The decision to invest in landscaping goes beyond mere beauty, unlocking potential tax benefits that can improve financial outcomes for businesses and property owners. This blog explores how property owners and businesses can leverage bonus depreciation to substantially offset the costs associated with landscaping improvements.
Key Takeaways:
Bonus depreciation is a valuable tax incentive that allows businesses to immediately deduct a large portion of the cost of eligible assets, rather than spreading the deduction over the asset's useful life through regular depreciation. This accelerated depreciation method, formally known as the additional first-year depreciation deduction, provides an upfront deduction in the year the asset is placed in service.
Traditionally, when a business acquires or develops an asset, the cost is depreciated over its useful life, gradually reducing the company’s taxable income each year. However, with bonus depreciation, a business can deduct a specified percentage of the asset’s cost in the first year, significantly lowering its taxable income for that year and reducing overall tax liability.
The Tax Cuts and Jobs Act of 2017 initially raised bonus depreciation to 100% for qualified new and used property to encourage business investment. However, the rate began phasing down by 20% each year starting in 2023. For 2024, bonus depreciation stands at 60%, allowing businesses to immediately deduct 60% of the cost of qualifying assets, with the remaining 40% depreciated over the asset's regular schedule. The rate will continue to decrease to 40% in 2025, 20% in 2026, and return to 0% in 2027, making strategic planning essential for tax optimization.
For example, under the 60% bonus depreciation rule for 2024, a business purchasing an asset with a 10-year useful life for $150,000 could immediately deduct$90,000 (60% of $150,000) in the year the asset is placed in service. This substantial upfront deduction significantly reduces the company's taxable income right away. The remaining $60,000 ($150,000 - $90,000) would then be depreciated over the asset's 10-year regular schedule, allowing the business to claim an additional $6,000 ($60,000/10 years) in depreciation that same year. By leveraging the 60% bonus depreciation, businesses can maximize their tax savings through a combination of immediate and ongoing deductions.
As a commercial property owner or facility manager,maintaining your exterior spaces is vital to creating a welcoming andattractive environment for your customers and employees. But did you know thatcapitalizing your landscaping costs can provide tax advantages and improve yourfinancial reporting? This blog will explore everything you need to know aboutcapitalizing commercial landscaping costs and how it can benefit your business.
Capitalization is an accounting technique that allows certain expenditures to be recorded as assets rather than expenses on a company’s income statement on the balance sheet. This method more accurately reflects a company’s financial situation by allocating the cost of an expense over the asset’s useful life. By capitalizing expenditures, companies can improve financial metrics such as return on assets (ROA) and return on equity(ROE).
Certain landscaping expenses are considered capitalexpenditures by the IRS and can be capitalized by companies. For instance,capitalizable gardening expenses include installing new plants, hardscaping,and irrigation systems. However, expenses related to ongoing maintenance, suchas mowing, fertilizing, and pruning, are not capitalizable. To capitalizelandscaping expenses, accounting and facility managers must adhere to strictguidelines, such as determining the asset’s useful life and the allowable depreciationexpense.
Expenses that can be capitalized include building walkways, retaining walls, patios, implementing irrigation systems, landscaping design, and adding drainage systems. Any expenditure with a useful life of more than a year and expected to benefit the company long-term can be capitalized, allowing companies to enhance customer experience while spreading the cost over several years and reducing their taxable income.
There are several limitations when considering capitalizing your commercial landscaping costs. The landscaping cost must be significant enough to warrant capitalization, generally if the price is less than $2,500, it should be expensed in the year it was incurred. Additionally, the landscaping must have a useful life of more than one year to be capitalized, and recurring maintenance costs should be expensed. Timing is also crucial; landscaping costs should be capitalized during the construction or renovation of a property, but if incurred after the property is placed in service, they should be expensed.
For individual homeowners, landscaping improvementsare not considered capital expenses and therefore cannot be depreciated.Although it might seem logical to deduct the costs of home improvements fromyour taxes, the regulations don't permit thisdirectly. However, these costs can potentially be subtracted from any profitmade on the sale of your home.
For individual sales, up to $250,000 of profit istax-free, which increases to $500,000 for married couples filing jointly,provided the home was your primary residence for at least two of the previousfive years. Unless your profit significantly exceeds these amounts, the financial impact of these improvements may be minimal.
Conversely, businesses and rental property owners enjoy more flexibility. While routine maintenance counts as a regular expense, capital improvements can indeed be depreciated over their "useful life." This includes tangible upgrades like paved driveways, fencing, and even extensive landscaping, which enhance the property's value and functionality.
Such improvements adhere to a 15-year depreciation schedule, allowing you to deduct a larger portion of the costs annually. Additionally, if you own a property with considerable land, there might be unique opportunities to claim parts of it as agricultural, forested, or conservation are as, which come with specific tax incentives.
While residential property owners may find limited tax relief for landscaping, commercial property owners benefit from greater depreciation opportunities. This serves as a substantial incentive for businessowners to invest in and continually upgrade their properties.
Investing in landscaping goes far beyond mere aesthetic enhancements. Understanding how to capitalize and depreciate landscaping costs can lead to significant tax savings and improved financial reporting for commercial property owners and businesses. Bonus depreciation offers a potent tool for businesses to manage taxable income through substantial immediate deductions. It's important, however, to consult with tax professionals to ensure compliance with IRS rules and to optimize financial strategies based on individual business circumstances. By fully using these opportunities, businesses can improve their property's visual appeal and financial value, making landscaping a smart investment in many ways.
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