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Tuesday, August 26, 2008, 8-10:45 a.m., Napa Valley Marriott, Napa

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Economic stimulus act includes tax incentives for tenant improvements

NORTH BAY – Both tenants and owners of commercial buildings should consider making property improvements before the end of 2008 in order to take advantage of temporary tax benefits, according to local CPAs.

That is because the Economic Stimulus Act of 2008 – passed earlier this year by Congress – includes a bonus depreciation provision that lets individuals and businesses write off half the cost of qualified improvements during the first year, rather than taking smaller deductions over longer periods of time.

“We have clients who are aware of it, who we’ve made aware of it, that are planning their 2008 capital expenditures accordingly, and they are looking to take advantage of this thing to the max,” said Jim Perez, a CPA and partner with Pisenti & Brinker LLP in Petaluma.

Businesses that lease space and pay for their own tenant improvements can use bonus depreciation to offset more of their operating income for tax purposes, according to Mr. Perez. And property owners can use improvements on one property to offset rental income from their entire portfolio.

However, bonus depreciation can only be used for non-structural property improvements, which do not include items such as walls or elevators. Examples of improvements that meet

the requirements

include window coverings, desks, cubicle dividers and certain light fixtures.

“If it’s a remodel that has value that’s separate from the structure of the building, than it is eligible,” said CPA Chris Paris, a partner and strategic tax planning practice group leader for Andersen & Company LLC in Santa Rosa.

Mr. Paris suggested that anyone who wants to take advantage of the new rules pursue a cost segregation study, an item-by-item analysis of a project to determine which expenditures qualify for bonus depreciation.

“Normally, you would need the assistance of an engineer or contractor,” Mr. Paris said.

There are additional restrictions that limit the types of property that can qualify for bonus depreciation, but according to Mr. Paris, the benefits should be significant enough to spur at least some additional remodeling activity for commercial properties. The last time bonus depreciation was allowed – for several years following the Sept. 11 attacks – many businesses took advantage of the provision, Mr. Paris said.

“By far the biggest impact that I noticed was the increase in cost segregation studies,” he said. “People said, ‘It’s worth spending the money to have a cost segregation study done because of the huge increase in tax benefits that we get by

depreciating things over a more accelerated basis.’”

Commercial real estate developer Joan Woodard said bonus depreciation can help investors leverage the tax benefit from one property to acquire or improve another.

“It can potentially give a building owner a lovely boost in their cash flow in the years they can take it, and perhaps that should be considered if cash flow enables them to do some other … investment,” said Ms. Woodard, president and CEO of Simons & Woodard, an architectural, development and property management firm based in Santa Rosa.

But Ms. Woodard cautioned against using tax benefits as a deciding factor for pursuing a deal.

“Using bonus depreciation as a way to justify a real estate investment is a way of creating phantom value that can be very dangerous,” she said.

The current bonus depreciation provision is set to expire at the end of 2008, but it is possible that it could be extended by Congress.

“If it does create activity in an otherwise dismal sector of the economy, there’s a chance they’ll leave it in place,” Mr. Paris said of Congress.

The stimulus provision follows the expiration of a separate tax benefit that shortened the depreciation period for certain building improvements to 15 years, compared with as many as 39 years under traditional tax code. According to Mr. Perez, businesses and individuals who have filed for extensions on their 2007 tax returns should check to see if they are eligible for the 15-year depreciation.

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