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Is It Time for a Cost Segregation Study? & Beware of “Wash Sales” When Selling Securities

Is it time for a cost segregation study?

Because of the economic impact of the COVID-19 crisis, many companies may want to conserve cash and not buy much equipment this year. As a result, you may not be able to claim as many depreciation tax deductions as in the past. However, if your company owns real property, there’s another approach to depreciation to consider: a cost segregation study.

Depreciation basics

Business buildings generally have a 39-year depreciation period (27.5 years for residential rental properties). Typically, companies depreciate a building’s structural components — including walls, windows, HVAC systems, plumbing and wiring — along with the building. Personal property (such as equipment, machinery, furniture and fixtures) is eligible for accelerated depreciation, usually over five or seven years. And land improvements, such as fences, outdoor lighting and parking lots, are depreciable over 15 years.

Often, businesses allocate all or most of their buildings’ acquisition or construction costs to real property, overlooking opportunities to allocate costs to shorter-lived personal property or land improvements. Items that appear to be “part of a building” may in fact be personal property. Examples include removable wall and floor coverings, removable partitions, awnings and canopies, window treatments, signs and decorative lighting.

Pinpointing costs

A cost segregation study combines accounting and engineering techniques to identify building costs that are properly allocable to tangible personal property rather than real property. Although the relative costs and benefits of a cost segregation study will depend on your particular facts and circumstances, it can be a valuable investment.

It may allow you to accelerate depreciation deductions on certain items, thereby reducing taxes and boosting cash flow. And, thanks to the Tax Cuts and Jobs Act, the potential benefits of a cost segregation study are now even greater than they were a few years ago because of enhancements to certain depreciation-related tax breaks.

Worth a look

Cost segregation studies have costs all their own, but the potential long-term tax benefits may make it worth your while to undertake the process. Contact our firm for further details.

Beware of “wash sales” when selling securities

If you’re planning to sell capital assets at a loss to offset gains that have been realized during the year, it’s important to beware of the “wash sale” rule. Under this tax rule, if you sell stock or securities for a loss and buy substantially identical stock shares or securities back within the 30-day period before or after the sale date, the loss can’t be claimed for tax purposes.

The rule

The wash sale rule is designed to prevent taxpayers from benefiting from a loss without parting with ownership in any significant way. Note that the rule applies to a 30-day period before or after the sale date to prevent “buying the stock back” before it’s even sold. (If you participate in any dividend reinvestment plans, the wash sale rule may be inadvertently triggered when dividends are reinvested under the plan, if you’ve separately sold some of the same stock at a loss within the 30-day period.)

Although the loss can’t be claimed on a wash sale, the disallowed amount is added to the cost of the new stock. So, the disallowed amount can be claimed when the new stock is finally disposed of (other than in a wash sale).

An example

Assume you buy 500 shares of XYZ Inc. for $10,000 and sell them on November 5 for $3,000. On November 30, you buy 500 shares of XYZ again for $3,200. Since the shares were “bought back” within 30 days of the sale, the wash sale rule applies. Therefore, you can’t claim a $7,000 loss. Your basis in the new 500 shares is $10,200: the actual cost plus the $7,000 disallowed loss.

If only a portion of the stock sold is bought back, only that portion of the loss is disallowed. So, in the above example, if you’d only bought back 300 of the 500 shares (60%), you would be able to claim 40% of the loss on the sale ($2,800). The remaining $4,200 loss that is disallowed under the wash sale rule would be added to your cost of the 300 shares.

No surprises

The wash sale rule can come as a nasty surprise at tax time. Contact us for assistance.

Archive of Past Monthly Newsletters

Sep 2020 AMT Less “Toothy” But May Still Take A Bite & College Savings Showdown: 529s vs. Roth IRAs
Aug 2020Risks vs. Benefits of Life Insurance Loans & With Glitch Fixed, Consider Business Property Upgrades
Jul 2020 Keeping Up With the Net Operating Loss Rules & Charitable Giving in a Time of Crisis
Jun 2020 Protecting Yourself from Opportunistic Fraud & Can You Qualify for the Payroll Tax Credit?
May 2020 New Break Temporarily Makes Retirement Plan Withdrawals Less Taxing & How Employers Can Get Some Financial Relief with the Retention Tax Credit
Apr 2020 April 2020 – Special COVID-19 Update
Apr 2020 Seniors: Medicare Premiums Could Lower Your Tax Bill & Protect Your Estate with These Two Essential Documents
Mar 2020 Gig Workers, Know Your Tax Responsibilities & The 2019 Gift Tax Return Deadline is Almost Here, Too
Feb 2020 The TCJA Effect: Qualified Residence Interest & Careful Tax Planning Required for Incentive Stock Options
Jan 2020 Do You Know Your Tax Bracket? & Every Business Owner Needs an Exit Strategy
Dec 2019Year-End Tax and Financial To-Do List for Individuals & Pump the Brakes Before Donating That Vehicle to Charity
Nov 2019Act Now to Save 2019 Taxes on Your Investments & Living the Dream of Early Retirement
Oct 2019 Is "Bunching" Medical Expenses Still Feasible in 2019? & Mortgage Matters: To Pay Down or Not To Pay Down
Sep 2019The Tax Cost of Divorce Has Risen for Many & Double Up on Tax Benefits by Donating Appreciated Artwork
Aug 2019Know a Teacher? Tell Them About This Tax Break & Planning for the Net Investment Income Tax
Jul 2019No Surprises: Why You Should Check Your Tax Bracket & Estate Planning Portability Lives on Under The TCJA
Jun 2019Consider the Tax Advantages of Qualified Small Business Stock & Vacation Homes: Do You Understand the Tax Nuances?
May 2019Innocent Spouse Rules Offer Protection Under Some Circumstances & Send Your Kids to Day Camp and You May Get a Tax Break
Apr 2019Business vs Hobby: The Tax Rules Have Changed & Are Income Taxes Taking a Bite Out of Your Trusts?
Mar 2019 Weigh the Tax Impact of Income vs. Growth When Investing & Deducting Charitable Gifts Depends on a Variety of Factors
Feb 2019Multistate Resident? Watch Out for Double Taxation & Fewer Taxpayers to Qualify for Home Office Deduction
Jan 2019 Laying the Groundwork for Your 2018 Tax Return & Installment Sales: A Viable Option for Transferring Assets
Dec 2018Use Capital Losses to Offset Capital Gains & Accelerating Your Property Tax Deduction to Reduce Your Tax Bill
Nov 2018 Taxable vs. Tax-advantaged: Where to Hold Investments & Is Now the Time for Some Life Insurance?
Oct 2018Are You a Member of the Sandwich Generation? & Fourth Quarter Tax Calendar
Sep 2018TCJA Draws a Silver Lining Around the Individual AMT & Study Up on the Tax Advantages of a 529 Savings Plan
Aug 2018Take Note of the Distinctive Features of Roth IRAs & Assessing Your Exposure to the Estate and Gift Tax
Jul 2018 Don't Let the Kiddie Tax Play Costly Games with You & 4 Questions to Ask Before Hiring Household Help
Jun 2018Deducting Home Equity Interest Under the Tax Cuts and Jobs Act & Three Common Types of IRS Tax Penalties
May 2018Get an Early Tax "Refund" by Adjusting Your Withholding & Foreign Accounts Reporting Requirements
Apr 2018Child Credit to Get Even More Valuable & The New Deal on Employee Meals and Entertainment
Mar 2018Dynasty Trusts Are More Valuable Than Ever & Business Owners: Brush Up on Bonus Depreciation
Feb 2018Making 2017 Retirement Plan Contributions in 2018 & When an Elderly Parent Might Qualify as Your Dependent
Jan 2018Highlights of the New Tax Reform Law & Help Prevent Tax Identity Theft By Filing Early
Dec 2017 5 Common Mistakes When Applying For Financial Aid & Ensuring Your Year-End Donations Are Tax-Deductible
Nov 2017Mutual Funds and Taxes & Are Frequent Flyer Miles Ever Taxable?
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