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CPAs Should Urge Commercial Property Owners to File Forms 3115… Despite IRS “Relief”

Posted by Don Warrant on 2/19/15 11:41 AM

Benefits of filing Form 3115 include IRS audit protection and valuable tax savings from prior-year repairs and dispositions.

Revenue_Procedure_2015-20To file Form 3115 or not. That is the question of the week.
 
Our answer: Owners of commercial property should continue to file a Form 3115 with their 2014 tax returns with limited exceptions (see sidebar), even though it may require filing extensions to allow adequate time to complete and file a Form 3115.

Sure… on its face, Rev. Proc. 2015-20 appears to be a reason to celebrate. Small taxpayers can now choose to make changes in accounting methods for tangible property without filing a Form 3115, as long as they use a “cut-off” method (i.e., for tax year 2014 and going forward).
 
Whew! Tax preparers can breathe a huge sigh of relief as a looming mountain of paperwork disappears in a puff of smoke. Right? Not really.
 
Filing a Form 3115 actually provides a number of protections that your client is waiving by taking advantage of this so-called “relief.”
 

  1. IRS examination protection. When taxpayers file Forms 3115, they receive IRS examination protection for their accounting method treatment for all prior tax years. By taking advantage of the exception for small taxpayers, your client waives that protection. For clients who may have aggressively expensed items in prior years under their old methods, that protection is likely worth the cost of preparing the Form 3115 (at most a couple of hours of your time). You still need to perform the work and documentation as to the methods and elections that apply to the 2014 tax year.
  1. Current deductions of previously capitalized items. Your client could be missing out on some taxpayer-friendly provisions within the Tangible Property Regulations if they choose to use the “cut-off” method. Many owners of commercial real estate actually have been fairly conservative in the past with regard to capitalization of costs in prior years. They could have tens or even hundreds of thousands of dollars in remaining tax basis that, under the new unit of property rules, are now eligible for current deductions. Without a method change filing, those deductions are off limits.
  1. Late partial disposition. As we’ve said in prior posts on "late" partial dispositions, taxpayers have a one-time opportunity to recognize partial dispositions of property that occurred in prior years on 2014 tax returns—and only if they file a Form 3115. Your client is waiving this opportunity if they file their return without a Form 3115.
  1. Recognize an unfavorable section 481(a) adjustment over a four-year period. If you have a commercial real estate client who aggressively expensed items in prior years that now must be capitalized and depreciated, then that client will be better off by coming into compliance now and spreading the hit over a four-year period. If the IRS finds those issues upon examination, they will require an immediate increase in income.

Resistant Clients? Have Them Sign a Waiver

What if your client has heard about this so-called good news from the IRS and demands to skip the Form 3115? We recommend that you ask your client to sign a written acknowledgement of the following:

  • They waive IRS exam protection for the item for all prior tax years.
  • They forego any tax benefits associated with a method change for repairs or for dispositions—including the expiring “late” partial disposition election.
  • Filing the return without a Form 3115 is irrevocable once the return is filed.
 
IRS issued Revenue Procedure 2015-20 revising Revenue Procedure 2015-14 Of course, we believe that your commercial real estate clients will see the light when you present all the benefits that can come from digging into their fixed asset and depreciation schedules to uncover tax savings while bringing them into compliance with the Tangible Property Regulations. If you have questions about whether filing Form 3115 is right for your client, contact us to learn how our accounting method change specialists can help.

Tags: commercial real estate, tangible property regulations, Don Warrant, Form 3115, fixed asset, Revenue Procedure 2015-20

And Here’s the Changeup: IRS Eases Transition to New Accounting Method Rev Proc

Posted by Don Warrant on 2/11/15 9:05 AM

Update: Revised revenue procedure means CPAs can continue to use existing method change templates citing Revenue Procedure 2011-14 for 2014 tax returns.

accounting_method_changes-1On Monday, the IRS followed up its tax-season curveball with a changeup. The Service issued a revised version of the revenue procedure issued on Jan. 16 that gives taxpayers and their tax preparers some welcome news with regard to preparing Forms 3115.

The Latest Ruling on Forms 3115

The revision recognizes that some taxpayers may already have prepared a Form 3115, Application for Change in Accounting Method, for their 2014 tax year with the expectation of using the procedures outlined in Rev. Proc. 2011-14. In addition, the existing Form 3115 and its instructions conform to Rev. Proc. 2011-14. A revised Form 3115 and instructions conforming to the procedures outlined in Rev. Proc. 2015-14 is expected sometime later this year.
 
The final word (for now) on these automatic method changes is that if your clients’ tax year-end falls between May 31, 2014 and January 31, 2015, you can (and should) continue to use the procedures outlined in Rev. Proc. 2011-14 rather than new procedures outlined in Rev. Proc. 2015-13.
 
Overview-of-Automatic-Method-Changes-1So rather than taking valuable time to update your firm’s templates for Form 3115 preparation, you can continue to use your existing templates for clients that fall into the tax years identified above. Other than this latest development, our guidance about these new revenue procedures remains largely unchanged—i.e., stay calm and carry on with tangible property compliance efforts.
 
If you are looking for guidance on these new accounting method change procedures, schedule a consultation with CSP360.

Tags: Don Warrant, accounting method changes, Form 3115

IRS Throws Curveball: Changing Procedures for Accounting Method Changes

Posted by Don Warrant on 1/28/15 9:06 AM

Stay calm and carry on with tangible property compliance; expect revised Forms 3115

accounting_method_changesThe IRS issued two new procedures for accounting method changes just as tax season was heating up, throwing a curveball into steps commercial property owners and their CPAs need to take to comply with the new Tangible Property Regulations.
 
Since the announcement on January 16, CSP360 has been inundated with questions about what these two new revenue procedures mean for CPAs’ efforts to get their clients into compliance. Here’s what you need to know about how to keep your clients happy by staying on the right side of the IRS.
 
  1. Continue calculating those 481a adjustments. We are sure that you have been taking our advice to start early on your 263(a) compliance efforts so you have plenty of time to act on tax-saving opportunities such as the soon-to-be-extinct late partial disposition election. The good news is that all of that work will not be for naught! The new revenue procedures do not change the steps required to bring taxpayers into compliance with the tangible property regulations.
  2. Update templates for making method changes. The primary changes in the new revenue procedures have to do with clarification of the rules for taxpayers who are under examination or in appeals, as well as for foreign corporations and partnerships, and a variety of other changes. These changes affect both eligibility for method changes and for 481(a) adjustments. If your firm uses templates to facilitate Form 3115 preparation, then make sure that those templates are updated to reflect all of these changes. If not, then you could overlook a procedure that could result in filing an improper method change—and potentially higher taxable income for your client.
  3. Expect updated Forms 3115. One consequence of the new procedures is that the existing Form 3115 now requires revision. Don’t be surprised if the IRS issues a revised Form 3115 very soon, as well as a second one specifically customized for use by eligible small taxpayers. Given the likelihood of new forms, consider holding off on filing Forms 3115 as long as possible in the event that you may be required to use the new Forms retroactive to filings since January 16, 2015.
  4. Change in procedures for removals. Remember when we told you that method changes for dispositions of property and for removal of that property must be filed, not only on two separate Forms 3115, but in two separate places? The new revenue procedure consolidates all automatic changes and requires that they all be filed with Ogden, Utah. However, the requirement to file two separate Forms 3115 for removal and disposition of property have not changed.

What Happens If You File Improper Forms 3115?

Our take? Don’t panic!
 
Here are the three things described in the new procedures that could happen if you file an improper Form 3115:

  • The director may make adjustments to bring the change into compliance
  • The director may deny the change in method of accounting and place the taxpayer on the proper method
  • The director may deny the change and require the taxpayer to use the old method
However, we believe the IRS will recognize that these new procedures blindsided the CPA community as we are entering our busiest time. For the most part, we expect that they will fix incorrect filings rather than deny a method change due to a procedural error.
 
Overview-of-Automatic-Method-Changes-1Just keep in mind that if that “fix” involves a positive 481(a) adjustment, then your client could be facing higher taxable income, penalties and interest. The new procedure requires the IRS to apply any adjustment to the oldest period covered by the 481(a) adjustment. The best way to keep your clients happy is to stay on the right side of the IRS by seeking out guidance from accounting methods specialists who can interpret these revenue procedures and file the forms appropriately.
 
If you have questions about how the new accounting method change procedures affect you and your commercial real estate clients, contact CSP360.

Tags: Don Warrant, accounting method changes, Form 3115

Navigating Building Demolition Rules to Retain Tax Benefits of Tangible Property Regs

Posted by Don Warrant on 1/20/15 9:04 AM

How to preserve commercial property owners’ depreciation tax deductions.

Commercial_property_ownersEvery self-proclaimed handyman has heard the saying “measure twice and cut once”.
 
Planning is key in all aspects of construction, and no less so in tax planning. If your commercial real estate client is planning a rehabilitation or major maintenance project on a building, careful planning can help preserve valuable depreciation deductions.
 
While the final tangible property regulations allow building owners to write off the remaining adjusted basis of retired building structural components, the final revenue procedure made clear that the rules of IRC Section 280B on demolition costs still apply. Under 280B, the remaining tax basis of a demolished building is added to the basis of non-depreciable land. However, a safe-harbor rule allows the building to continue to be depreciated if 75% or more of the external walls of the building remain in place as internal or external walls and 75% or more of the existing internal structural framework of the building remains in place. Therefore, once demolition removes 25% of the external walls and internal structural framework, the safe harbor no longer applies. When that happens, the client loses all future depreciation deductions related to the remaining basis of the building.
 
Tax Planning when 280B could apply
 
With some up-front planning, you can help your client save those depreciation deductions. Here’s how it works:
 
Your client acquires a building for use in an active trade or business activity. Your client may decide to substantially renovate or completely demolish the building in a future year whereby IRC 280B would apply.
 
In the year of acquisition, you engage CSP360 to perform a cost segregation study to properly classify assets as real or tangible personal property and accelerate depreciation deductions. In the same tax year, you make general asset account (GAA) elections for each class of assets based on the cost segregation study.
 
Under the tangible property regulations, the disposition of assets within a GAA are not recognized unless the taxpayer elects to do so. Therefore IRC 280B doesn’t apply because a disposition isn’t recognized for tax purposes. Your client can continue to depreciate the demolished building without having to capitalize the remaining tax basis to non-depreciable land. In effect, your client will be able to depreciate two buildings: the old building that was demolished and the new building that was constructed. A cost segregation study should be performed on the new building as well.
 
Are You Consulting with the Right Professionals?
 
tangible property regs This is one example where consulting with the right professionals can achieve substantial tax deductions for commercial building owners that you might otherwise miss. Do you have the right team in place that can provide this type of engineering, tax and accounting expertise?
 
Contact CSP360 to learn how our team of tax specialists, engineering professionals and accounting method specialists can help you identify and preserve depreciation deductions for commercial building owners.

Tags: tangible property regulations, Don Warrant

New Year’s Resolution for Landlords: Clean-Up Fixed Asset Schedules and Find Tax Benefits

Posted by Don Warrant on 1/14/15 9:13 AM

Landlords should consider whether tenants have removed portions of building components as a result of tenant improvements.

Fixed_Asset_SchedulesFor many, ringing in a New Year includes a list of resolutions to reorganize and clean out unwanted items. For landlords, cleaning up fixed asset schedules could be the best resolution of all. We have identified a common trend with commercial real estate leases that has benefitted many of our clients.

Partial Disposition for Landlords

Many commercial leases require the tenant to make leasehold improvements to the building. Thanks to the new tangible property regulations, when the tenant replaces a building component, the landlord has an opportunity to abandon the original component and write off the remaining tax basis.
 
For example, say a building tenant replaced the roof in 2013. The new roof would be capitalized on the tenant’s books and will never appear on the landlord’s fixed asset records. But since the old roof is on the landlord’s books, the landlord can file a method change to make a “late” partial disposition election and recognize a loss for the remaining tax basis in the old roof.
 
There is a danger to landlords in overlooking this opportunity to clean up their fixed asset schedules. If the landlord were to sell the building and have assets on the books that have actually been disposed of, that building owner could potentially have a depreciation recapture—which is taxed as ordinary income--on an asset that the client no longer owns. 

Planning Opportunity

How do you identify these opportunities for your commercial real estate clients? Start by reviewing lease agreements to identify those that require the tenant to make improvements to the building.
 
Next, review what improvements have been completed by the tenants that would have resulted in the removal of building components. If a tenant has made an improvement that resulted in the removal of a portion of a building component, then the landlord is eligible to recognize a loss for the remaining tax basis.

Act Now to Claim Deductions for Prior Year Partial Dispositions

Remember that 2014 is the only year in which taxpayers can file a method change to make a “late” partial disposition election and recognize a loss for the remaining tax basis of portions of building components disposed of in prior years. So once the 2014 extension deadline passes, the building owner loses forever the opportunity to write off portions of building components abandoned in prior years.
 
Time is also of the essence going forward. As your client’s tax adviser, you will need to stay on top of tenant improvements each year so that your client can recognize the abandonment of portions of building components in the current and future years on a timely filed original return. The election cannot be made on an amended return.

Give Yourself A Breather

CSP360 Deep Dive Program This clean-up process will take time, since your client may not be readily aware of all the improvements that tenants have made in 2014 and prior years. Therefore, we recommend filing an extension for the 2014 tax year to give yourself more time to identify and recognize partial dispositions of building components.
 
If you have questions about how your commercial landlords can take advantage of this fixed asset clean-up process, contact us to learn how we can help.

Tags: Don Warrant, tax saving opportunities, fixed asset

3 Ways That CPA Firms Are Going to Lose Clients Because of 263(a) Compliance

Posted by Don Warrant on 1/6/15 9:14 AM

Ignore these tax-saving opportunities at your peril!

263(a) Compliance OpportunitiesIt’s a scenario that haunts every CPA. The controller of your largest client returns from a CPE session and says, “I just heard about this great tax-saving strategy. Why didn’t you tell me about it?”

 
This tax season, CPAs who ignore the implications of the tangible property regulations are likely to see that scenario play out over and over again.
 
Here are a few of the ways that we believe CPA firms could potentially lose a client as a result of 263(a) compliance:

  • You were late to the “late partial dispositions” party. The final tangible property regulations allow building owners to take a current deduction on the disposition of any structural component that has not been fully depreciated—including, for a limited time, structural components of buildings that were disposed of in prior years. In fact, after you file your client’s 2014 tax return, the “late partial disposition” for building components disposed of in prior years is gone forever. If you fail to take advantage of this one-time opportunity to accelerate tax deductions into the 2014 tax year, and your client becomes aware of that oversight, perhaps resulting in additional taxes paid in a future year when the property is disposed of, then your client relationship could be jeopardized.
  • You missed de minimis. Imagine your client’s horror if he discovers from an IRS examiner or competitor CPA firm that he could have been writing off all amounts paid to acquire, produce or improve tangible property based on his book capitalization policy but you failed to make that election! CPAs who fail to make their clients aware of this new de minimis safe harbor could jeopardize their client relationship or lose the client to a competitor.
  • You left your small taxpayers exposed. It’s not easy being small. Especially when it comes to complying with complex tax requirements. That’s why the Treasury Department created the small taxpayer safe harbor—to simplify their compliance with the rules regarding building property. Imagine the displeasure of a client who pays for a complete 263(a) repairs vs. improvements study, only to discover that she could have written off all costs related to the building property free and clear simply by making an election!
tangible property regs These scenarios don’t have to play out in your firm. Establish a strategic partnership with tax, accounting methods and engineering specialists who will make sure that you are taking advantage of every opportunity to save your clients money and keep them in compliance with the tangible property regulations. Contact us to learn how CSP360 can help you help your clients.

Tags: cost segregation, 263(a) regulations, tangible property regulations

Telling Clients About Your (GASP!!!!!!) Fees for 263(a) Compliance

Posted by Jennifer Birkemeier on 12/30/14 9:48 AM

Hear that noise? That’s the collective intake of breath from property owners all over the U.S. when they hear estimates for 263(a) compliance... but there may be some good news, too....

Partial Property DispositionYour role as a tax practitioner is to make sure your client has complied with all applicable Internal Revenue Code and Treasury Regulations. And due to the final tangible property regulations, that compliance work will require significantly more time and expense this year than your clients might be expecting—anywhere from tens to hundreds of hours per client.
 
Why is the compliance load so burdensome with this round of regulations? In a word: documentation. In addition to the significant investment of time to understand these complex regulations, the IRS is expecting all taxpayers that own or lease buildings to file at least one Form 3115 for method changes required to comply with the new regulations impacting building property. Otherwise, the taxpayer must show why such method changes weren’t required for their building property. As a tax return preparer, your professional standards for tax return preparation require that you document your client’s compliance with these Regulations to avoid potential preparer penalties.

The Good News: The Spoonful of Sugar That Will Help the Medicine Go Down!

The good news is that most commercial building owners are eligible for method changes and elections that will result in federal tax deductions. And those onerous and time-consuming Forms 3115 will protect those tax deductions in the event the IRS examines your client’s tax return. 
 
So, to fulfill your own professional standards and to demonstrate to building-owning clients the benefits of compliance, tax return preparers should discuss (and clearly document the results of those discussions) each of the following tax-saving opportunities from the tangible property regulations:
 

  1. De minimis. Making this safe harbor election allows your clients to write off amounts paid to acquire, produce or improve tangible property—up to $5,000 per item or invoice for clients that have an Applicable Financial Statement and follow written accounting procedures ($500 for clients without an AFS). In addition to reducing taxable income, this safe harbor will protect amounts expensed in the event of an IRS examination.
  1. Small taxpayer safe harbor. This safe harbor, which is made on a building-by-building basis by eligible small taxpayers, also serves to reduce taxable income and to protect all amounts expensed from IRS examination. The total expenditures for the year for each qualified building may not exceed the lesser of $10,000 or 2% of the original cost of the building. If total expenditures for amounts paid to maintain and improve the building for the year exceed this limitation by any amount, the safe harbor is not applicable for that building.
  2. Dispositions. The “late partial disposition” election, which allows a tax deduction for portions of building property disposed of in prior tax years, is only available for the 2014 tax year. So use it or lose it!
  1. Improvements to tangible property. Many building owners have unknowingly capitalized repairs in prior years that now can be expensed. The identification of capitalized repairs is based on the new unit of property rules, which the regulations have defined as the building and its structural components, and eight specific building systems. A new three-part test is applied to each unit of property to determine whether the amount is a deductible repair.
tangible property regs Failing to identify and make elections and/or method changes that will reduce or eliminate your client’s income tax liability and protect your client’s expenses from IRS examination could have repercussions if examined by the IRS or a competitor. Therefore, best practice is to identify those elections and method changes that are applicable and document your client’s decision—whether or not those elections and method changes will be made. It is likely that such elections and method changes will substantially reduce your client’s costs to comply while you satisfy your professional standards as a tax return preparer.
 
Need help identifying opportunities to lower your clients’ tax bills while also bringing them into compliance? Read our guide to using the tangible property regulations to help clients and gain new business.

Tags: 263(a) regulations, tangible property regulations, Jennifer Birkemeier, Late partial dispositions, Form 3115

Execute on This Triple Play Opportunity Presented By Final Tangible Property Rules

Posted by Jennifer Birkemeier on 12/10/14 11:39 AM

As Senate considers tax extenders bill, learn how to use dispositions and removal costs to enhance tax savings of 179D.

Ever heard the saying that you must give to receive? During this season of giving, CPA firms can help owners of commercial property benefit from this phenomenon when they dispose of tangible property and, as a result, realize lowered tax bills and increased cash flow.

179D Energy Eficiency DispositionsIn fact, this holiday season could be a very happy one indeed if the Senate approves the tax extenders bill (Tax Increase Prevention Act) that passed the House by a wide margin on Dec. 3.

But even if that particular gift is delayed, commercial property owners still have a rare opportunity as a result of the interplay between the 179D federal tax deduction for energy efficient improvements to buildings and the new tangible property regulations. Read more about this triple play in our latest blog post.

Even in the unlikely scenario that Congress fails to extend 179D, your commercial real estate clients still can capture deductions (up to $1.80 per square foot) for energy efficiency improvements placed in service between January 2006 and December 2013.

But why stop there? For every building improvement, the property owner should dispose of old property. And thanks to the final tangible property regulations, those dispositions can result in significant tax savings.

How The Triple Play Works

Consider a hotel that upgraded its lighting to a more energy-efficient system in 2013. How do you turn that expensive renovation into a tax-saving opportunity?

First, you conduct an energy efficiency study and claim a deduction for the new lighting system—for lighting; the deduction is up to $.60 per square foot.

Next, you claim a loss on the disposition of the old lighting and recognize a tax deduction for the remaining basis in that asset. But this is a limited-time opportunity. The Revenue Procedure allows for making a “late partial disposition election” as a change in method of accounting for the 2012, 2013 and 2014 tax years only. So that means that once the property owner’s 2014 tax return is filed, the opportunity to look back to prior year dispositions is gone forever. Ignoring this limited-time opportunity could cost your client tens or even hundreds of thousands of dollars in potential tax deductions.

tangible property regs The final leg of this triple play is the potential opportunity to take a deduction for removal costs. When your client installed new lighting, that property owner most likely also paid to have the old lighting removed and hauled away. Using cost segregation methodology, you can identify removal costs that qualify for current tax deductions.

Recruit the Right Team

Executing a triple play takes skill and precision. Is your firm equipped with the engineering, tax and accounting expertise required to take advantage of these three tax-saving opportunities? Through our CPA Partnership Program, CSP360’s team of tax specialists, engineering professionals and accounting method specialists partners with CPA firms throughout the country. Contact us to learn how we can position you as a tax-slashing hero.

Tags: Section 179D, tangible property regulations, Jennifer Birkemeier, tax saving opportunities, CPA partnership program

Form 3115 Change of Accounting Method Mistakes Could Mean Losing Clients or Censure by the IRS!

Posted by Don Warrant on 12/2/14 9:19 AM

3 deadly pitfalls created by the Tangible Property Regulations and Form 3115.

Here’s a scary scenario: You and your 263(a) strategic partner have done the hard work to identify tax deductions for your clients’ repairs and maintenance or dispositions of tangible property—only to have the IRS come back and disallow those deductions because you made a seemingly innocuous mistake when filing the Form 3115—Application for Change of Accounting Method.

tangible_property_regs-3The hard truth is that most CPA firms are not accounting methods specialists. In fact, until the Tangible Property Regulations were finalized, you may not have had much need to file a Form 3115 with your clients’ tax returns. But suddenly, the IRS expects every property-owning taxpayer to file at least one Form 3115 with 2014 tax returns.

Through a series of revenue procedures, the IRS and Treasury have spelled out the steps they expect taxpayers and their return preparers to follow in order to qualify for automatic method changes. And if you miss one small detail, then:

  • The IRS could deem the method change impermissible, which means that any associated tax deductions would most likely be disallowed. And as a result, your client’s tax bill (along with his ire) will increase.
  • It also means that you, as the return preparer, could be exposed to penalties. In the most egregious cases—if the IRS detects a pattern of improper method changes—you may be contacted by the IRS for a further investigation of your tax practice impacting Form 3115 preparation.

Watch Out for These 3 Pitfalls in Filing Form 3115s

Let’s face it: Revenue procedures are not easy reading for anyone. But our clients rely on us to keep them in compliance with the letter of the law. There is no shortcut for a thorough reading and understanding of these IRS rules, so if your practice does not already have access to accounting methods specialists, then we recommend bringing in that expertise from another source.

Here are just a few of the arcane changes that are all-too-easy to overlook in the voluminous new revenue procedures:

  1. When a cost segregation study and a disposition analysis are conducted on the same building, both method changes should be reported on a single 3115—not two separate forms – to obtain a waiver of scope limitations that could affect the ability to make an automatic method change for the cost segregation.
  2. Method changes for dispositions of property and removal of that property must be filed on two separate Forms 3115. And get this: Those 3115s must be filed in two completely different places—removal costs go to D.C. while dispositions must be filed with Ogden, Utah. Do the two offices ship misfiled returns from one office to the other? Who knows—but do you really want to chance it?
  3. Manufacturers, retailers, and other businesses that are subject to the Uniform Capitalization Rules (UNICAP) must capitalize a portion of costs as year-end inventory and factor that capitalization into the 481(a) adjustment.

Rely on Accounting Methods Specialists

Overview-of-Automatic-Method-ChangesThese seemingly innocuous mistakes—filing one Form 3115 instead of two, or two instead of one—can have serious implications for your clients and for you as the preparer in the form of penalties, back taxes and (scariest of all) censure by the IRS. So cover your bases by seeking guidance from professionals with the experience to interpret these revenue procedures and file the forms appropriately.

Backed by Top 100 firm Freed Maxick, CSP360 has assembled a team of accounting methods specialists who work closely with our cost segregation engineers. So when we partner with CPAs to minimize clients’ taxes through fixed asset reviews, dispositions analysis, cost segregation and energy efficiency studies—we also defend that tax treatment by properly filing Forms 3115 so that those accounting method changes will stand up under IRS review. Contact us to learn how our accounting method change specialists can help you.

Tags: tangible property regulations, accounting method changes

How a Spoonful of Sugar Can Sweeten the Pill of Tangible Asset Compliance

Posted by David Barrett on 11/18/14 9:39 AM

3 messages that will help the medicine go down for clients owning commercial property.

tangible_property_regs-2You know that all of your clients and prospects must be in compliance with the final tangible property regulations by the time you file their 2014 returns. But how do you convince the client or prospect that the value is greater than the cost of compliance—especially for complex cases that can require hundreds of hours of your time?

Mary Poppins knows that a spoonful of sugar helps the medicine go down, and CPAs can use the same idea when communicating with commercial real estate owners about complying with the tangible property regulations.

Following are a few verses from a sweet song of tax minimization that you can use in your marketing materials or your one-on-one conversations with clients and prospects to help the pill of compliance go down easier.

“Do you own commercial property that requires frequent repairs? If so, then you could be eligible for tax savings that could more than offset the cost of compliance with the new tangible property regs.”

Your prospects and clients are likely cringing as they envision all the money, time and effort they will have to spend to bring their accounting into compliance with the tangible property regulations. Imagine their relief when they discover that the tax savings could far exceed the costs of compliance.

Commercial real estate such as office space, hotels, restaurants and manufacturing facilities all require expensive and frequent repairs and updates. Under the new regulations, many of these updates now constitute deductible repairs. And since commercial property owners can go all the way back to 1987 to deduct previously capitalized costs that now qualify as repairs, the total current tax deduction just from repairs and maintenance can easily reach tens or even hundreds of thousands of dollars.

“We have a limited-time opportunity to reap immediate tax benefits for prior year dispositions.”

Sugar seems sweeter when it’s in limited supply. The final dispositions regulations that came out this summer put an official time limit on recognizing a loss for prior year dispositions of structural components, and that deadline is December 31, 2014. While taxpayers will continue to be able to claim a loss on the disposition of a portion of an asset when the disposition occurred in the current tax year, the opportunity to go back to prior years to take deductions for dispositions will disappear forever after the 2014 filing season. Communicating this limited-time opportunity tends to make clients and prospects much more inclined to start the compliance process as early as possible to avoid losing out on that incentive.

“We could uncover opportunities to slash your tax bill through accelerated depreciation deductions while bringing you into compliance.”

Who doesn’t like getting two for one? A cost segregation that is conducted in conjunction with the 263(a) repair and maintenance review can deliver a sweet combination of current deductions, accelerated depreciation, and regulatory compliance. While a cost segregation study does not bring clients into compliance with the tangible asset regulations, the study can accelerate depreciation of building acquisition and improvement costs and segregate the cost of the eight building systems for purposes of applying the new improvement rules and future dispositions. So now is an ideal time to evaluate whether the client has property that would qualify for accelerated depreciation.

tangible property regs While these messages certainly sweeten the pill of compliance, your success will depend on being able to back those sweet words up with the tax and engineering expertise required to recognize these opportunities and make the required accounting method changes.

Contact CSP360 to find out how our engineering, tax and accounting methods specialists can partner with your firm to sweeten the pill of tangible property regulation compliance for your clients and prospects who own commercial real estate.

Tags: tangible property regulations, David Barrett, dispositions of tangible assets

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