Tax Tips
Accelerated depreciation for building improvements

If your business is planning to make improvements to its physical space this year, you may qualify for accelerated depreciation deductions. Last October’s Emergency Economic Stabilization Act of 2008 (EESA), also known as the “bailout” act, extended accelerated depreciation for leasehold and restaurant improvements through 2009 and also extended this benefit to certain retail properties. Qualifying property can be depreciated over 15 years instead of the usual 39-year recovery period for commercial real estate.

The 15-year recovery period is available for structural or other real-property improvements made to an interior portion of a nonresidential building by a lessor, lessee or sublessee “under or pursuant to a lease.” To qualify:

• The space must be occupied exclusively by the lessee,
  
  
• The building must be more than three years old, and
  
  
• The improvements must be placed in service by the end of 2009.

The tax break isn’t available for space leased to a related party (such as a family member or another company that the lessor controls).

The bailout also extended through 2009 similar tax benefits for improvements to qualified restaurant property and expanded these benefits to qualified retail property. Essentially, this provision allows qualifying restaurant and retail businesses to take advantage of the 15-year recovery period even if their buildings are owner occupied.

Qualified leasehold improvements don’t include any expenditures you make to enlarge the building or change its internal structural framework, structural components benefiting a common area, elevator or escalator. Other limits and exceptions may apply. •

Are you a trader or an investor?

The short answer is, “If you have to ask, you probably aren’t.” People who buy and sell a lot of stock often attempt to classify themselves as traders rather than investors. Traders have several tax advantages, including the ability to deduct losses as ordinary rather than capital losses and fully deduct their investment expenses.

A recent U.S. Tax Court case illustrates how difficult it is to achieve trader status. In Holsinger et al v. Commissioner the court ruled that a couple who set up a trading company and made nearly 700 trades over a two-year period were not traders. As a result, they owed approximately $98,000 in taxes.

The court explained that, to be considered a trader, your trading activity must be substantial and you must try to profit from short-term swings in the market. The couple traded on 63 days one year and 110 days the next. The court concluded that it was “doubtful whether the trades were conducted with the frequency, continuity and regularity indicative of a business.” •

Dipping into retirement savings comes at a high price

In today’s tough economic times, it may be tempting to dip into your IRA or 401(k) account, if your plan allows it. Remember that you’ll have to pay income taxes and, if you’re under age 59¹/₂, penalties on the money withdrawn — though penalties may be waived if you use the funds from your IRA for qualifying expenses, including certain medical, college and housing expenses. It’s also important to consider the loss of tax-deferred growth on the funds you withdraw. Even borrowing against your 401(k) account usually slows the growth of your retirement savings. •