What better time to fix up, remodel or redecorate the building, offices or studios that house your radio operation? Naturally, you will want to keep out-of-pocket expenditures to a minimum and recover as much of the funds spent just as quickly as possible. Fortunately, broadcasters who own their buildings as well as those who lease their property can take advantage of a variety of tax deductions, credits and other tax breaks to achieve those goals.
Under the basic tax rules, additions and improvements are usually depreciated in the same manner as the existing property would be depreciated if it were placed in service at the same time as that addition or improvement. A roof replaced on a commercial building is, for example, usually treated as 39-year nonresidential real property, regardless of how that building is actually written off or depreciated.
Imagine, however, that those expenditures for improvements, additions or remodeling could qualify for faster write-offs, even a direct reduction of the radio broadcasting operation’s tax bill. The result would be a reduction in the radio operation’s out-of-pocket expenses, faster – and larger – write-offs to reduce its tax bill and, most important, a much improved business environment.
First, consider a soon-to-disappear, faster write-off for so-called “leasehold improvements” created by the American Jobs Creation Act of 2004.
A good example of leasehold improvements was provided by a case involving the Walgreen Company, the company that operates drugstores and restaurants, before the U.S. Tax Court. The company routinely made improvements to the leased spaces that these businesses occupied. These leasehold improvements included interior partitions, millwork, acoustic ceilings, floor finishes as well as bathroom and lighting fixtures.
While Walgreen did not own the stores that it was improving, it did make capital improvements to its leased property. Under our tax rules, those capital expenditures were “improvements” to leased property and tax write-offs were possible by Walgreen.
The 2004 tax law changes created a 15-year recovery period for so-called “qualified leasehold improvement property” placed in service between Oct. 22, 2004 and Jan. 1, 2006. All improvements must be made to the interior portion of the radio station’s studio or building.
This write-off is not optional. The new law, temporarily, reduces to 15 years the depreciation period for the improvements made to leased business property (and for qualified restaurant property). Qualified leasehold improvement property is an improvement to the interior portion of a building that is nonresidential real property – provided certain requirements are met, of course
The improvements must be made under or pursuant to a lease either by the lessee (or sub lessee), or by the lesser. The lessee and lessor cannot be related and, furthermore, the improvement must be made to that portion of the building occupied exclusively by the lessee (or sub lessee). And, the improvement must be placed in service more than three years after the date the building was first placed in service (i.e., the building must be more than three years old).
Divide and conquer
The Internal Revenue Service recently announced that it would go along with a ruling of U.S. Tax Court that permitted some elements of a building to be separately depreciated as personal property. The IRS has agreed with the court’s method for determining whether an item is a structural component (i.e., real property) or personal property. The separate, shorter recovery period for the personal property elements of a building is referred to as cost segregation.
The following items, at least if related to the operation and maintenance of a building, are examples of structural components: bathtubs, boilers, ceilings (including acoustical ceilings), central air conditioning and heating systems, chimneys, doors, electrical and wiring, fire escapes, floors, hot water heaters, HVAC units, lighting fixtures, paneling, partitions (if not readily removable), plumbing, roofs, sinks, sprinkler systems, stairs, tiling, walls and windows.
In order to qualify as an immediately “expensed” Section 179 allowance, the property must be tangible Section 1245 property, depreciable and acquired by purchase for use in the active conduct of a trade or business. The Section 179, first-year expensing allowance, does not include a building or its structural components. It can include many Section 1245, personal property costs but only to the limits.
Those limits meant a broadcaster could expense up to $102,000 in Section 179 expenditures in 2004, a figure that will be indexed for inflation for 2005. Should total expenditures for Section 179 property have exceeded $410,000 in 2004 (another figure that will be increased for 2005), the deduction must be reduced dollar-by-dollar by any excess.
Rehab vs. fixup
The tax rules also contain a unique tax credit for any broadcaster incurring so-called “rehabilitation expenditures” during the tax year. The rehabilitation investment tax credit equals 20 percent of the qualified rehabilitation expenses (QRE) for certified historic structures and 10 percent of QRE for qualified rehabilitated buildings first placed in service before 1936 (other than certified historic structures). No energy credit is allowed on that portion of the basis of property that is attributable to QRE.
A building and its structural components constitute a qualified rehabilitated building (QRB) if they are (1) substantially rehabilitated and (2) placed in service before the rehabilitation begins. Property other than a certified historic structure must also satisfy (3) a “wall retention” test, (4) an age requirement and (5) a location of rehabilitation requirement. Property is considered substantially rehabilitated only if the expenditures during a self-selected 24-month measurement period (60-month period for phased rehabilitation) are more than the greater of the adjusted basis of the property or $5,000.
QRE does not include new construction; an enlargement; the cost of acquisition; non-certified rehabilitation of a certified historic structure; rehabilitation of tax-exempt use property; expenditures, generally, that are non-depreciable; and lessee-incurred expenditures if, the remaining term of the lease (determined without regard to renewal periods) is less than the property’s recovery period.
The Energy Tax Incentives Act of 2005, recently signed into law, created an immediate tax deduction, rather than recovery through depreciation, for the cost of major energy-savings improvements to commercial buildings and property. Unfortunately, the new deduction applies only to qualifying expenditures made after Dec. 31, 2005 and before Jan. 1, 2008.
The energy-efficient commercial buildings deduction applies to energy-savings improvements installed as part of interior lighting systems, the heating, cooling, ventilation or hot water systems or the building envelope. What’s more, they must meet a 50-percent energy-reduction standard and the deduction is limited to $1.80 per square foot.
Already available is a unique tax credit, a direct reduction of the broadcasting operation’s tax bill rather than a deduction from the income upon which that tax bill is computed, for so-called “energy” property. That’s right, the business energy investment credit is equal to 10 percent of the basis of energy property placed in service during the year (subject to reduction if the property is financed by tax-exempt private activity bonds or by subsidized energy financing).
No energy credit is allowed for that portion of the basis of property for which rehabilitation investment credit is claimed. An advance energy investment credit may be claimed under special rules for progress expenditures.
Energy property includes equipment that uses solar energy to generate electricity, to heat or cool a structure or to provide solar process heat. It also includes equipment that produces, distributes or uses energy derived from geothermal deposits (but only in the case of electricity generated by geothermal power, up to the electrical transmission stage).
To qualify for the credit, the equipment must be depreciable (or amortizable) and must meet performance and quality standards prescribed by the regulations. No partial deductions are available, so a broadcaster must complete the construction, reconstruction or erection of the property. If the property is acquired, the radio station must be the first to use it.
Under our tax rules, the cost of the land upon which the broadcasting business sits is not deductible. Fortunately, the improvements made to that land often can qualify for a tax deduction.
Land improvements not specifically included in any other asset class and otherwise depreciable are 15-year property. Examples of land improvements include sidewalks, driveways, curbs, roads, parking lots, canals, waterways, drainage facilities, sewers (but not municipal sewers), wharves and docks, bridges and nonagricultural fences
Regardless of whether your broadcasting operation’s business premises are owned or leased, there are an abundance of tax deductions, credits and unique write-offs available to help offset the cost of remodeling, fixing up or adding to it. The new, but temporary, 15-year write-off for leasehold improvements applies only to improvements placed in service before Jan. 1, 2006. Fortunately, the many other tax credits, deductions and write-offs constitute a more permanent part of our tax laws.
The question is will you – and your broadcasting business – take full advantage of this helping hand provided by Uncle Sam?