Segregation-Services
Radius-blog-header

5 Questions to Uncover a 263(a) Opportunity

Posted by Don Warrant on 8/26/14 9:21 AM

Clients with $500,000 or more of capitalized improvements, old assets on the books are prime prospects for tax savings.

263(a)As your clients’ trusted advisor, you are constantly searching for opportunities to lower your clients’ tax bills while keeping them in compliance with IRS Regulations.

A fixed asset review is an ideal way to accomplish all of the above. We discussed the benefits of a mid-year fixed asset review in a previous post. But how do you identify those clients that represent the greatest opportunities to realize tax savings while complying with 263(a)? Here are five questions you should be asking.

  1. Does the client own properties that require frequent or expensive repairs? Hotels, restaurants, commercial office buildings and retail establishments all must keep the property in good condition to attract clients and customers. Manufacturing and distribution facilities require expensive repairs to keep a unit of property in efficient operating condition. These are exactly the kinds of clients and prospects that have costs that are likely to qualify as deductible repairs.
  2. Does the client have more than $500,000 of capitalized improvements on the books? A commercial property owner can look back all the way to 1987 for capitalized costs so it’s not hard to reach that number. By proactively reviewing previously capitalized costs, you can demonstrate your value by identifying costs that now qualify as current tax deductions. And by performing that review now, you can present your client with the option of taking those deductions on the 2013 tax return or saving them to offset 2014 taxable income.
  3. Is the client depreciating old windows or roofs? The proposed regulations allow taxpayers to claim a tax deduction for the retirement of structural components of buildings—or any portion of a structural component. The clock is ticking on your ability to make this “late partial disposition election” for assets disposed of in prior years. The election is currently available only for the 2013 tax year. While the final regulations (which are yet to be released) are expected to extend the election to 2014, cover your bases by cleaning up property owners’ depreciation records now.
  4. Could your client benefit from the de minimis safe harbor? This safe harbor allows taxpayers to write off any amounts paid to acquire, produce or improve tangible property that are less than a certain threshold. For taxpayers that have an Applicable Financial Statement (AFS) and follow written accounting procedures, that threshold is $5,000 per item or invoice; for taxpayers without an AFS, the threshold is $500 per item or invoice. Because the final regs removed the ceiling on this election, your clients and prospects now have a significantly greater opportunity to shield these tax deductions from IRS scrutiny.
  5. Has the client purchased, constructed or renovated a building with a cost basis of at least $1 million? Compliance with the tangible property regulations is mandatory, but if you can find opportunities to accelerate depreciation deductions at the same time utilizing a cost segregation study—that’s just gravy!

If you’re looking for ways to increase your clients’ cash flow while putting them into compliance with 263(a), CSP360 can help. Sign up to take a Deep Dive and find out how.

Tags: commercial real estate, 263(a) regulations, Don Warrant, tax saving opportunities

Act NOW on 179D Opportunities for Commercial Real Estate Owners

Posted by Don Warrant on 8/19/14 9:16 AM

Tax deductions for energy efficient upgrades plus dispositions of abandoned assets can add up to big tax savings.

tax_savingSo what ever happened to the EXPIRE bill—the one that would have extended the Section 179D Energy Efficient Commercial Building Tax Deduction through the end of 2015 and boosted the whole-building deduction to $3 per square foot? Sadly, it is mired in political quicksand, and the chances of any extender bill making its way through Congress before the November elections are about as good as a snowball’s chance in…well, you know.

But that doesn’t mean you should stop talking to your property-owning clients about 179D. In fact, now is an ideal time for your commercial property owners to capture deductions for past energy efficiency improvements made between 2006 and 2013. If your clients own hotels, restaurants, apartment buildings, manufacturing or distribution facilities, or other properties that require upgrades to improve energy efficiency, don’t forget about this valuable tax deduction.

263(a) Reviews Can Turn Up 179D Opportunities

As your firm is conducting its review of 263(a) repair vs. improvement costs, take some time to evaluate any lights, HVAC systems and exterior improvements that were performed between 2006 and 2013 and meet the criteria of the Energy Policy Act of 2005. An energy study conducted on those efficiency improvements could qualify the taxpayer for up to $1.80 per square foot.

What About Those Old Fixtures?

There is another potential tax-saving opportunity that could end up being even more valuable than the 179D deduction. An abandonment study conducted on the old lights or HVAC system that the client pulled out could more than double the size of the tax deduction that is available to offset either 2013 or 2014 taxable income.

For example, consider a hotel owner that spent $100,000 on a new lighting system for the 50,000 square foot building. Whereas the 179D deduction would be $30,000 (50,000 sq ft x $0.60), an abandonment study on the old lighting system could realize an additional deduction of about $60,000. That total deduction of $90,000 is a sure way to put a smile on that client’s face.

Of course, sometimes the best bang for your client’s buck will come as a result of expensing the cost as a repair, rather than going through the extra expense and effort of bringing in a qualified engineer to certify the property. Making the determination of how to treat building related expenditures requires deep expertise in these engineered tax solutions. CSP360 has the experience and knowledge you need to delight your commercial real estate clients with tax-minimization opportunities.

Contact us to find out how we can partner with you to spot opportunities in your client base to take advantage of 179D deductions or other tax-saving strategies.

Tags: commercial real estate, Section 179D, 263(a) repair and maintenance review, Don Warrant

What Your Commercial Real Estate Clients Need to Know About Unit of Property

Posted by Don Warrant on 8/12/14 9:07 AM

New rules provide limited time opportunity to take current tax deductions for “late” partial dispositions.

By now, you should have a pretty good idea about the tax-saving opportunities provided by the final tangible property regulations for your clients that own commercial property. At the root of many of those opportunities is the fact that, for the first time, the IRS and Treasury have provided regulatory guidance that dictates how a unit of property (UOP) is defined.

The basic rule is that a UOP consists of all components that are functionally interdependent. For example, a forklift needs its battery to operate, so the forklift is the UOP and the battery is a component of the UOP. Conversely, a printer can work independently from a computer and so is considered a separate UOP. This definition of UOP is the foundation for the determination of whether an expense is a deductible repair or a capitalized improvement. In general, the smaller the UOP, the more likely the taxpayer must capitalize the cost incurred.

However, as with all tax law, the devil is in the details.

The Good News About Buildings

The final tangible property regulations include special rules for buildings. Instead of treating the entire building as a UOP, the rules state that the building and its structural components are a single UOP, while each of eight defined building systems is a separate UOP.

tangible_property_rulesBut there is good news here: Most of your clients have probably overcapitalized their expenditures, because they were following their book capitalization policy. While that may have made sense in the past, the final tangible property regulations require taxpayers to apply the new UOP definition. Applying the three-part improvement test to each UOP, while time-consuming, will likely result in significant opportunity to reclassify previously capitalized expenses as deductible repairs. And that’s what clients really like to hear!

Limited Time Opportunity to Write Off Old Components

The tangible property regulations provide another gift to building owners. While they are not yet final, new proposed regulations allow taxpayers to make an election to dispose of a structural component or a portion of a structural component. That means that those old roofs that are still on your clients’ books that have not been fully depreciated can now be swept away with one 481(a) adjustment. Most important to your clients, the remaining basis in all those old roofs is now currently deductible.

This opportunity to make the partial disposition election for previously disposed assets might be a once in a lifetime opportunity. As of right now, partial disposition elections are only available for TY13. While the final regulations (expected to come out in the Fall) might extend the partial disposition election for one more year, don’t take that chance. Make sure your clients know that they have the opportunity to tidy up their fixed asset accounts—and clean up in tax savings.

Cost Segregation Expertise Needed

What your commercial real estate clients really need to know is that there is a very important first step before they can make a partial disposition election or take current deductions for repairs that were previously capitalized. That step is a segregation of the building systems conducted by a qualified cost segregation specialist.

Properly classifying assets within each of the eight building systems, as well as identifying the original cost basis for previously disposed property, including removal costs, requires construction and engineering knowledge. If your firm does not have these capabilities in-house, your clients need to know that you have a strategic partnership with a provider of engineered tax solutions.

Contact us to find out how CSP360 can help you identify tax-saving opportunities while bringing your clients into compliance with the tangible property regulations.

Tags: commercial real estate, Don Warrant, Unit of Property

You Blew It! 3 Ways CPA Firms Miss Out On Cost Segregation Sales

Posted by Don Warrant on 8/5/14 9:08 AM

Open your eyes to opportunities for accelerated depreciation during estate planning and like-kind exchanges.

angrySo you think you’re capturing all the cost segregation opportunities within your commercial real estate client base. We think there are a few you probably missed.

Sure…anytime a client buys or builds a new building, you’re bringing in your cost segregation strategic partner to segregate those costs. Those cost seg studies are realizing accelerated depreciation deductions for your clients and boosting your firm’s bottom line.

What if we told you that you could be realizing even greater benefits for your clients and your firm? Here, we share three of the most common blind spots CPAs have when it comes to cost segregation—and how to open your eyes to even greater tax-minimization opportunities.

Hiding in Plain Sight

Have you won any clients in recent years that already own commercial buildings? Of course, the answer is yes. But were you so wrapped up in the details of winning the client’s tax compliance, accounting and audit that you forgot about the wealth of engineering-based opportunities that could make their eyes light up?

To efficiently uncover these opportunities, take a Deep Dive through your tax software, creating a list of clients who own real property with a value of at least $1 million. You can easily identify those properties that have not already had a cost segregation study conducted on them because they will be classified as 39-year property rather than being segregated between 5-, 7-, 15- and 39-year property.

Step-Up to Accelerated Depreciation Deductions

So your client is about to inherit a commercial building. After you were done congratulating yourself on the solid estate planning work that ensured Junior wouldn’t be facing a gargantuan estate tax bill, did you consider the huge income tax bill he would face when rental income started to flow?

The transfer of property from one family member to another represents a golden opportunity to accelerate depreciation deductions by performing a cost segregation study on the step-up in basis. Basically, the portion of the step-up in basis that is allocated to real property is depreciated as if it were new property at the time the taxpayer receives the interest, and a cost segregation study can be conducted on that portion.

There is no better time for Junior to come into some accelerated deductions than when he is inheriting property with step-up in tax basis. Those deductions will reduce his taxable income just when he’s getting hit with increased property taxes on a significantly higher property value.

Joined At the Hip: 1031 Exchange and Cost Seg

With the commercial real estate market heating up—especially in high-end markets—1031 exchanges are once again becoming popular tax-deferral strategies. In many cases, your clients are trading up to bigger and better properties to generate even more rental income. Along with that increased income comes markedly higher taxes. But by segregating the building costs into classes that qualify for shorter depreciable lives, you could significantly mitigate that tax increase, freeing up cash that can be used to purchase more or better real estate.

But beware! Because of the precedent set by the Peco Foods, Inc. v. Commissioner case, any purchase price allocation agreed to in writing at the time of the transaction will likely be binding and could negate or significantly limit the opportunity to accelerate depreciation deductions through cost segregation. The lesson here is that timing is critical. If possible, seek to perform the cost segregation prior to the purchase.

Now that your eyes are wide open about the ways you are currently blowing cost segregation sales opportunities, let CSP360 help you become a tax-slashing hero to your property owning clients. Contact us to learn more about how we can help you grow your commercial real estate niche through cost segregation and other engineering-based tax solutions.

Tags: cost segregation, Don Warrant

Low-Hanging Fruit: 3 Tangible Asset Safe Harbors That Can Save Your Clients Money

Posted by Don Warrant on 7/29/14 9:44 AM

Taxpayer-friendly safe harbors are easy ways to delight your clients!

tangible asset safe harborsAre you so busy solving complex tax problems that you miss low-hanging fruit right in front of your nose? A number of expanded safe harbors under the new tangible asset regulations represent some simple ways to increase tax savings while achieving compliance—especially for your smaller owners of residential and commercial real estate.

Before you move on to higher-value opportunities for tax minimization, take a look at these three opportunities to save your clients taxes while protecting them from the taxman.

Don’t Miss the De Minimis Safe Harbor Election

Almost every client can benefit from taking the de minimis safe harbor, which now is applied at the invoice or item level (instead of in aggregate). The final tangible asset regulations also removed the ceiling on the de minimis safe harbor election.

Here are the facts: Any taxpayer with an applicable financial statement (AFS) and written accounting procedures that it follows may deduct up to $5,000 per item or invoice for amounts paid to acquire, produce or improve tangible property—without limit. The final regs also allow clients without an AFS to deduct amounts paid up to $500 per invoice or item, if the taxpayer has accounting procedures that it follows and treats those expenses accordingly. (Note that the accounting procedures for these smaller taxpayers do not have to be written.)

The removal of the ceiling and expansion to include clients without an AFS opens up significant opportunities for you to delight your clients with increased tax deductions. And taking refuge under this safe harbor provides you and the taxpayer with a layer of protection if the IRS comes calling.

More Opportunities to Deduct Materials and Supplies

Every commercial property owner has materials and supplies, and now they can deduct even more of those routine items.

The facts: The final tangible property regulations increased the limit for treating an item as a material or supply to $200 (up from $100 under the temporary regs), which means those espresso makers and deluxe nameplates are now fair game. The final regs also retained the 12-month rule, which says that an item with an economic useful life of 12 months of less can be deducted.

The result? Even more tax-minimization opportunities to delight your clients!

Shield Your Small Taxpayers

We all have those clients with just one or two small rental properties. The small taxpayer safe harbor was designed just for these clients, shielding them from having to capitalize costs paid or incurred for repair, maintenance or improvement of building property.

The facts: Owners of buildings with an unadjusted basis of $1 million or less and who generate average annual gross revenue of $10 million or less can deduct any costs paid or incurred for the repair, maintenance or improvement of building property—up to $10,000 or 2% of the building’s unadjusted basis, whichever is less.

Because this election is taken on a building-by-building basis, it represents significant flexibility for commercial or residential real estate owners with multiple smaller properties—which means more ways to reduce taxable income and increase cash flow. The upshot is that if you have these Schedule E property-owners on your client list, the small taxpayer safe harbor will save them money and protect both of you in the event of an IRS audit.

These expanded safe harbors are the tax regulators’ way of shielding taxpayers (especially small businesses) from the hardships that the tangible property regulations might otherwise impose on them. Make sure that you are looking out for your clients’ best interests by taking advantage of every opportunity to reduce their taxable income and protect them in the event of an audit.

CSP360 can help you delight your real estate clients by finding opportunities to save them money while bringing them into compliance with the tangible property regulations. Contact us to talk about how we can partner to delight your clients through services such as fixed asset reviews and capitalization vs. expense consulting.

Tags: cost segregation, New Tangible Asset Regs

Mid-Year Fixed Asset Reviews Make Tax Time Smoother, More Profitable For Clients

Posted by Don Warrant on 7/22/14 9:16 AM

Don’t wait to find tax savings opportunities that will delight your commercial property owning client.

Mid-Year Fixed Asset ReviewWith the 2013 tax season fresh in your memory—or ongoing, as you continue to prepare extended returns—you may not want to think about the 2014 tax season just yet.

But when it comes to finding opportunities to get tax savings or advantages from the new tangible property regulations, CPAs who wait until next spring to review their clients’ fixed asset accounting methods could find their client base poached by competitors who beat them to the punch.

Any time you invest now in 263(a) tax planning will pay big dividends when spring rolls around in the form a smoother, more efficient process for all involved, and even more importantly, the potential for a HUGE check from Uncle Sam for your client.

Now is the time to conduct a mid-year review of your property-owning clients’ fixed asset and depreciation schedules. By investing the time in that review now, you will:

  • Clean up depreciation and fixed asset accounts by adopting new accounting methods and procedures.
  • Identify previously capitalized costs that can now be classified as repairs and eligible to be deducted
  • Make sure clients are following the correct accounting methods and recording fixed assets in accordance with the new regulations and their own capitalization policy—and hence are able to support those current deductions.
  • Present your clients with the opportunity to realize those tax savings on either the extended 2013 return or the 2014 tax return.

Given the new unit of property definitions contained in the tangible property rules, your commercial real estate owning clients are especially likely to require a number of accounting method changes. But these regulations will affect almost every client in one way or another; in fact, Treasury is expecting at least one Form 3115 and at least one election with every 2014 tax return.

Here are 4 steps you can take to facilitate this invaluable review and make your clients happy now.

1. Stratify your clients between small, medium and large.

Whereas your smaller clients might own one commercial property that requires a single accounting method change and an election or two, the large clients are those with multiple commercial properties (such as hotel or office complex owners) who will require a full-blown multi-phase work plan that addresses each area of the regulations.

2. Start with the big fish.

These are the clients who represent the greatest opportunities to realize tax savings—and demonstrate your value. Did a hotel owner replace HVAC units in multiple properties this spring? Did a manufacturer replace expensive batteries in multiple forklifts? Did the owner of an office complex replace a roof? These big-ticket items, which many commercial property owners capitalized in the past, now are likely to qualify as deductible repairs.

3. Create templates and checklists to facilitate compliance.

This is the step that is going to streamline the time you spend on your smaller and medium-sized clients so that you can invest more time with the big fish. There are likely a number of method changes and elections that are applicable to almost all of your clients. For example, most clients will require accounting method changes due to overcapitalization, and many will require method changes for materials and supplies. Or, perhaps you have a number of clients who will adopt the safe harbor for routine maintenance. Prepare these templates now, and you will be significantly closer to identifying tax-saving opportunities once you receive each client’s year-to-date fixed asset schedule.

4. Turbocharge tax savings.

Identifying deductible repairs that were previously capitalized is just the tip of the iceberg when it comes to a commercial property owner’s potential tax savings. By performing a cost segregation study to assign costs to the major structural component and each of the newly defined building systems, those clients could uncover a plethora of opportunities to accelerate depreciation.

Tapping into the engineering expertise of a qualified cost segregation/263(a) specialists is critical to identify costs that kept the building in normal operating condition (as opposed to those costs that improved the UOP). A review of past years’ cost segregation studies may also reveal a number of opportunities to take current deductions for retired assets, including dispositions of leasehold improvement property.

When it comes to uncovering tax-saving opportunities by reviewing your clients’ fixed asset accounting methods, it’s best not to wait until Uncle Sam is breathing down your neck. If you are looking for guidance on conducting a mid-year fixed asset review, contact us to find out how we can help you grow your commercial real estate niche through our CPA Partnership Program.

Tags: commercial real estate, tangible property regulations, Don Warrant, tax savings from repairs vs capitalization

How to Explain the Tangible Property Accounting Method Changes to Your Clients…and See Them Smile

Posted by Don Warrant on 7/16/14 9:44 AM

Quick Answer: Tell them about the tax savings that will more than offset the cost of compliance.

Tangible_PropertyBy now, your clients with commercial real estate know that there are new regulations about how they must account for tangible property. You’ve explained the new regs to them, sent them e-alerts, maybe even hosted a webinar on the topic.

So why is it, when you propose a fixed asset review to bring your client’s accounting methods into line with the tangible property regulations, you are met with blank stares and noncommittal hedging?

Maybe you’re sending the wrong message. As they say in newspaper writing, don’t bury the lead – tell them a story about tax savings instead of a miserable tale of compliance.

Let’s face it: while a few clients truly are motivated by the “stick” of potential penalties for noncompliance, most clients will be much more enthusiastic when they see the “carrot” of tax savings.

Don’t Wait for the Client to Give you the OK

Go ahead and review those fixed asset schedules and identify those repairs that they were capitalizing. While you’re at it, bring in a cost segregation/263(a) specialist (like CSP360) who has the engineering background to identify opportunities to accelerate depreciation on building systems, dispose of abandoned property or perform energy efficiency studies. When you lead the client discussion showing these tax-saving opportunities, we’re pretty sure that you’ll see smiles instead of frowns or blank stares.

Dealing with Client Resistance

Of course, you still will likely have some clients who resist spending the time and money to change their fixed asset and depreciation schedules. Here are a few tips about how to address some of the most common sources of pushback from clients about why they must deal with these pesky accounting method changes:

“Why do I have to do this?”

The short answer is: The federal government says so. The Treasury has indicated that it expects every taxpayer to file at least one Form 3115.

“But our accounting methods already line up with the final tangible property regulations.”

First of all, how can you be 100% in compliance with regulations that didn’t exist previously? At the very least, almost every client will require method changes for repairs and maintenance or materials and supplies. But even assuming that your client truly is in compliance, Treasury still expects to see at least one Form 3115 on every 2014 return, showing what steps you took to comply with the rules.

“What’s the worst that could happen if we don’t change our accounting methods?”

Well, the IRS could decide that the client filed an incomplete tax return and could assess penalties, plus interest on any unpaid taxes. Also, you will be required to include Form 8275-R with the return to show that you do intend to comply with the regs in the future. Not only is this a short-term solution (you can’t do this two years in a row), it also can serve as a red flag for the IRS to put your client in queue for an audit or other form of review. Remember that compliance examinations regarding tangible property accounting methods will commence with the 2014 tax year.

“OK, I get it. We need to comply. What do I have to do?”

Here’s your opportunity to show your clients that you are a proactive tax advisor looking out for their best interests. You have already reviewed their prior years’ capitalized costs, so you are able to present them with prequalified tax deductions and give them the option of taking these deductions on their extended 2013 return or the 2014 return. Because the costs of compliance will likely be offset by those tax savings, your client will now be whole-heartedly on board with making those changes.

Get More Help

Looking for a comprehensive plan to bring your clients into compliance—while also uncovering numerous tax-saving opportunities? Contact us to talk about partnering to delight your clients with engineering-based tax solutions and services like cost segregation and 263(a) analyses.

Tags: tangible property regulations, Don Warrant

Get Happy: How Tangible Property Regs Make Commercial Real Estate Owners Smile

Posted by Don Warrant on 7/2/14 9:27 AM

Routine maintenance and disposition rules put cash in property owners’ pockets.

tangible_property_regsWhen you’re telling your commercial real estate clients about the new tangible property regulations, do they start singing that catchy Pharrell Williams song, Happy? Well, they should. Here are just a few reasons why.

Routine Maintenance Safe Harbor—Like Christmas in July

Because the final tangible property regulations expand the routine maintenance safe harbor to building property, a number of expenses that previously had to be capitalized now qualify as current deductions.

Tenant improvements are the perfect example. Say your client owns a number of office buildings and has been capitalizing tenant improvements for years. These expenses likely now qualify for current expensing, and a 263(a) repair and maintenance review could turn up a goldmine of tax deductions, potentially going all the way back to 1987.

Tidiness Has Its Benefits

Pharrell may “feel like a room without a roof,” but most commercial property owners have too many roofs—at least on their books.

Now, the tangible property regulations allow all of those extra roofs to be swept off the client’s fixed asset schedule in a single 481(a) adjustment—resulting in a big reduction in taxable income in the current year. Whereas historically the roof was considered a structural component of a building and could not be disposed of separately, the new definitions of UOP allow taxpayers to make an election to dispose of a structural component or a portion thereof.

A Cumulative Effect

We find that commercial property owners with at least $500,000 in capitalized improvements have significant potential to benefit from a review of their fixed asset schedules to identify repair and maintenance activities and opportunities for partial dispositions, while also bringing them into compliance with the tangible property regs.

Since taxpayers can look back all the way to 1987 when calculating the 481(a) adjustment, the potential tax savings from current expensing of previously capitalized expenses can amount to hundreds of thousands or even millions in tax deductions. That huge reduction in taxable income—which they can choose to take on extended 2013 returns or 2014 returns—is sure to put a smile on your client’s face.

CSP360 can help you delight your commercial real estate clients with lowered tax bills and greater cash flow. Let us show you. Sign up to take a Deep Dive into the CSP360 process.

Tags: tangible property regulations, Don Warrant, dispositions of tangible assets

CPA Firm Growth Opportunity: Real Estate, Cost Segregation Markets Heat Up

Posted by David Barrett on 6/12/14 9:07 AM

Higher percentage of Top 100 accounting firms see revenue growth from cost seg services.

cost_segregation-1Accounting Today Top 100 firms are realizing the top-line benefits of offering cost segregation services. Is it time for your firm to explore this opportunity to grow revenues and delight clients and prospects?

In the 2014 survey, nearly half of responding firms saw increased revenue from cost segregation, up from roughly 40 percent of firms in each of the past two years’ surveys.

Correspondingly, industries that have the most potential to benefit from cost segregation studies – real estate , construction,and manufacturing - are now among the top niche practice areas. That’s great news for firms looking for more growth via engineered tax opportunities.

  • Nearly 80 percent of 2014 Top 100 firms saw increased business from real estate clients, bumping the niche to third on the list of top client segments, up from fifth in 2013.
  • Construction moved up 14 percentage points to 66 percent of responding firms, putting it sixth on the list of top client categories, up from eight in 2013.
  • Manufacturing businesses continue to drive growth for the largest percentage of responding firms, with just over 80 percent saying that their firm is increasing business within that industry.

What’s driving the trend?

A confluence of factors is driving the opportunity for new revenue for CPA firms via cost segregation.

First, the final tangible property regulations have turbocharged the value of a cost segregation study. By combining a cost seg study with a 263(a) repair and maintenance review, clients can potentially double their tax savings. That’s a great story to bring to clients and prospects!

Are you aware that clients for whom your firm has performed a cost segregation in the past are ideal candidates for a 263(a) review? Since a portion of the heavy lifting was already completed during the initial cost seg study, the client will see a lower overall cost of 263(a) compliance.

Second, the value of commercial real estate is beginning to recover. As wealthy individuals and businesses increasingly look to acquire and improve commercial properties, CPA firms that can demonstrate their ability to lower those property owners’ tax bills will maintain and build their competitive advantage.

Open the door with commercial real estate owners

Cost segregation provides the perfect door opener with growth-oriented business owners. And once that door is open, you have easier access to additional corporate and personal tax services, or even the annual audit.

Think about it. Once you’ve demonstrated your firm’s ability to deliver tens or even hundreds of thousands of dollars in tax savings through cost segregation and tangible property reviews, clients are likely to be receptive to other tax-minimization opportunities, from 179D to location based credits and incentives.

Recognizing hot trends is one thing. Being in a position to take advantage of those trends requires access to the right expertise and tools. Learn more about the 5 Key Lessons for Integrating Cost Seg Studies into Your Firm’s New Business Program.

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

Tangible Property Rules on Accounting Method Change 184: Make Sure Your Clients Capture ALL the Deductions They Have Coming to Them (Part 3)

Posted by Jennifer Birkemeier on 5/23/14 9:09 AM

A little bit DOES NOT go a long way when it comes to applying rules to expense or depreciate tangible assets.

We all pick and choose the rules we want to follow. Generally, we’re law-abiding citizens, but we all have a certain stretch of road where we can justify going just a little bit (or a lot) faster than the posted speed limit. As reasonable as your excuses for noncompliance may be, your local law enforcement officer is completely within his rights to ticket you.

The same goes for the IRS and the U.S. Department of the Treasury. Representatives from the Treasury Department have confirmed that in order to comply with the tangible property regulations beginning with the 2014 tax year, taxpayers cannot pick and choose which sections of the regulations they want to adopt. Non-compliance or only addressing the favorable method changes can result in penalties imposed upon both taxpayers and return preparers.

By dotting all your i’s and crossing all your t’s when keeping commercial property owning clients in compliance with these new regs, your CPA firm will be better able to identify (and defend) your clients’ current deductions.

The rules

The Treasury Department expects every taxpayer with tangible property to file at least one Form 3115 under accounting method change 184 to address each of the following:

  • Change in defining the unit of property (UOP)
  • Current deduction of tangible property repairs that were previously capitalized
  • Capitalization of improvements to tangible property that were previously expensed

The taxpayer also must compute a cumulative 481(a) adjustment, which will either result in a reduction in taxable income that can be deducted in the current year or an increase in taxable income that will be spread over four tax years.

RiskWhat’s at risk

While you may be tempted to only make the changes that are favorable for your client, doing so puts you and your client at risk. Following only one portion of the accounting method change procedures may be considered an impermissible method change that could lead to the IRS disallowing those valuable deductions—and your client could end up with a higher tax bill plus possible interest and penalties.

As the tax return preparer, signing a 2014 tax return that is not in compliance with tangible property regulations violates your professional responsibilities under Circular 230, potentially exposing you to penalties and even suspension of your license.

The opportunity

With the new regulations that clarify deductible repairs, your firm has an opportunity to identify a treasure trove of tax-minimization opportunities for clients with tangible property. Many clients and their CPAs have been extremely conservative with respect to treatment of tangible property expenses. As a result, they now have an opportunity to clean up their fixed asset records and take a current deduction for repairs performed on those assets based on available records. But you will only be able to support and defend those deductions if you follow all the rules.

To take advantage of this tax-minimization opportunity while bringing your clients into compliance, we advise CPAs to take the following approach:

  1. Conduct a thorough repair and maintenance review for each client that owns tangible property. This review can be especially valuable for owners of commercial property that require frequent repairs and refreshes to attract clients and tenants (for example, hotels, restaurants and office buildings).
  2. For each client, perform testing on amounts paid to acquire, produce or improve tangible property to identify any costs that you had previously expensed that should now be capitalized as improvements, as well as any repair costs that were capitalized. Compute a 481(a) adjustment on the net impact on the client’s income and expenses, going back as many years as is reasonable, based on the availability of the client’s records. The Treasury and the IRS are looking for a “good faith” effort that you and your client applied these rules to the best of your ability, and they expect to see at least some adjustments.
  3. Remember that your clients must follow the new rules effective with the 2014 tax year. Prepare your clients’ Forms 3115 on each of these changes now rather than wait until the end of the year to find out the client has been improperly classifying improvements as deductible repairs.

Capturing the maximum amount of current deductions for tangible property repairs requires in-depth construction engineering expertise and understanding of the nuanced rules regarding the new definitions for UOP. By establishing a strategic partnership with a specialty provider of engineered tax solutions, CPAs will be better able to bring their clients into compliance while maximizing the tax benefits of these changes.

Find out how CSP360 can position your CPA firm to assist clients and prospects with timely and valuable guidance on the final tangible property regulations.

Tags: commercial real estate, tangible property regulations, Jennifer Birkemeier

Subscribe to Email Updates

Our Latest Resources

Follow Us