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The Top 7 Most Frequent Questions Commercial Property Owners Ask About Cost Segregation

Posted by Jennifer Birkemeier on 4/12/16 9:22 AM

The right responses can help your CPA firm get more cost segregation opportunities and close more cost segregation deals faster

FAQs.jpgIf your firm is offering or going to offer cost segregation services, you’ll be faced with a number of questions from the commercial property owner. Here are some quick FAQs that will help you prepare your responses.

Question 1: Is this a scam?

Cost segregation is an accepted strategy with clear guidelines, has passed scrutiny by the IRS and Tax Courts, and is not a scam.

In our blog post, 6 Tips for Explaining Cost Segregation to Commercial Real Estate Clients, we wrote:

The IRS has accepted cost segregation as a legitimate tax planning strategy for years. The Service has released clear guidelines on what information must be included in a quality cost segregation study. Depending on the provider you choose to perform the cost segregation study, you may be eligible for support in the event that the IRS chooses to audit your study.”

Question 2: What makes my building(s) eligible for cost segregation?

Cost segregation can be an appropriate tax savings strategy for new building construction, existing property placed in service after 1986, a new real estate purchase, renovation of an existing building, or leasehold improvements which are the unsung heroes of the cost segregation world.

In our blog post Don’t Overlook These 3 Client Transactions that Qualify for a Cost Segregation Study, we highlighted:

  1. Purchase or construction of a building with a cost basis of $1 million or more, but this could be as low as $750,000 for certain types of buildings
  2. Multiple buildings of the same type that, all together, add up to a cost basis of $1 million or more, and
  3. Tenant buildout with a cost basis of $500,000 or more because these projects are likely to be comprised of a higher percentage of Sec. 1245 property that qualifies for 5- and 7-year depreciation.”

Question 3: How much can I save?

Generally, the ROI from a cost segregation study is 10 to 1, but we try to make it closer to 20 to 1.

In our blog post, How to Pitch a Cost Seg Project to a Commercial Real Estate Client or Prospect, we wrote:

When it comes down to it, commercial property owners are most interested in knowing how much they can expect to save on their taxes in the next few years. In general, we find that tax-paying owners of commercial buildings with a tax basis of $1 million or more see accelerated depreciation deductions that add up to at least 10 times the cost of the study. With just a few pieces of data, a reputable and established cost segregation firm can provide a detailed estimate of anticipated tax benefits.”

Question 4: How long does it take?

A cost segregation study typically takes 30 days to complete, unless there are extenuating circumstances (multiple locations, lack of access to information).

Question 5: How does cost segregation relate to compliance with the Tangible Property Regulations?

There is a direct and critical relationship between cost segregation and annual compliance with the Tangible Property Regulations. Effectively, the combination of the annual compliance requirements of the Tangible Property Regulations combined with the data gathered and tax savings power of cost segregation makes for a powerful 1-2 punch.

In our blog post The Complex Process of Simplifying Tangible Property Regulations we wrote:

Cost segregation plays an important role in a business’ compliance with the new tangible property regulations. A cost segregation study identifies the appropriate unit of property needed to apply the new improvement rules to each building system and the major components of the building itself. Any costs incurred to improve real property must be segregated between real and tangible personal property before applying the improvement rules. In addition, cost segregation is necessary to recognize partial dispositions of building structures and systems, and to segregate removal costs from acquisition or production costs.”

Question 6: What happens if I get audited?

Because we have followed IRS Guidelines and have worked with a quality provider, we are confident that the study we do for you will pass IRS scrutiny.

Quality providers deliver substantial authority as required by the IRS. A quality provider will provide some level of support on audit as part of the fee for preparing the study.

And lastly ...

Question 7: Does Your Firm Have the Experience and Expertise to Conduct a Cost Segregation Study?

Even after you’ve convinced your client or prospect about the merit of doing a cost segregation study, you still have one critical question to answer from them: does your firm have the necessary skills, training, and experience to do a cost segregation study that will capture every post tax savings opportunity in an audit compliant manner?

Because most firms don’t have building engineers or construction experts on staff, this could be a tough sell, and a surefire way to lose a client (or face a lawsuit from the client) if the study your firm performs is audited and found to be deficient.

In our blog post, Plan for a Rainy Day, we wrote “… If your client’s cost segregation study fails to hold water, then your client will be handing all of those tax savings back over to the IRS.”

Ouch.

How CSP360 Can Help

It’s likely that if your firm wants to provide cost segregation services, you’ll need to partner with a boutique firm like CSP 360. Regardless, when selecting partner, there’s three questions you’ll want to get answered before you can answer a question from a client or prospect about credentials and credibility:

  1. Does the provider follow the Cost Segregation Audit Technique?
  2. What is the provider’s basis for “substantial authority” as required by the IRS?
  3. Does the provider understand the implications of the Peco Foods, Inc. v. Commissioner case, in relation to purchase contracts?

Cost Segregation Partnership Opportunity We invite you to learn more about CSP360 and the opportunities for us to create a strategic partnership with you to serve commercial property owning clients and prospects in your market. To get a better understanding of our experience and expertise, we invite you to read our related posts about cost segregation, download any of our resources, or call me at (800) 591.0148 today.

Tags: cost segregation, commercial real estate, Jennifer Birkemeier

The 4 Most Horrible Excuses We’ve Heard From CPA Firms About Why They Don’t Want to Do Cost Segregation

Posted by Jennifer Birkemeier on 3/24/16 9:06 AM

It May Be Time for a Second Look

Stop_excuses.jpegThere are a slew of very good reasons why a CPA firm should add cost segregation into its mix of tax services for commercial property owners, but yet, a lot of small and mid-sized firms are reluctant to pull the trigger.

In some cases, it’s a matter of not having enough experience. In other cases, it’s a matter of not having enough bandwidth or resources to perform a cost segregation study that’s compliant with IRS Guidelines. It could even be a matter of the lack of construction or engineering expertise that’s necessary to identify building components eligible for accelerated depreciation.

These are all valid concerns, and each can be easily resolved with a strategic alliance or partnership with an experienced and credentialed cost segregation provider like CSP360.

However, there are still a lot of misconceptions about cost segregation that are holding smaller CPA firms back from delivering tax savings that will delight their clients, while concurrently protecting their client roster from poaching by a larger firm and creating opportunities for new business.

Here’s a list of our four least favorite, horrible excuses:

  1. It’s too risky.

    If you team up with a qualified, credentialed partner, that’s simply not true. They will bring a “just right” combination of experience and expertise to the table, along with a comprehensive way of complying with the IRS’ Cost Segregation Audit Techniques Guide. Also, for those studies they have done, quality providers will offer cost segregation audit defense services at no additional charge.

  2. Our clients’ commercial property is too small to qualify.

    While that may be true, you might also be surprised at what could qualify, and once you look through your roster of commercial property owning clients, you might be delighted by the hidden opportunities. Buildings with a value of $750,000 or over may be eligible, as may buildouts valued at over $500,000, depending upon the taxpayer’s tax bracket.

  3. Not worth it if my client is not going to be holding on to a property for a long time.

    Again, this is not true. A cost segregation study can be done in the year that your client disposes of a property. For example, we did a cost segregation study for a commercial property owner that didn’t have the money to pay taxes on the sale of his property, and used the study to recharacterize the taxable gain and reduce the total taxes due.

  4. I don’t see a value because my clients’ tax savings are really just a matter of a timing difference.

    Cost segregation is built on the time value of money. As we wrote in a previous blog post, 6 Tips for Explaining Cost Segregation to Commercial Real Estate Clients, you save money on taxes sooner.

    Proper segregation of real property and personal property assets allows for more deductions in the early years of the property’s life. If you’re talking with buzzword-happy entrepreneurs, you can say, “The accelerated deductions decrease taxable income in the early years thus expediting the anticipated ROI on the asset.” However you say it, as long as your audience understands the basic concept that money in hand today is worth more than the same amount in hand a few years from now, they’ll see the value of cost segregation.

How do you really know if you don’t investigate the opportunities?

CSP360 has partnered with quite a few CPA firms that have approached cost segregation with a healthy degree of skepticism and worry. After we partner on a study or two, universally, their skepticism turns into enthusiasm for adding, promoting, and delivering cost segregation services to their current client roster and as a means to attract prospects to their firm.

Cost Segregation Partnership Opportunity If you’re a skeptic, you’ll never know if cost segregation is right for your firm until you do a bit of investigation. Start with some free education, like reading and subscribing to our blog, here. Or, download a couple of our whitepapers, here.

Best of all, we’re only a phone call away and would welcome the opportunity to kick the tires with you. You can do that by calling us at (800) 591.0148, or use this form to initiate the conversation.

Tags: cost segregation, Jennifer Birkemeier

A PATH to Tax Savings: New Law Makes Important Changes to Extended Provisions

Posted by Don Warrant on 3/7/16 9:27 AM

We’ve gotten so used to hearing that these provisions have been extended “as is” for another year that it’s easy to overlook some significant changes for commercial real estate clients in this year’s “extenders” bill.

Clear-Path.jpgIn December of 2015, Congress passed the Protecting Americans from Tax Hikes (PATH) Act of 2015, affecting a number of tax provisions that, until now, have not been permanent parts of the Tax Code. This extenders package is different from many previous ones in that it actually makes some provisions permanent and it makes changes to some provisions that can be helpful to businesses. In particular, some of the changes made to Section 179 expensing and bonus depreciation may be of interest to commercial real estate clients. When combined with the recent tangible property regulations, the new law increases opportunities for your clients to accelerate deductions using cost segregation studies.

Section 179 Expensing

The Section 179 deduction for small businesses was made a permanent part of the tax code at its pre-2015 level of $500,000 per year. The extension is retroactive to 2015. As before, the deduction will phase out on a dollar-for-dollar basis when the cost of eligible property exceeds $2 million. However, the $2 million threshold and the $500,000 deduction limit will now be indexed for inflation beginning in 2016. For the 2016 tax year, no adjustment will be made to the $500,000 deduction, but the phase-out will start at $2,010,000.

The PATH Act did not change the limited applicability of section 179 expensing for commercial real estate. The provision still only applies to “qualified real property,” which is limited to:

  • Qualified leasehold improvement property,
  • Qualified restaurant property, or
  • Qualified retail improvement property.

However, the Act did remove limitations on carrying forward Section 179 deductions that exceeded income in prior years.

A summary of PATH Act changes to Section 179 are as follows:

  • The $500,000 limit is retroactive to 2015 and made permanent going forward;
  • The deduction amount and phaseout threshold are indexed for inflation beginning with the 2016 tax year; and
  • Beginning with the 2016 tax year, the normal Section 179 carry forward provision applies to qualified real property.

Bonus Depreciation Provisions

The PATH Act retroactively extended the bonus depreciation rules for MACRS property with a recovery period of 20 years or less. For property placed in service before January 1, 2016, the act basically extended the rules that had expired at the end of 2014. For property placed in service after December 31, 2015, there are some significant changes to consider.

Bonus depreciation will phase out as follows: 50% for 2015 – 2017, 40% for 2018, and 30% for 2019.

Prior to the PATH Act, bonus depreciation was available to commercial building owners for qualified leasehold improvement property only. Qualified retail improvement property and qualified restaurant property did not qualify unless they were also qualified leasehold improvement property.

Qualified leasehold improvement property placed in service after December 31, 2015 is no longer eligible for bonus depreciation. Instead, a more expansive “qualified improvement property” is eligible for bonus depreciation. Qualified improvement property is an improvement to the interior of a nonresidential real property that is placed in service after the date that the building was placed in service.

As a result of this change, the following requirements no longer apply: 1) the building must be in service for at least three years, 2) the improvements must be made pursuant to a lease, and 3) improvements to common areas are ineligible. However, certain improvements such as enlargements, elevators/escalators, and internal structural framework continue to be excluded. Unfortunately, qualified leasehold and retail improvement property, and qualified restaurant property are not eligible for bonus depreciation unless they are also qualified improvement property.

A summary of the PATH Act changes to bonus depreciation are as follows:

  • The bonus deprecation was extended for five years: 50% (2015-2017), 40% (2018), and 30% (2019);
  • Qualified improvement property placed in service after December 31, 2015 is eligible for bonus depreciation; and
  • Qualified leasehold and retail improvement property, and qualified restaurant property are not eligible for bonus depreciation unless they are also qualified improvement property.

Cost Segregation More Important than Ever

The changes under the PATH Act make it more important than ever to properly classify improvements to commercial buildings. As a result cost segregation specialists will be in high demand to make the following classifications:

  • Repairs expense resulting in an immediate tax deduction;
  • Tangible personal property subject to shorter recovery periods and eligible for bonus depreciation;
  • Qualified improvement property eligible for bonus depreciation
  • Qualified leasehold and retail improvement property, and qualified restaurant property subject to a 15-year recovery period and Section 179 expense election, and qualification for bonus depreciation.

The misclassification of improvement to commercial buildings will likely result in missed tax deductions for bonus depreciation, Section 179 expense, and accelerated depreciation.

New Call-to-action The PATH Act has created additional tax saving opportunities for commercial building owners for a limited time. As a result, it is more important than ever to engage qualified cost segregation professionals to assist with the proper classification of improvements to commercial buildings.

If you would like to talk with a CSP360 cost segregation professional about how these changes may affect your clients, please click the button to schedule a free 15-minute consultation.

Tags: cost segregation, Don Warrant, PATH Act of 2015

PATH Act Extends More than 50 Tax Provisions

Posted by Leia Marino on 2/23/16 9:24 AM

How business owners are impacted by the changes

New Call-to-action As a recent guest on WBEN's Growing Buffalo, Director of Freed Maxick's Tax Practice, Don Warrant, summarized the significance of the Protecting Americans from Tax Hikes (PATH) Act of 2015.

Click here or on the button for Don's take on the act's most important tax extenders for businesses large and small.

Tags: Don Warrant, PATH Act of 2015

5 Mistakes That Accounting Firms Make When It Comes to Cost Segregation

Posted by Jennifer Birkemeier on 2/18/16 8:38 AM

To err is human, but these 5 mistakes that relate to cost segregation are easily avoided.

Cost Segregation NYWe all make mistakes. It’s part of being human. In the accounting profession, we work to minimize mistakes through an ongoing process of continuing education and a thorough regimen of redundancies and internal reviews designed to protect our firms and our clients from a mistake made by any one individual. When it comes to cost segregation, many firms are making mistakes that lead to missed opportunities for improved client retention and revenue growth.

These 5 examples demonstrate some common misconceptions about cost segregation and mistakes that could cost your firm revenue. 

  1. Misunderstanding Qualifying Dollar Amounts. Some firms miss cost segregation opportunities because they get a $1 million threshold stuck in their heads. That’s an accurate number for standalone buildings, but buildouts of leased space often benefit from cost segregation studies at values as low as $500,000. These projects typically involve fewer structural components, making it realistic to expect that as much as 60-70% of the costs may be classifiable as property with an asset life of less than 39 years.
  2. Intimidating Entry Costs. Many CPAs shy away from this service because the amount of training needed, as well as the close relationships with building professionals. If you start from scratch, it’s a tough expertise to build. However, if you work with a trusted partner to provide the service to your clients, you can be learning about cost segregation while you are working with an experienced professional who can deliver a quality cost segregation study.
  3. Creating Marketing Materials. Some accountants think of the effort it takes to create materials to advertise a new service line and decide their time can be more profitably spent providing existing services. However, a quality cost segregation partner can provide top-notch private-labeled marketing materials to help you discuss the new service line with clients and prospects without demanding significant amounts of your time.
  4. Misunderstanding Cost Segregation’s Ability to Draw New Clients. We talk to a lot of firms who tell us that they just don’t have enough clients who need this service to justify partnering with us to provide it. While your firm may not have a significant real estate practice now, a new service like cost segregation can help you to grow in that area. When you partner with an outside provider, your initial investment remains relatively small while you learn the service and build your client base with it.
  5. Failure to Recognize the Value of Cost Segregation Under New Tangible Property Regs. Beyond its well-known value in accelerating depreciation deductions, cost segregation now has a significant role in properly allocating costs under the new tangible property regulations. Clients who may not have had a use for it in the past may find themselves in need when calculating depreciation in the future.

Cost Segregation Partnership Opportunity Any one of these mistakes could cost a firm significant opportunities to grow revenue and expand its client base. We’ve talked to some firms that have made several of the mistakes on this list, and it typically doesn’t take them long to see the value of partnering with a quality cost segregation specialist to expand their service offering.

 

Tags: cost segregation, Jennifer Birkemeier

6 Tips for Explaining Cost Segregation to Commercial Real Estate Clients

Posted by Don Warrant on 2/4/16 9:12 AM

Once you can explain the basic concepts and advantages of cost segregation, the service basically sells itself.

business-handshake.jpgMany of the people who are drawn to study accounting and choose careers in the profession don’t realize that, at some point, their career growth will depend on their ability to sell accounting services. It takes a lot of studying to get a degree, then more studying and significant experience to get a CPA license. Along the way, successful accountants learn that their license doesn’t get them very far if they don’t have projects to work on. And they don’t get projects to work on if they don’t have clients to pay fees for the work.

Cost segregation is a great client offering because it’s relatively easy to explain to property owners and the value it delivers is fairly obvious to most businesspeople. If you have existing commercial real estate clients or even if you need a quick idea to share with someone you meet at a networking event, cost segregation does a pretty good job of selling itself.

Here are 6 tips to help you explain the service to potential clients and grow your practice.

  1. You save money on taxes sooner. Proper segregation of real property and personal property assets allows for more deductions in the early years of the property’s life. If you’re talking with buzzword-happy entrepreneurs, you can say “The accelerated deductions decrease taxable income in the early years thus expediting the anticipated ROI on the asset.” However you say it, as long as your audience understands the basic concept that money in hand today is worth more than the same amount in hand a few years from now, they’ll see the value of cost segregation.
  2. No amended returns are needed. Sometimes clients will resist filing amended returns. The great news about cost segregation is that it is treated as an accounting method change. That means the modifications can be calculated as far back as the effective date of the law in 1987 and related deductions taken on the current year’s return.
  3. Annual compliance with the tangible property regulations. A proper cost segregation study will assign costs to the major structural components of a building and 8 different building systems. Accurate cost information on these assets is needed each year to comply with the tangible property regulations. This information is useful in determining whether current year construction costs may be expensed or must be capitalized.
  4. Disposition of building property. Effective cost segregation practices make it easier to identify and determine the adjusted basis of building property. The adjusted basis is necessary in order to accurately recognize a disposition for tax purposes.
  5. Small taxpayer safe harbor election. When the cost of tangible personal property is properly segregated from the cost of the building, the tax basis of the building is reduced. In some cases, proper segregation of costs can reduce the cost of a building below the $1 million threshold needed to qualify for the small taxpayer safe harbor election. This safe harbor allows for costs that might otherwise be capitalized as improvements to the building to be expensed as incurred for tax purposes, again accelerating deductions for the client.
  6. Accepted strategy with clear guidelines, not a scam. The IRS has accepted cost segregation as a legitimate tax planning strategy for years. The Service has released clear guidelines on what information must be included in a quality cost segregation study. Depending on the provider you choose to perform the cost segregation study, you may be eligible for support in the event that the IRS chooses to audit your study.

Cost Segregation Partnership Opportunity Not everybody is cut out to be a salesperson. Some of us can sell ice to Eskimos, while others can lead horses to water but never get them to drink. Regardless of your skills in sales, it’s always easier to work with a product that sells itself. Cost segregation studies provide such obvious benefits that they make anyone a more effective seller.

 

Tags: cost segregation, commercial real estate, Don Warrant

Explaining Cost Segregation to Clients Can Be as Easy as 1-2-3

Posted by Jennifer Birkemeier on 1/19/16 8:57 AM

Many tax concepts are difficult to explain to clients. Cost segregation can be explained with 3 easy talking points.

Cost Segregation for Clients - CSP 360Albert Einstein has often been quoted as saying, “The hardest thing in the world to understand is the income tax.” That means a couple of things for accountants and tax professionals.

  • Job security, and
  • You spend much of your career trying to help clients understand the hardest thing in the world to understand.

Fortunately, not every section of the Internal Revenue Code is THAT hard to understand. Also, you have resources at your disposal who can help you explain parts of the income tax to clients and to prospects that you hope will become clients. Like this blog post, for instance. It will provide you with 3 easy talking points to explain the value of a cost segregation study to clients who own real property.

  1. Maximize your tax savings by accelerating deductions. Realistically, most clients will hear “bigger deductions on this year’s return” and tune you out after that. You won’t need to show spreadsheets explaining the time value of money and why they save money even though the total amount deducted over the course of the building’s life may not change significantly. That’s not to say you shouldn’t be ready to dive into the details if asked. But start at a high level and see if that’s enough to get someone interested.
  2. A cost segregation study creates its own documentation. Like most conversations about maximizing tax savings, this one will likely raise the specter of the IRS. One of the attractive selling points of a cost segregation study is that the IRS has put out very clear guidance in its “Cost Segregation Audit Technique Guide” that explains how a study should be conducted and how the report should be prepared. It’s possible that the IRS may question the deductions, but your client will already have in hand the exact documentation that the Service needs in order to support the positions taken. Depending on who prepares the study, they may also have professional representation to help them through any examination.
  3. Cost segregation goes way back. Maybe you’ve talked with your clients about amended returns before, or maybe they’ve learned elsewhere that amended returns can typically only be done for 3 years after the original return was filed. But cost segregation is treated as an accounting method change. Clients may not care to learn about the terms or the definitions, but they need to understand this key point. A cost segregation study may help with more than just accelerating future deductions into the current year. In many cases, it could also lead to the recalculation of prior year depreciation amounts to reflect the acceleration that would have occurred if they had segregated costs initially. That means additional deductions may be available in this tax year for property put in service as far back as 1987. If the segregation study identifies property with less than a 20-year life, bonus depreciation deductions may be available in addition to accelerated amounts.

Obviously, no tax deduction applies to every client all of the time. The good news about cost segregation is that it’s pretty easy to identify the clients who might benefit from a study. And, with these 3 easy talking points, it can be pretty easy to explain the benefits to them. Good luck!

Tags: cost segregation, Jennifer Birkemeier, tax saving opportunities

The Complex Process of Simplifying Tangible Property Regulations (Part 3 of 3)

Posted by Don Warrant on 1/14/16 9:06 AM

2015 Compliance with the Tangible Property Regulations

Tangible Property Regulations - CSP 360As tax advisors begin working with the new rules introduced with Revenue Procedure 2015-20, it’s important to review 2014 returns to understand the choices made by taxpayers, either by filing required Forms 3115 for specific method changes, or adopting all applicable method changes incorporated in Rev. Proc. 2015-20. This post is the third and final of our series on this issue:

  • The first post focused on the method changes that each qualifying taxpayer who followed Rev. Proc. 2015-20 adopted and whether they are in compliance with the regulations.
  • The second post examined the consequences for those taxpayers who were required to file Form(s) 3115 and did not.
  • This post will focus on issues related to complying with the tangible property regulations in 2015.

A Quick Look Back at 2014

Beginning with the 2014 tax year, taxpayers may no longer claim depreciation for repairs and maintenance expenses capitalized in prior tax years. These amounts should have been included in a Section 481(a) adjustment for the 2014 tax year. The election to capitalize and depreciate repairs and maintenance in accordance with book procedures is only available beginning with the 2014 tax year. In order to elect into this treatment each year going forward, taxpayers must file an election statement with the tax return. A failure to file the election statement may result in the loss of depreciation claimed for repair expenditures in the event of an IRS examination.

Likewise, beginning with the 2014 tax year, taxpayers may no longer depreciate assets disposed of in prior tax years that were not removed from the fixed asset records. Treasury Regulation 1.1016-3 provides the authority for the IRS to deny these deductions.

Businesses with tangible property fall into one of the following categories:

  • Small business under Rev. Proc. 2015-20 and did not opt out (Please see Post 1 for discussion.)
  • Properly filed required Forms 3115 for 2014
  • Improperly filed or missed filing a required Form 3115 (Please see Post 2 for discussion.), or
  • Did not file required Forms 3115 for 2014

Tax return preparers who work with businesses that filed Forms 3115 with their 2014 tax returns should review these forms and confirm that the client’s fixed asset records have been updated accordingly. it's also important to make sure that the Form 3115 wasn’t missing information and that the taxpayer didn’t erroneously report a $0 Section 481(a) adjustment. Corrections to Forms 3115 should be made ASAP before discovery by IRS examiners. Otherwise, the taxpayer may have made an impermissible change in accounting method that could result in an additional tax liability as well as potential penalties and interest.

Tangible Property in 2015 and Beyond

Each year, tax advisors serving clients with tangible property will need to review the taxpayers’ treatment of the following:

  • Costs to acquire or produce tangible property,
  • Materials and supplies,
  • Repairs & maintenance,
  • Improvements, and
  • Dispositions of property (including removal costs).

The new methods of accounting required by the tangible property regulations change the way that many businesses treat these types of expenditures beginning in 2014. These changes should be reflected in the 2014 return and all future year returns.

In addition, return preparers should maintain a list of the elections made by the taxpayer each year. The regulations offer a variety of elections that require an annual review, such as:

  • Elections to expense tangible property under the de minimis and small taxpayer safe harbors,
  • Election to capitalize repair & maintenance costs in accordance with book treatment,
  • General asset account elections,
  • Partial disposition elections,
  • Elections to capitalize employee compensation and/or overhead costs as facilitative costs, and
  • Elections to capitalize and depreciate rotable, temporary and/or emergency spare parts when the alternative method of accounting is not used.

Cost Segregation

Cost segregation plays an important role in a business’ compliance with the new tangible property regulations. A cost segregation study identifies the appropriate unit of property needed to apply the new improvement rules to each building system and the major components of the building itself. Any costs incurred to improve real property must be segregated between real and tangible personal property before applying the improvement rules. In addition, cost segregation is necessary to recognize partial dispositions of building structures and systems, and to segregate removal costs from acquisition or production costs.

New Call-to-action As we’ve noted before, it has been clear from the start that these tangible property regulations would have a significant impact on tax accounting methods for businesses. As time passes, we continue to learn even more about how the new rules and the efforts of the IRS to implement them affect small businesses.

To consult with a CSP360 professional about the effect of the rules on your clients in 2015 and beyond, please contact us.

Tags: tangible property regulations, Revenue Procedure 2015-20

The Complex Process of Simplifying Tangible Property Regulations (Part 2 of 3)

Posted by Don Warrant on 1/12/16 8:48 AM

Due Diligence Reviews for Compliance with the Tangible Property Regulations: Missed Forms 3115 or Incorrectly Filed Forms 3115

IRS Form 3115 Filing -  CSP 360The IRS has made several efforts to simplify the process for small businesses to start applying new tangible property regulations, culminating with the release of Revenue Procedure 2015-20. It’s critical to review 2014 returns to understand taxpayers' choices, either by filing required Forms 3115 for specific method changes, or adopting all applicable method changes incorporated in Rev. Proc. 2015-20.

In our previous post, we focused on the method changes that each taxpayer who followed Rev. Proc. 2015-20 adopted and whether they are in compliance with the regulations. This post examines the consequences for those taxpayers who were required to file Form(s) 3115 and did not, or who may have filed a Form 3115 with missing information. The last of the three will focus on issues related to complying with the tangible property regulations in 2015.

Taxpayers Who Failed to File Required Forms 3115

A taxpayer who failed to file a required Form 3115 for the 2014 tax year may file Form(s) 3115 beginning with the 2015 tax year. The same holds true for taxpayers who qualified for Rev. Proc. 2015-20 in 2014 but chose to opt out by filing a statement with their return. The IRS requires that taxpayers continue the use of their current tax accounting methods until the taxable year in which a Form 3115 is properly filed.

If you’re working with a new client who failed to file a required Form 3115 with their 2014 return, you may find a Form 8275-R Regulation Disclosure Statement. If a paid preparer felt that a client had reasonable basis for not filing a required Form 3115, this disclosure statement is filed with the return to avoid the penalties that can be imposed on preparers who prepare a tax return that does not comply with Treasury Regulations.

Automatic Extension of Time to File Forms 3115

Section 6.03(4) of Rev. Proc. 2015-13 provides an automatic six-month extension of time to file Forms 3115. Fiscal year taxpayers may be able to file the required Form(s) 3115 with their 2014 tax return if they are within six months of the original due date of their 2014 tax return.

Correcting a Previously Filed Form 3115

Section 6.03(1)(e) of Revenue Procedure 2015-13 provides the procedures to submit additional correspondence regarding a previously filed Form 3115. For example, if the Form 3115 was missing information or the section 481(a) adjustment was incorrectly reported as $0, then the taxpayer has made an impermissible change in method of accounting. If a taxpayer reported a $0 Section 481(a) adjustment for repairs but in fact, had capitalized repairs in prior years, then corrections to a previously filed Form 3115 should be made since the taxpayer may no longer treat these items as depreciable fixed assets.

It’s important to review the 2014 returns of your clients with the information from this post and our previous one in mind. When onboarding new clients over the next several years, a review of Forms 3115 filed in prior years will continue to be a key step. If it’s there, was it filed correctly? If it’s not there, was the failure to file permitted under Revenue Procedure 2015-20? If the IRS discovers an incorrectly filed Form 3115 before you make New Call-to-action corrections, the IRS can propose examination changes for the oldest year under audit and assess penalties and interest. In other words, the taxpayer may have lost the IRS exam protection that is available when a Form 3115 is properly filed and be exposed to penalties.

Our first two posts on this topic have focused on what to do if you review a 2014 return that doesn’t have a Form 3115 attached, either because the client chose to follow Revenue Procedure 2015-20 or because the client failed to file a Form 3115 that was required by the regulations. Our next post will look ahead to the work that needs to be done for tangible property calculations on Tax Year 2015 returns.

Tags: tangible property regulations, Revenue Procedure 2015-20

The Complex Process of Simplifying Tangible Property Regulations (Part 1 of 3)

Posted by Don Warrant on 1/7/16 8:52 AM

How did Revenue Procedure 2015-20 impact small businesses?

Tangible Property Regulations - CSP 360Throughout the recent implementation of the tangible property regulations, the IRS made several attempts to simplify the process for small businesses to start applying the new rules. These efforts culminated with the release of Rev. Proc. 2015-20 that allowed small businesses to make changes in methods of accounting using a cut-off method without filing a Form 3115.

As the dust settles and tax advisors begin working with the new rules going forward, it’s important to review 2014 returns to understand the choices made by taxpayers, either by filing required Forms 3115 for specific method changes, or adopting all applicable method changes incorporated in Rev. Proc. 2015-20. We’re going to look at this issue in 3 consecutive posts:

  1. This post will focus on the method changes that each taxpayer who followed Rev. Proc. 2015-20 adopted and whether they are in compliance with the regulations.
  2. The next one will examine the consequences for those taxpayers who were required to file Form(s) 3115 and did not.
  3. And the last of the three will focus on issues related to complying with the tangible property regulations in 2015.

2014 Compliance Review

For existing clients or for new clients that you bring in this year, one of the first things you’ll want to review from the 2014 return is the Form(s) 3115 that were or were not filed. If Form(s) 3115 were not filed, then you’ll want to confirm the taxpayer qualified as a “small business” under Rev. Proc. 2015-20 and if so, did they comply with their new methods of accounting for the 2014 tax year. (We’ll cover the “if not” option in the next post.) Form(s) 3115 filed in prior years are important data points for any new client you take on and should be kept as part of your permanent records.

What Impact Does Rev. Proc. 2015-20 Have on Small Businesses?

Taxpayers who followed Rev. Proc. 2015-20 have adopted all method changes that are necessary to comply with the tangible property regulations without benefit of a negative section 481(a) adjustment for amounts paid or incurred, or dispositions, in taxable years beginning before 2014. These taxpayers automatically adopted each of the following methods of accounting, as applicable to their business:

  • #184 – Repairs & maintenance, improvements, routine maintenance safe harbor, and unit of property
  • #185 – Regulatory accounting method
  • #186 – Non-incidental materials and supplies
  • #187 – Incidental materials and supplies
  • #188 – Non-incidental rotable and temporary spare parts
  • #189 – Optional method for rotable and temporary spare parts
  • #190 – Dealer – to deduct costs that facilitate the sale of property
  • #191 – Non-dealer - to capitalize costs that facilitate the sale of property
  • #192 – Capitalizing costs to acquire or produce property
  • #193 – Real property investigatory costs
  • #200 – Permissible to permissible method of accounting for depreciation of MACRS property
  • #205 – Dispositions of a building or structural component
  • #206 – Dispositions of tangible depreciable assets (other than a building or its structural components)

Beginning with the 2014 tax year, small businesses are required to use the new methods of accounting for tangible property listed above. For example, they may no longer depreciate repairs and maintenance capitalized in prior tax years, or assets that were disposed of in prior tax years. Fixed asset records should have been updated accordingly as of the beginning of the 2014 tax year.

Rev. Proc. 2015-20 excluded the following method changes:

  • #7 – Depreciation or amortization
  • #21 – Removal costs
  • #199 – Depreciation of leasehold improvements

Therefore, small businesses may have filed Form(s) 3115 even though they followed Rev. Proc. 2015-20.

Impact on Future Years Returns

Taxpayers that followed Rev. Proc. 2015-20 are required to continue to use the new methods of accounting adopted for the 2014 tax year unless they decide to change their methods of accounting. If a taxpayer chooses to change accounting methods, the change should be made by filing a Form 3115 and calculating a section 481(a) adjustment in a later year. The important thing to remember for clients who opted to rely on Rev. Proc. 2015-20 is that any section 481(a) adjustment is calculated by taking into account only amounts paid or incurred, and dispositions, in taxable years beginning in 2014.

New Call-to-action It has been clear from the start that these tangible property regulations would have a significant impact on tax accounting methods for businesses. As time passes, we continue to learn even more about how Revenue Procedure 2015-20 impacts small businesses.

This article focused on clients who relied on Revenue Procedure 2015-20 and elected to not file Form(s) 3115. Our next post will look more closely at the circumstances of taxpayers who failed to file a required Form(s) 3115 and did not qualify as a “small business” under Revenue Procedure 2015-20.

Tags: tangible property regulations, Revenue Procedure 2015-20

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