Preserving Cash Flow with Strategic Asset Management

Are you looking for effective ways to preserve your company’s cash flow? By strategically managing fixed assets, your business can uncover valuable tax benefits, immediately freeing up cash for future investments. These resources can then be reinvested or used to strengthen overall financial health, enhancing the client’s investment portfolio. In this article, we’ll explore key areas in fixed asset management, such as qualified improvement property (QIP), repairs versus capital expenditures, the phase-out of bonus depreciation, and utilizing statistical sampling to streamline your asset review process. Fixed asset planning involves optimizing how your business depreciates assets for tax purposes. Typically, tax-basis asset management systems are integrated with financial reporting, automatically assigning asset categories, tax lives, and depreciation methods to enhance enterprise asset management. Unfortunately, these systems frequently miss potential tax incentives, becoming outdated as tax regulations or business circumstances evolve, which can jeopardize the security of the client’s investment. Regular fixed asset reviews can significantly enhance tax benefits. Effective fixed asset planning accelerates deductions, lowers tax liabilities, and generates immediate cash savings. For instance, carefully reviewing expenses related to nonresidential buildings—which usually depreciate over 39 years—may allow reclassification to shorter tax lives or even immediate deductions. Realizing these benefits usually requires filing an accounting method change with the IRS. According to Revenue Procedure 2024-23, companies can adopt several automatic accounting method changes without extensive IRS involvement. These changes typically include a Section 481(a) adjustment, capturing cumulative depreciation changes on current returns, thus avoiding amending prior-year tax returns. Businesses can go back as far as their existing tax basis allows to calculate adjustments, even for assets placed in service in closed tax years.

Qualified Improvement Property To Attract Investors

Qualified Improvement Property (QIP) refers to improvements made inside nonresidential buildings. Initially introduced in the Tax Cuts and Jobs Act (TCJA), QIP was intended to qualify for 100% bonus depreciation, attracting institutional investors interested in financial services. However, due to a drafting mistake, QIP was initially assigned a 39-year depreciation period, disqualifying it from bonus depreciation. This error was corrected retroactively by the CARES Act in March 2020, providing a significant advantage to investors. To qualify as QIP (eligible for a 15-year recovery period and bonus depreciation), improvements must be strategically planned by an asset manager.

• Be made to the interior of a nonresidential building by the taxpayer, which can also be seen as an investment in the property’s value.
• Be placed in service after the building’s original service date.
• Exclude enlargements, elevators, escalators, and internal structural frameworks.

Due to initial confusion, many companies overlooked opportunities to classify expenses as QIP between 2018 and 2020. Companies can now review these expenses through a fixed asset lookback study and claim missed deductions via an automatic accounting method change and a Section 481(a) adjustment. Companies that may benefit significantly include:

• Businesses that typically only classify larger, clearly qualifying projects as QIP.
• Companies lacking resources or time to thoroughly identify QIP deductions between year-end and tax filing deadlines.

Remember, QIP eligibility is determined on a dollar-for-dollar basis rather than project-by-project, making detailed reviews critical for maximizing deductions. The tangible property regulations under IRC Section 263(a), finalized in 2014, clarify when costs must be capitalized and depreciated versus deducted immediately. These regulations significantly impacted compliance procedures, yet many businesses haven’t consistently adhered to them. Revisiting fixed asset strategies under these guidelines can reveal substantial tax savings. These regulations, dependent on specific business circumstances, offer limited bright-line tests. Conducting a fixed asset study can help classify more costs as immediate deductions, enhancing tax efficiency. Bonus depreciation under IRC Section 168(k), allowing accelerated depreciation for certain assets, began phasing out in 2023. Under the TCJA, bonus depreciation percentages reduce annually:

• 80% for 2023, a figure that investors should consider when evaluating their financial strategies.
• 60% for 2024
• 40% for 2025
• 20% for 2026
• 0% after 2026

As bonus depreciation diminishes, reviewing properties eligible for accelerated depreciation becomes vital. Businesses should explore opportunities to classify qualifying costs as immediately deductible repairs or maintenance, adapting investment management strategies in response to changing tax regulations. Statistical sampling offers an efficient approach to fixed asset reviews, especially beneficial for companies managing numerous assets. By evaluating a representative asset subset, businesses can more effectively identify tax savings opportunities while maintaining compliance and managing resources efficiently.

Boost Financial and Investment Performance with a Professional Asset Manager

To fully leverage fixed asset opportunities, businesses must compile comprehensive, asset-level tax basis data. A detailed analysis, such as that offered by Cavanaugh & Co, can identify overlooked tax savings, including missed QIP or repair deductions, ensuring businesses maximize their financial performance through strategic asset management. Contact us today to find out how our asset management services can help optimize your cash flow.