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How to Pitch a Cost Seg Project to a Commercial Real Estate Client or Prospect

Posted by Don Warrant on 5/25/15 9:19 AM

Establish credibility by demonstrating cost segregation tax law and engineering expertise—then show them the money!

cost_seg-1
Last week we talked about how to qualify a commercial property owner as a strong prospect for accelerating depreciation deductions through a cost segregation study. Now how do you position your firm as the right solution to deliver those tax benefits?
 
In our experience, CPA firms are often strong contenders for cost segregation projects, primarily because they already have strong relationships with their existing clients and typically are not in a competitive bid situation. Even when pitching to a non-client, most accounting firms have a leg up over boutique cost segregation providers because CPAs typically are known in their markets for both integrity and tax know-how. However, general tax knowledge and trustworthiness usually are not enough to convince savvy commercial real estate owners to sign on the dotted line.
 
To win a seat at the table and get a chance to quote on a cost segregation project for a client or prospect, you need to demonstrate three important things:
  1. Understanding of the relevant tax code and case law.
From the 1997 Hospital Corp. of America Tax Court ruling to the January 2015 Louisiana district court ruling on placed in service dates, commercial property owners need confidence that your firm has access to the most up-to-date knowledge of relevant case law. For CPAs that haven’t already dedicated the time and resources to research this ever-evolving area of the tax code, partnership with a reputable cost segregation specialist might be the best path to delivering this service line.
  1. Engineering experience and industry expertise.
Just like snowflakes, every building has different features. That’s why cost segregations that rely on industry averages or “rules of thumb” are likely to be inaccurate and subject to restatement upon IRS examination. Cost segregation studies based on either actual construction costs or estimates based on engineering expertise, on the other hand, are more likely to generate depreciation deductions that are not only accurate and defensible but also more comprehensive—so the client will not be leaving money on the table.
 
Again, the backing of an established cost segregation strategic partner is the best route to give your client or prospect confidence that you will deliver the full package of tax minimization and IRS audit defense.
  1. “Show me the money.”

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. 

Preparing a Cost Segregation Quote

Once you have clearly demonstrated your firm’s credentials, you are ready to prepare a quote for the project. Different CPA firms take different approaches. Some provide an estimate of their time on top of the cost seg specialist’s fee, and others give the client a package quote that allows them to value bill for their role in delivering the cost segregation study. (Remember that the only pricing strategy that is completely off the table is a contingent fee.)
 
For most CPAs, however, the true pot of gold at the end of the rainbow is the ability to keep competitors at bay and delight an important client with accelerated deductions that improve the owner’s cash flow.
 
cost seg prosposal template Do you have a commercial real estate client or prospect who could benefit from a cost segregation study? Download our cost segregation data collection form, and we’ll give you a call to walk you through it and discuss how we can help you close on that opportunity and (most importantly) deliver valuable tax benefits to that building owner.

Tags: cost segregation, Don Warrant

Post Tax Season 263(a) Opportunities to Get New Clients from Competitors

Posted by Don Warrant on 5/22/15 9:03 AM

Don’t let competitors use a letter like this to steal your clients.

Most accountants spend the end of April and early May catching their breath and letting the dust settle from the spring filing season. Once you’ve cleaned up and started planning for the summer, remember that there’s a very rare opportunity this year related to the 263(a) tangible asset rules. Taxpayers who timely filed their 2014 federal tax returns receive an automatic extension of time to amend their tax returns to file Forms 3115 and make late elections.
 
Most commercial real estate businesses are likely to see a significant impact from the regs. Given the constant need for repairs, replacements and maintenance on buildings, these clients need to make sure that they have correctly implemented the accounting method changes and claimed the related adjustments. Because the IRS will continue to release guidance even after the filing season has ended, CPA firms should continue to consider this an important topic to discuss with clients. For example, the rules on building refresh’s are still evolving and IRS guidance is expected anytime.
 
You may very well be on top of things and maximizing any 263(a) opportunities for your clients. On the other hand, if you are behind the curve, you’ve opened up a tremendous window of opportunity for a more aggressive competitor to poach clients.
 
Given the complexity of these rules and the fact that significant pieces of guidance have yet to be released, the next few months are a great time for your firm to aggressively reach out to potential clients about their 263(a) opportunities. For example, if they already filed, explain how you can help them capitalize on a missed opportunity under the automatic extension procedures. If they are on extension, then their current tax preparer may not have pinpointed the tax savings opportunities, carpe diem (seize the day)!
 
Here’s what that letter from an aggressive accounting firm to your client might look like.

263a

We’re pretty sure that you would be very displeased if one of your clients got a letter like this, but your clients are fair game for firms that can deliver more tax advantages from an opportunity with an ever closing window.

This opportunity to amend 2014 tax returns under the automatic extension period might be missed by other tax return preparers. But it’s also an opportunity that some of your competitors may seize if you don’t.

If you would like to evaluate your clients’ plan to comply with the new rules for tangible property, we can help. Contact us to schedule a consultation.

For more on this topic, be sure to download our whitepaper, “Using the New Tangible Property Regs to Help Clients and Gain New Business

Tags: 263(a) regulations, tangible property regulations, accounting method changes, Form 3115

4 Pieces of Data You Need to Qualify a Cost Segregation Opportunity

Posted by Don Warrant on 5/20/15 9:03 AM

Tax-Saving Formula: A + B + C + D = $$$

cost_seg_tax_savingWe've talked about when cost segregation might not be right for your commercial real estate client or prospect. So how do you know when cost segregation is the right answer?
 
At CSP360, we rely on a few key pieces of data to estimate the tax savings a commercial property owner can expect as a result of accelerated depreciation. Here are the 3 most important inputs into that equation:
 
  1. The physical attributes of the property. You’re probably already aware that certain types of buildings naturally have a high proportion of shorter-lived assets. For example, hotels, restaurants, golf clubs and other hospitality-oriented businesses tend to have lots of furniture, fixtures, and other finishing touches that qualify as Sec. 1245 property. Did you also know that location factors large in the cost-benefit equation? If the building is on a city block surrounded by city-owned sidewalks, then the opportunity to take accelerated depreciation for land and land improvements is severely limited.
  1. The federal tax depreciation schedule for the property owner. A cost segregation tax specialist will need to see how the property currently is being depreciated on schedules submitted to the IRS (as opposed to schedules used internally or for financial statement purposes). If the property is primarily being depreciated over 39 and 27½ years, that owner is more likely to be able to reap the benefits of a cost segregation study.
  1. The property owner’s tax-paying history. Clients that expect negative adjusted gross income or those that will only have passive rental income will not be able to benefit from accelerated depreciation deductions.
  1. The tax basis of the property. The cost-benefit calculation generally works out best for buildings with a tax basis of $1 million or more. However, owners of buildings with a high proportion of nonstructural elements (e.g., hotels, restaurants, apartment buildings) often can justify a study with an even lower tax basis.
 
cost seg prosposal template Of course, the right answer can’t be boiled down to a simple formula. Every situation is different and depends on many factors, such as how the property was acquired and how long the owner plans to hold it. A successful cost segregation—one that results in the greatest amount of accelerated depreciation that also will stand up to IRS scrutiny—requires extensive knowledge of cost segregation tax law as well as industry-specific engineering expertise. Success also relies on the CPA’s intimate knowledge of the building owner’s specific circumstances and tax situation.
 
If you think your commercial property owning client or prospect could benefit from a cost segregation study, we can help qualify that opportunity. Request our cost segregation data collection form and get started today.

Tags: cost segregation, Don Warrant, tax saving opportunities

Is 179D Tax Deduction Right For Your Commercial Real Estate Client or Prospect?

Posted by Jennifer Birkemeier on 5/12/15 9:28 AM

Here are 3 pieces of data you need to tell if a 179D study will generate at least 10-to-1 ROI.

179D_tax_deductions_for_commerical_real_estateGreen is the new black, and chances are good that your commercial real estate clients and prospects have replaced windows, HVAC units, or lighting in the past few years with more energy-efficient models.
 
The status of the 179D tax deduction for energy efficient commercial buildings currently is in limbo for 2015 and beyond. However, this perennial “tax extender” is a popular one that enjoys broad support, and so it will most likely be implemented retroactively for the 2015 tax year.
 
Digging for just a few pieces of information now will allow you to see if your commercial real estate clients would benefit from this valuable tax deduction (up to $1.80 per square foot) that can generate ROI for the property owner of up to 10 times (or more) the cost of the study.
 
The pieces of data you will need to perform a 179D analysis include:
  1. Square footage of the building and the energy efficient improvement or addition.
Ask the client or prospect for architectural drawings of the buildings to get an accurate measurement of the overall square footage and the size of the addition or improvement. Generally, because 179D requires an independent certification by licensed engineer licensed and thorough modeling for each individual building, the building should be at least 30,000 square feet for the benefits to outweigh the costs of the study.
  1. Technical specifications on efficiency improvement.
Next, you will need the technical specifications about the energy efficiency of the new unit. The engineer will compare each building’s performance to government standards to determine if it reaches the required threshold of energy savings.
  1. Invoices for energy-efficient upgrades and additions.

Currently, the maximum 179D tax deduction is $1.80 per square foot for buildings that achieve the threshold of 50% energy and power cost savings for the whole building, or $0.60 per square foot for partially qualifying property. However, the deduction is capped at the taxpayer’s actual costs for the improvements. So to determine whether the deduction will or will not be worthwhile, you will need the client’s invoices for the improvement project or new building. 

Do the Benefits of 179D Outweigh the Costs?

Once you’ve gathered all these pieces of data, you can use the U.S. Department of Energy’s 179D calculator to estimate the potential tax savings for your client.
 
Buildings of at least 30,000 square feet that meet the government’s technical specifications typically generate ROI of at least 10 times the cost of the 179D study. However, since the lookback on this deduction goes all the way back to January 2006, commercial property owners that have performed efficiency upgrades over multiple years might see even better returns, in some cases closer to 20-to-1.
 
If you would like to evaluate your clients’ previous or upcoming building or renovation projects to determine whether they qualify for the 179D tax deduction, we can help. Contact us to schedule a consultation.

Tags: commercial real estate, Section 179D, Jennifer Birkemeier, tax saving opportunities

3 More Things That Might Surprise CPAs About Cost Segregation

Posted by Jennifer Birkemeier on 5/6/15 9:13 AM

Owners of commercial property can realize 20-to-1 ROI on cost segregation study performed by a firm with engineering and tax expertise.

Cost_segregation_heroYou know that a cost segregation study can uncover opportunities to slash your commercial real estate clients’ tax bill. But there might still be a few questions lingering in your mind about whether the benefits of cost segregation outweigh the time and expense of the study. For the right types of commercial property owners—and by working with the right cost segregation strategic partner—a cost segregation study can deliver higher ROI and require less time and effort from you and your client than you might think.

Surprisingly Good ROI for Clients and Prospects

We tend to be conservative when we estimate a client’s potential tax savings from cost segregation. We typically tell our CPA firm partners that their clients can expect a return on investment of at least 10 times what they pay for the study.
 
But for owners of properties with a high proportion of nonstructural elements—such as hotels, restaurants and manufacturing facilities—segregating those shorter-lived assets often generates tax deductions that add up to 20 times what they pay for the study.
 
Of course, the opportunity to realize that high ROI will depend on whether the cost segregation provider brings to the table both tax and construction engineering expertise.
 
Consider this: As a CPA, you have been trained to pick depreciable assets out of a balance sheet. But do you know how to read blueprints to identify all of the elements that qualify for shorter depreciable lives? Probably not.
 
Construction engineers know what lies behind the walls of a building—the miles of wiring, ductwork and plumbing that could qualify for 5-, 7- or 15-year depreciation. When you partner with a cost segregation provider that has the combined knowledge of cost segregation tax specialists and engineering professionals, your client or prospect is more likely to benefit from higher ROI, and you will cement that relationship for your firm.

Minimal Disruption to You and Your Clients

Maybe you’re worried that the cost segregation study will suck up time and resources that you and your client don’t have to give. Actually, experienced cost segregation engineers know how to minimize the disruption of their site visits. Engineers who are experienced with the type of property in question often require only a quick introduction to the site by a property maintenance manager and conduct the remainder of the site survey independently.
 
An experienced cost segregation firm also will make the process easy for you and your tax team. Once the cost seg specialists have the final cost for the finished building, either from the owner’s general ledger or a final invoice from the contractor, your involvement is over until you receive the final depreciation numbers to factor in to the client’s tax return.

Higher Profit Potential for Your Firm

Tax slashing hero Here’s the great news for you: Because cost segregation often generates significant ROI for commercial property owners and requires little investment of time on your part, your firm’s profit potential skyrockets. Not only do you have opportunities to value bill for time you spend consulting with your client on these lucrative tax opportunities, but you have also positioned your firm as the go-to resource for progressive, tax-slashing solutions.
 
Ready to become a tax-slashing hero for your clients and prospects? Learn more about the benefits of performing cost segregation in our whitepaper.

Tags: cost segregation, Jennifer Birkemeier

3 Things That Might Surprise You About Cost Segregation’s Tax-Slashing Potential

Posted by Jennifer Birkemeier on 4/28/15 9:19 AM

What you don’t know about tenant buildouts, asset abandonment, and bonus depreciation could cost your clients tax benefits.

cost_segregationWe performed our first cost segregation study for a property owner 20 years ago—and my, how the discipline has evolved since those early days.
 
We’ve learned quite a few things along the way. Here are a few that might surprise you and delight your commercial real estate clients and prospects.
 
  1. Tenant’s build outs reinforce tax savings.
Leasehold improvements represent a wealth of tax deductions for property owners. Because these build outs typically do not involve the building shell, a high percentage of those costs typically are for tangible personal property. The only way to claim those depreciation benefits? Allocate costs to their proper asset groups through a quality cost segregation study.
  1. When abandonment is a good thing.
Most tenant build outs involve replacing an asset. If the old asset is still being depreciated, then the property owner might be able to write off the remaining tax basis of the asset that is being disposed of. There are two prerequisites to take advantage of this tax benefit: First, the new asset must be capitalized (i.e., you can’t deduct both the new and the old asset). Second, the cost of the abandoned asset must be specifically identified. So once again, cost segregation saves the day!
  1. A bonus surprise.

You probably already know that property owners can take bonus depreciation on personal property with a depreciable life of less than 20 years. (Currently, bonus depreciation is available only for assets placed in service in 2014 and earlier.) You also know that cost segregation identifies assets that qualify for shorter depreciable lives.
 
By conducting a cost segregation, your client benefits from accelerated depreciation for newly segregated personal property AND ALSO a bonus depreciation deduction on those assets.
 
And there’s even better news. Property owners can go all the way back to 2001, when this particular benefit came into law, to claim bonus depreciation on tangible personal property placed in service in previous years.

Tax and Engineering Expertise Required

Capturing depreciation benefits through cost segregation is a complex area of taxation, and there are many more nuances than we can explore in this blog post. For example, bonus depreciation is one of those tax “extenders” that has come in and out of the law throughout the last 15 years at different percentages, so CPAs must be careful to apply the correct percentages to the assets in question.
 
cost segregation Recognizing and taking advantage of depreciation benefits requires a special combination of both tax and engineering expertise. In fact, the IRS Cost Segregation Audit Technique Guide states:
 
The preparation of cost segregation studies requires knowledge of both the construction process and the tax law involving property classifications for depreciation purposes.
 
As you’re working on your clients’ extended 2014 tax returns, keep an eye out for the above opportunities to boost your their depreciation deductions through a cost segregation study. Feel free to contact us if you have questions about how to spot and take advantage of those opportunities.

Tags: cost segregation, Jennifer Birkemeier, Accelerating depreciation deductions, bonus depreciation

Don’t Overlook These 3 Client Transactions That Qualify for a Cost Segregation Study ... and Tax Savings!

Posted by Jennifer Birkemeier on 3/16/15 9:03 AM

If your client owns a group of commercial buildings that has a combined cost basis of $1 million or more, you may have some good news in store for them.

CostsegregationSo you’re sold on why tax time is the perfect time to talk about cost segregation opportunities with your client. Now you just have to spot those opportunities—and, of course, bring in the right cost segregation strategic partner to deliver those tax savings.
 
As you’re preparing your clients’ tax returns, look out for these three types of transactions that generally present an opportunity to accelerate depreciation deductions to the tune of at least 10 times the cost of the cost segregation study:
  • Purchase or construction of a building with a cost basis of $1 million or more. The cost-benefit calculation generally is most beneficial at the $1 million price point. However, in certain types of buildings with a high proportion of nonstructural components (such as hotels, restaurants, apartment buildings, retail establishments, and manufacturing facilities), a lower cost basis (such as $750,000) might also justify the cost of the study.
  • Multiple buildings of the same type that, all together, add up to a cost basis of $1 million or more. When one entity or individual conducts cost segregation studies on multiple buildings of the same type (e.g., 2-3 quick-service restaurants), as long as those buildings are within the same geographic market, the client will see efficiencies of scale in conducting cost segregation on that group of properties.
  • Tenant buildout with a cost basis of $500,000 or more. While new buildings tend to get all the attention, leasehold improvements are the unsung heroes of the cost segregation world. Because they are likely to involve fewer improvements to the building envelope or structural components, these construction projects likely are comprised of a higher percentage of Sec. 1245 property that qualifies for 5- and 7-year depreciation.
CSP360 Deep Dive Program If you missed these opportunities in prior years—don’t worry! Cost segregation can be conducted on properties that were placed in service as early as 1987. In fact, we recommend that CPAs automatically extend for all commercial property owners—not only to give them time to bring those owners into compliance with the Tangible Property Regulations, but also to perform cost segregation studies and other engineered services to minimize the tax bill.
 
Need help uncovering transactions that qualify for cost segregation? Contact us to schedule a Deep Dive into your commercial real estate client base to identify those tax-minimization opportunities.

Tags: cost segregation, Jennifer Birkemeier, Accelerating depreciation deductions, bonus depreciation

4 Reasons to Talk About Cost Segregation With Your Commercial Real Estate Clients NOW!

Posted by Jennifer Birkemeier on 3/11/15 9:05 AM

Tax season is the perfect time to talk to clients about lowering their tax bill by accelerating depreciation deductions.

taxslashingheroYou’re deep in the throes of preparing your commercial property owners’ tax returns, and your partners are clamoring for those clients’ Schedule K-1s so they can close the books on 2014. The last thing you’re thinking about right now is how to create more work for yourself.
 
That might be shortsighted. Now is the perfect time to identify and discuss with your clients how they can reduce their 2014 tax bill through accelerated depreciation deductions—especially since the actual work to segregate out the costs can be deferred until the extension deadline.
 
Why is now the ideal time to talk about cost segregation?
 
1. Position yourself as a tax-slashing hero.
 
With the Bush era tax cuts far behind us, your clients are likely facing a significant tax bill for 2014. As you are meeting with your clients to gather information or deliver their tax returns, you can offset the bad news of a looming tax bill with the good news that you uncovered ways to lower that bill. Consider this: The average cost segregation study delivers accelerated depreciation deductions that add up to at least 10 times the cost of that study. So take the time now to sniff out cost segregation opportunities.
 
2. Leverage your Tangible Property Regulations compliance work.
 
Another great reason to bring up cost segregation opportunities now: You’re already doing part of the work. The Tangible Property Regulations require you to analyze your clients’ costs for purposes of testing them as repairs vs. improvements. As long as you’re digging into that fixed asset schedule, why not look for opportunities to accelerate depreciation deductions on Sec. 1245 property?
 
Here’s a shortcut: If you find a high proportion of 39-, 27.5- and 15-year property on the client’s depreciation schedule, it might be time to consider a cost segregation study on that property.
 
3. Take advantage of bonus depreciation for 2014.
 
Congress’ last-minute bill retroactively extended, for 2014 only, the 50% bonus depreciation. Since that incentive applies to 5-, 7-year, or 15-year property, conducting a cost segregation to identify those shorter-lived assets could mean even greater opportunities for depreciation deductions, which may or may not be available in 2015 and beyond.
 
4. Get in front of commercial property owners’ purchase agreements.
 
CSP360 Deep Dive Program We’ve all had clients who closed on the acquisition of a commercial property without consulting us and were faced with unfavorable tax consequences. Here’s one of those consequences you’ll want to steer your clients away from: Thanks to Peco Foods, Inc. v. Commissioner, if the purchase agreement includes an allocation of purchase price, then the purchaser might be precluded from conducting a cost segregation. If you have an opportunity to get out in front of your clients’ acquisitions of property, we recommend bringing in a cost segregation strategic partner to advise the client on how to leave the door open for a cost segregation study.
 
If you have questions about any of these opportunities, we’d be happy to help. Contact us to schedule a consultation.

Tags: cost segregation, Jennifer Birkemeier, Accelerating depreciation deductions, bonus depreciation

‘Placed in Service’ Ruling - New Depreciation Opportunities for CPA Firms to Bring to Commercial Property Owners

Posted by Jennifer Birkemeier on 3/2/15 9:39 AM

Can you start depreciating a client’s commercial building before their business opens? U.S. District court says yes.

Accelerating_depreciation_deductionsEvery CPA knows that a building is considered placed in service—and thus depreciation begins—when it is open for business. Right?
 
A recent U.S. district court ruling turned that conventional wisdom on its head, and in turn, gives CPA firms the opportunity to bring good news to their commercial property-owning clients and prospects. In the case of Stine, LLC v. United States, a Louisiana district court found in favor of a taxpayer who argued that his two new retail stores were placed in service as of Dec. 31, 2008, because they both had received certificates of occupancy—despite the fact that neither was open for business.
 
At stake was the property owner’s ability to take advantage of an accelerated depreciation allowance granted by the Gulf Opportunity Zone Act of 2005. The IRS had disallowed Stine’s depreciation deduction and assessed the building supplies retailer with more than $2 million in taxes for the tax years 2003 through 2008. Stine sought a refund of these taxes.
 
In supporting Stine’s motion, the Court stated the following (emphasis added):
 
“…understanding that Congress could have easily expressed that a building be placed in service when open for business leads this court to believe that there is no requirement that a building be open for business in order for it to be placed in service for purposes of a depreciation allowance.”

Did your client buy a commercial building in December? Accelerate tax benefits into 2014.

The Stine finding is a welcome opportunity for commercial building owners and their CPAs who might otherwise have deferred depreciation benefits for 12 months or more because the business had not yet started and therefore, depreciation was not claimed.
 
As you complete your commercial real estate clients’ 2014 tax returns, keep an eye out for buildings that were purchased, built, or renovated near the end of the year, and consider the benefits of conducting a cost segregation study on that building for the 2014 tax year. If the cost-benefit calculation works out in the client’s favor, then extend or amend that property owner’s return so that you can take advantage of that opportunity to slash the client’s 2014 tax liability.
 
Need help identifying and taking advantage of tax-minimizing opportunities? Let's talk.

Tags: commercial real estate, Jennifer Birkemeier, placed in service, Accelerating depreciation deductions

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

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