by Bill Lomel and Robert L. Brown, CPA
You know about the corporate tax rate change and changes to home and mortgage deductions, but did you know the new federal tax law impacts your commercial roof, too? Now you can expense your commercial roof in the same way you expense your equipment and machinery — that’s a big change. Other changes include how much you can expense and when, and over how long a period of time you can depreciate your roof.
Here’s an overview of four big changes and how they can impact you as a property owner:
1. Commercial roofs are now included in Section 179
Section 179 of the IRS tax code allows you to deduct the full purchase price of qualifying equipment during the same tax year you purchase it — commercial roofs now qualify, too.
Along with non-residential roofs, the new tax law expands Section 179 improvements to include HVAC systems, fire protection systems, alarm systems and security systems. Here is the complete list of qualifying Section 179 deductions for 2018.
2. The Section 179 deduction is doubled
Last year the Section 179 deduction was $500,000. This year it’s $1,000,000. Since your roof is probably one of your building’s largest assets — and one of the costliest to replace — taking the deduction in one year could make a serious impact on your 2018 bottom line. It may also help with:
- Finally fixing or replacing that failing roof
- Investing in a roof that’s reflective and/or reduces power and water bills (such as with TPO, vegetative, solar and other solutions)
- Increasing your property’s value at an opportune time
- Upgrading your property’s appearance
- Attracting new tenants or retaining tenants you already have
- Updating your budgeting strategies to meet short- and long-term goals
Here’s a 2018 Section 179 Tax Deduction CalculatorTM to see how writing off the full amount of your roof improvements in one year can lower the cost of those improvements.
3. The phase-out threshold has increased to $2.5 million
For 2018, the threshold was increased 25% from $2 million to $2.5 million. The phase-out threshold is the point at which a tax credit begins to phase out. This means in 2018 you can take advantage of the $1 million single-year deduction as long as you don’t spend more than $2.5 million on your improvements. If you spend more, every dollar spent over $2.5 million reduces the amount of your 2018 deduction by one dollar as well. So if you spend $3.5 million on Section 179 improvements your entire $1 million deduction is phased out. The goal is for the tax benefit to target small to medium-size businesses only.
Both the $1 million deduction and the $2.5 million phase-out amount will be indexed for inflation after 2018. See complete details about Section 179 from Section179.org.
4. Your roof’s depreciable life has been shortened by about 36%
One of the most frustrating things for commercial property owners has been that their roof needs replacing long before its depreciable life runs out.
The new tax law shortens the commercial roof depreciation schedule from 39 years to 25 years — that’s an enormous difference. And it makes a lot more sense.
Even if you had been doing everything right — had a certified roofing contractor install a high-quality roof with a 25-year warranty and followed best practices for maintaining and repairing your roof — you were still coming up 14 years short when it comes to depreciation. The commercial roofing industry had been working hard to shorten the depreciable life of roofs, and it’s great news that roof life and depreciable life are now in alignment. Now you get to choose between expensing up to $1 million in roofing improvements in a single year or expensing them over 25 years — whichever is right for your situation.
While the new changes can be exciting and can impact property owners in positive ways, there are some things to keep in mind. Be aware that:
- Standard capitalization and depreciation may still be the best way for you to go financially.
- The new tax bill doesn’t reduce the cost of your roof improvements — you still need the capital!
- Construction of a new roof for an expansion of your current property does not qualify as a Section 179 expense. Only replacing, renovating or repairing your existing roof qualifies for the same-year deduction.
- Section 179 can be changed again. If you’re thinking about making improvements to take advantage of the new expensing options, you may want to act soon.
For Sentry Roof, it will be exciting to see how our customers adapt and benefit from this change. We are often heavily involved in advising clients about their options regarding the financials aspects of roof management. Commercial roofs are not cheap to own — by working closely with our clients and having a deep understanding of their roofing systems, goals, priorities, budgets, and short- and long-term objectives, we plan roof management strategies that make the most sense for them. We also offer business services related to buying and selling properties, and have long-standing relationships with financial institutions that work with property owners on their roof-related expenses.
If you have a major re-roofing or roof renovation project that you’d like to discuss, please give us a call. We can talk about what you need and how the new tax law might help you.
Many thanks to Robert L. Brown, CPA, LLC for his assistance with this post. Robert works with Sentry Roof Services providing accounting and advisory services.