This week, we wish you all a fantastic Thanksgiving filled with wonderful food and hopefully the company of family and/or friends as we count the blessings bestowed on us throughout the year.
We all know how much thought goes into preparing for that important day and the welcome break it brings from the stress of everyday life. Once the turkey leftovers are all gone and the guests have gone back home, it’s important to start preparing for another important event: Tax Day. It sounds so far away but always seems to creep up before we know it, so planning your or your client’s 2025 year-end tax strategy early this year is key to avoiding the ultimate pressure of procrastination!
Several significant changes in the tax code affecting the commercial real estate industry were announced as part of the One Big Beautiful Bill Act (OBBBA). Therefore, investors and their tax professionals need to carefully consider how to make the most of this year’s returns. Here are CRS’ recommended tax planning activities to get you ready for this season of change:
Annual Expenditure Review/Planning
A critical step in year-end planning is to discuss 2025 expenditures with your tax professional or your client before January. Understanding expenditures now will help maximize opportunities to properly allocate costs as either expenses or items that must be capitalized.
Information gathering regarding repairs, expansions and renovations should be a current focus. Comparing and planning for commercial real estate purchases in 2025 that will get you the most return on investment is critical for maintaining your profitability. This is especially true for capitalizing on benefits from energy tax incentives, many of which will be expiring after June 30, 2026.
Energy Tax Savings Review
Have you or your client made energy-efficient investments within the last few years, or are you planning your future sustainability strategy? If so, owners (and/or designers and builders of non-profit building projects) can gain potentially tens of thousands in tax savings through the 179D tax deduction for commercial buildings or the 45L tax credit for single or multi-family dwellings. Unfortunately for energy conscious investors, the OBBBA will terminate both incentives beginning in 2026.
While the maximum deduction and credit potential is significant (up to $5.94/sq. ft. or $5,000/unit, respectively), the requirements for being able to take the most advantage of these benefits are complicated, and investors need to be aware of final eligibility deadlines and rules. While the incentive will begin to sunset in July 2026, owners can still gain significant tax savings if they begin or complete their projects soon.
CRS can help educate and guide you in determining what incentives you qualify for based on your situation.
Acquisition or Construction of Real Estate
Have you or your client acquired a commercial property in 2025 or constructed a property that will be placed in service this year? Are you (or do you represent) a property owner/tenant who has undertaken significant interior improvements to a building? If so, consider a cost segregation study to:
- Take advantage of immediate expensing options.
- Maximize 2025 depreciation deductions.
- Reduce income taxes in 2025 and beyond.
- Provide the documentation required by the IRS to obtain these tax benefits.
Luckily for investors, the OBBBA initiated the return of 100% bonus depreciation, which had been set to phase out completely by 2027. More good news that we’ve previously reported on is that the incentive also became permanent. However, timing is everything – 100% bonus is only eligible on buildings acquired and placed in service after January 19, 2025. Those acquired on or before that date are subject to to a much lower bonus rate of 40%, regardless of the placed-in-service date.
This means that owners and tenants need to review their contracts and opening dates carefully to verify which level of bonus is available to be taken on the project. It’s also imperative to have a trusted vendor who uses IRS-preferred methodologies to complete their cost segregation studies and can successfully defend their findings should an audit occur.
Remember that no matter which bonus rate applies, the cost segregation study enables investors to deduct a significant amount of eligible assets upfront, providing a direct boost to cash flow and lowering taxable income in the year of purchase.
Qualified Production Property Review
Another potentially game-changing provision added to the OBBBA concerns Qualified Production Property (QPP), a category of real property eligible for immediate expensing when used in the manufacturing, production or refining of agricultural or chemical products.
To qualify, the property must meet several particular criteria, but only certain parts of the building qualify for the incentive. For more specific details, read our October newsletter on QPP.
If eligible, QPP receives 100% bonus depreciation, allowing the full building construction costs to be deducted in the year it’s placed in service.
The challenge, and the opportunity, lies in identifying, properly allocating and documenting the specific costs in those areas that qualify as QPP.
Section 179 Expensing
Often used in conjunction with bonus depreciation, Section 179 expensing allows businesses to deduct the full purchase price of qualifying equipment and software in the year they are placed into service.
The OBBBA increases the Section 179 deduction from the previous 2025 cap of $1.25 million on qualifying purchases (phasing out when they exceed $3.13 million) to $2.5 million (phasing out when they exceed $4 million).
The updated limits apply to property placed in service after December 31, 2024 and will be adjusted annually for inflation.
Fixed Asset Retirement Studies
Have you or your client renovated or expanded a facility or demolished a structural component of a building?
If so, did you know that the remaining cost basis of the retired components can be written off? CRS can help identify these components and attribute the correct basis for each one as required by the IRS.
Depreciation Schedule Review – Retroactive Studies
It’s important to review depreciation schedules to search for opportunities that could qualify for retroactive cost segregation studies. Retroactive studies typically generate large, current-year depreciation deductions without the need to amend prior tax returns. CRS can help you identify these opportunities, which can be critical to help recoup investment losses. They are most beneficial for properties with more than $750,000 of cost basis capitalized within the last 15 years.
Commercial property owners/investors, tenants and tax professionals should not wait until the last minute to come up with a 2025 tax strategy. Knowing how to take advantage of the latest tax codes and opportunities presented through the OBBBA will be a critical factor in planning future investment opportunities.
We welcome the opportunity to help reduce your tax liability and increase your cash flow, so don’t hesitate to give us a call. Our experts will be happy to help you determine the best plan to get through the complicated 2025 tax season!
