Examination of IRS data demonstrates the importance of various depreciation deductions for the construction and real estate sectors. These rules include the Section 179 small business expensing option, bonus depreciation, and normal tax depreciation. The data also illustrate what classes of property are most common, including the 5-year class for construction equipment and apartment property. This information is useful for the industry to consider as discussions of possible business tax reform take place during 2015. Some tax reform plans would increase the use of expensing, while others would extend depreciation periods, in some cases significantly.
Claiming deductions for the depreciation of business assets is an important part of most enterprises’ income tax calculation. Tax law permits deductions that allow recovery of the cost of tangible property used for business purposes. These deductions reflect an allowance for the wear and tear of the property. Depreciation deductions also encourage reinvestment into older residential units.
IRS tax data allow us to examine the use of these deductions by class of property and business sector. There are some important limitations however. First, the data examined in this post are limited to businesses organized as C Corporations. Thus, the data do not reflect businesses organized as pass-through entities, such as S Corporations and LLCs, which constitute the majority of real estate-related firms. Nonetheless, this smaller set of data can be viewed as a sample of the sector, with a bias toward larger businesses that organize as C Corporations.