tax benefits of roof replacement. Increased Section 179 expensing allows certain taxpayers to deduct the full purchase price of specific types of property on their income taxes, rather than capitalizing the cost of the property. Rooftop equipment should also be included in the total dollar amount of a roof replacement because Section 179 now embraces HVAC systems and other company-specific items, as well as fire protection, alarm systems and security systems. The allowable expense increased from $500,000 to $1 million in 2018, and the phase-out deduction increased to $2.5 million.
Bonus depreciation is another advantage under the new law. You might want to replace your roof to take full advantage of this change—property placed in service after Sept. 27, 2017 and before 2023 receives 100 percent bonus depreciation; 80 percent for 2023, 60 percent for 2024, 40 percent for 2025 and 20 percent for 2026. The acquisition date is the date of the contract for property purchased with a written contract.
The qualified property, or the roof, does not have to be new, as long as you, the taxpayer, haven’t previously used the property and it’s not acquired from a related party.
Business Interest Expense Limitation
However, note that a qualified property does not include property used in a business that is not subject to the net business interest expense limitation, which could mean a potential loss of prior credits. Interest is now limited to 30 percent of a business’ adjusted taxable income, with the exception of businesses with average annual gross receipts of $25 million or less. You can opt out of the interest limitation if you choose to elect the Alternative Depreciation System (ADS) recovery period rather than MACRS (the Modified Accelerated Cost Recovery System). ADS recovery periods are 40 years for nonresidential property, 30 years for residential and 20 years for improvement property.
Be aware of other potential loss of credits previously granted, such as state and local tax and property tax deduction, as well as property placed in service. First, exclusion of local income and sales tax deductions is for non-corporate taxpayers, and $10,000 is the limit for deductibility of property tax which applies to individuals, not businesses. Second, under the new law you can deduct up to $1 million starting in 2018. The limit is reduced dollar-for-dollar if $2.5 million in property is placed in service during the year. This would affect the election for roofs and other rooftop equipment now considered expenses for nonresidential real property placed in service after the date the real estate was first placed in service. The provisions are effective for property placed in service in 2018.
As a whole, the TCJA will provide significant tax savings for commercial businesses considering a roof replacement. Consider the pros of roof replacement when reviewing projected revenue, tax liability and the application of accelerated depreciation to take advantage of these increased expenses on all acquisitions.
Roberts Roofing Company has been a leading provider of innovative commercial and industrial roofing solutions in Cleveland, Ohio since 1981. We provide commercial repair, replacement and maintenance to serve companies of all sizes in Ohio and the surrounding region, offering a combination of technical expertise, custom solutions and quality workmanship to every project.
If you have questions regarding these new tax benefits of replacing a roof, or any other roofing matter, we are happy to be of service. To find out more about selecting a commercial roofer in Cleveland, Ohio, simply fill out the form on this page and a member of our team will be in touch. Or, you may call us at 440.745.8578.