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

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

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

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

the_gift_of_179D_energy_efficiency_deduction_and_dispositionsIn fact, this holiday season could be a very happy one indeed if the Senate approves the tax extenders bill (Tax Increase Prevention Act) that passed the House by a wide margin on Dec. 3.

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

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

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

How The Triple Play Works

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

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

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

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

Recruit the Right Team

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

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

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

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

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

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

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

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

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

Watch Out for These 3 Pitfalls in Filing Form 3115s

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

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

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

Rely on Accounting Methods Specialists

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

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

Tags: tangible property regulations, accounting method changes

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

5 Questions Accounting Firms Should Ask to Uncover Cost Segregation Opportunities

Posted by David Barrett on 11/11/14 9:09 AM

Purchase, construction, exchange or inheritance of commercial real estate can add up to huge tax savings.

cost_segAs you were finalizing your clients’ 2013 extended corporate and partnership tax returns, did you find yourself wondering whether there was any way you could have saved them even more money? A cost segregation study might just be the key to putting more cash in the pockets of many of those clients.

Here are 5 question that could result in huge tax benefits for your clients:

Did the client build or buy a building with a cost basis of at least $500,000 and a high proportion of nonstructural elements?

The good news for your clients is that a cost segregation can be conducted on property that was purchased, constructed, renovated or expanded all the way back to 1987. Hotels, restaurants, apartment buildings, golf clubs, retail establishments, manufacturing facilities, restaurants, auto dealership facilities, and office buildings are among the types of buildings that are more likely to provide the high proportion of nonstructural components needed to justify the cost of the study through accelerated depreciation deductions.

We generally find that about 20% to 35% of the purchase price of these types of properties can be classified as 5-, 7- or 15-year property. However, the true answer can only be revealed through a cost segregation study conducted by specialists with tax and engineering expertise.

Does the purchase agreement include an allocation of purchase price?

If so, proceed carefully. Ask for a copy of the purchase agreement and review it with your firm’s cost segregation strategic partner. If you don’t have a strategic partner, click here to learn more.

If the agreement specifies an allocation of the purchase price between real and personal property, the client might not be able to re-allocate those costs after the fact. Why? Because in Peco Foods, Inc. v. Commissioner, the Tax Court ruled that the parties were bound by the allocation of the purchase price within the agreement, which could not be altered by a cost segregation study.

While your hands may be tied with regards to that specific property, it is still worthwhile to discuss this lost opportunity with any client who is looking to purchase additional commercial property. In the future, if your client seeks your counsel up front, then you bring in your cost segregation strategic partner to advise the client on how to leave the door open for a cost segregation study. Or better yet, you can encourage the client to negotiate a cost segregation study on the property before the sale closes.

Is the client considering building commercial property?

Accelerated depreciation deductions can drastically improve the cost-benefit calculation of new building projects. Consider a construction project with a cost basis of $1 million. If 20% to 35% of the costs can be allocated to 5-, 7- and 15-year property, then the client could accelerate tax deductions of $80,000 to $140,000 into that period, significantly lowering the total construction costs.

Is the client inheriting commercial real estate?

When a family member inherits rental property from another family member, that rental income has the potential to create a burdensome tax liability. But by conducting a cost segregation on the portion of property that receives a step-up in basis (i.e., IRC Sec. 754 basis adjustment), your client may see some relief from that additional tax burden.

Is the client conducting a 1031 like-kind exchange?

You may already know that a property owner can defer gain (and thus tax) on the exchange of like kind property. But did you know that the property owner might be able to benefit from even greater tax savings by conducting a cost segregation on the replacement property? This combination can result in increased cash flow for the property owner—and a happier client for you.

Don’t despair if you missed the opportunity for 2013! Now is the perfect time to dig deep for opportunities to accelerate depreciation deductions and delight your clients with a significantly lower 2014 tax liability.

CSP360 can help you become a tax-slashing hero. Contact us to find out how we are partnering with CPA firms around the country to delight their clients with lower tax bills and greater cash flow through cost segregation and other engineered tax solutions.

Tags: cost segregation, commercial real estate, David Barrett

3 Lessons for Building Your Commercial Real Estate Practice Using 179D

Posted by Don Warrant on 11/4/14 9:38 AM

Create urgency through the potential loss of millions in tax deductions—and align with a strategic partner who can execute.

commercial_real_estateIn last week’s post, we shared the story of how a CPA firm lured back a $50,000-a-year client using the 179D Energy Efficient Commercial Building Tax Deduction to recover more than $1 million in taxes.

The even more exciting news? This is far from an isolated incident. In our work with CPA firms throughout the United States, we have uncovered opportunities just like this countless times, positioning those CPAs to delight their clients with lowered tax bills and greater cash flow.

Here are our top three takeaways about how you can use 179D to build your tax practice:

  • 179D opens doors. Let’s face it: “We do a better tax return” as a marketing message just doesn’t cut it anymore (if it ever did). What commercial property owners really want is to free up cash flow for more profitable use, and engineering-based tax incentives are an ideal way to put that cash back in their pockets. While it is currently expired, 179D deductions may be available for prior years—all the way back to 2006, in some instances. For owners of as hotels, office buildings, retail stores and manufacturing facilities that have required updates to improve their energy efficiency, that lookback can represent a tax deduction of millions of dollars. And since most CPAs don’t have the knowledge or the engineering talent to complete a 179D study, working with the right strategic partner and educating your prospects about this potential windfall could propel you to the front of the pack.
  • Benefits of association. You probably know that qualifying for the 179D deduction requires an independent certification by an engineer licensed in the state where your client is based. Perhaps this seems like an insurmountable hurdle, but it doesn’t have to be. As the CPA in our 179D case study discovered, aligning with the right strategic partner (hmmm... are you seeing a pattern here?) that has the proper resources and personnel can provide all of the business-building benefits of 179D without having to undertake the permanent overhead and risk of bringing those resources in-house.
  • Limited-time offer. Good business developers know the value of urgency. And if your clients or target prospects are architects who design public schools and government buildings, then you have an urgent message to deliver, because the lookback available to those designers is just three years. As of right now, only green buildings and retrofits for government entities and schools performed in 2011 and later qualify for the deduction. And once the 2014 tax return is filed, 2011 will be off the table. For some architects and designers, those missed tax deductions can add up to millions of dollars. Make sure the designers of public schools and government buildings in your target market know that every day they delay a 179D study increases the chances that they are letting money slip through their fingers.

Here’s the thing about creating a sense of urgency: You have to be prepared to execute. Before you start singing the song of the potential tax benefits of 179D, make sure you have the right resources to deliver those benefits. A strategic partner such as CSP360 equips you with the engineering tools and expertise you need to confidently bring this tax-saving message to market and build your tax practice with progressive, growing commercial property owners and architects. Contact us to learn more about how we can help you spot 179D opportunities in your current client base and with your target prospects.

Tags: commercial real estate, Section 179D

How A CPA Firm Lured Back A $50,000 Architect Client With $1 Million in 179D Deductions

Posted by Don Warrant on 10/28/14 9:24 AM

Impressed by tax savings for energy efficient designs of public buildings, client re-hires firm for tax planning and compliance work.

179D_DeductionsImagine that you are a business owner who just realized that you missed out on hundreds of thousands of dollars in tax deductions that you could have claimed as a result of building or designing energy-efficient buildings. How would you feel about the CPA firm that let those opportunities pass you by?

Now imagine that you are the CPA who educates that business owner about how she could realize those tax savings and redirect that much-needed cash into her business operations. Do you think that success would help position you as the go-to provider for all of the firm’s tax planning and compliance needs?

The answer, of course, is YES! We have seen this scenario play out time after time. In fact, with CSP360 serving in the background, a Southeastern regional CPA firm recently won $50,000 in recurring work from a former client by educating the owner about how her architectural firm could claim current deductions for their designs of energy-efficient public schools and universities, as well as government and municipal buildings.

Here’s how this architect learned that she could slash her firm’s tax bill and free up cash flow using the 179D deduction:

The architect asked her (soon-to-be former) CPA about whether her firm could claim a deduction under 179D. The uninformed CPA assured her (falsely) that qualifying for the credit would be overly burdensome, and the firm would not be likely to reap significant benefit.

But that answer never fully satisfied her. So when she received an invitation to attend a U.S. Green Building Council (USGBC) chapter meeting about the 179D Energy Efficient Commercial Buildings Tax Deduction, she immediately accepted. Interestingly, the speakers included a representative from a regional firm that used to handle her firm’s tax and accounting work. She hadn’t realized that the firm was so closely aligned with the USGBC, and she was intrigued.

Yes, architects can qualify for 179D

What she learned at that 179D seminar surprised and delighted her—but it also disappointed her to confirm that her current CPA had really let her down! The presenters shared examples of dramatic tax savings achieved by designers of public school buildings—the very types of buildings that this architect had been designing for more than six years. They explained that the 179D provision had expired at the end of 2013, but that designers of public schools and government buildings can amend tax returns to claim tax deductions for buildings or retrofits from any open tax years.

She also learned that, while it is true that qualifying for the credit requires the designer of public buildings to obtain an “allocation letter” from the government agency that owns the buildings, as well as independent certification by a licensed engineer, these hurdles are completely manageable with a knowledgeable and experienced partner by your side.

Good news and bad news

This architect lost no time in meeting with the regional CPA firm and CSP360 to discover just how much she could recover using the tax deduction. She was not disappointed! After conducting a thorough analysis of the architect’s records and performing site visits, the tax and engineering specialists discovered that the architect qualified for a total of more than $1 million in tax deductions for public buildings designed in the past three years.

The bad news? The architect could have lowered her tax bill even more with tax deductions for previous years if only she had known about the opportunity sooner. Because designers of public buildings only qualify for a 3-year lookback window (taxpaying building owners can look all the way back to 2006), she had missed out on several hundred thousand in tax deductions for public buildings the firm designed prior to 2011.

The spectacular news for this regional CPA firm? This former client, who had left the firm for a competitor almost a decade ago, was so impressed with these tax savings that she re-engaged the CPA firm for all of her tax planning and compliance work, worth about $50,000 per year.

Are you missing out on opportunities to win new business with architects and designers of public buildings—plus owners of commercial buildings? CSP360 partners with CPA firms across the country to spot these opportunities and perform the energy efficiency certification required to qualify for the 179D Energy Efficient Commercial Building Tax Deduction.

Tags: Section 179D

Complying With The Tangible Property Rules

Posted by Don Warrant on 10/21/14 9:17 AM

Don’t let them be fooled into thinking a repairs and maintenance review equals compliance.

There’s a reason that every CPE session you’ve attended in recent months has addressed the tangible property regulations. Compliance with this complex set of rules is mandatory for the 2014 tax year. If your client is not in compliance, and therefore understates taxable income, you as the tax preparer are on the hook for stiff penalties—not to mention the potential loss of a client.

But bringing your client or a prospect into compliance entails a significant amount of your time, not to mention specialized expertise regarding method changes. So how do you convey the importance of complying with these voluminous rules so that those clients are willing—even happy—to pay you for the extensive time that will be required of you?

Following are four things that clients and prospects need to know about 263(a) compliance:

  • 263(a)_compliance“There’s gold in them hills.” While compliance with the tangible property regulations can be an arduous climb, a thorough review by tax and engineering experts can pay for itself by mining opportunities to take current deductions for repairs and dispositions of tangible property.
  • A repairs and maintenance review is not enough. Your clients should know that any report that merely identifies deductions, with no “givebacks” in the form of additional capitalized costs, is unlikely to address the client’s full compliance responsibilities. The tangible property regulations consist of five sections, each of which entails required method changes, as well as optional elections. Identifying previously capitalized costs that are now eligible for current deductions comprises only one-half of one method change (out of a total of 27).
  • That capitalization policy is a good start, but it’s still not enough. Some clients are under the impression that they complied with the new rules when they put in place a capitalization policy last December. While necessary to adopt the de minimis election, the capitalization policy does nothing to address the many other components of this substantial body of regulations.
  • Engineering knowledge is not enough. True compliance with the tangible property regulations requires a combination of deep knowledge of this nuanced area of the tax code. While firms that specialize in cost segregation may sing an alluring tune of tax savings, they may not have what it takes to make sure the clients’ 263(a) compliance requirements are met.

Of course, simply telling your client or a prospect what doesn’t constitute compliance is not going to give you the opportunity to help them with these complexities, and in the process, earn additional revenue. That’s why you need to present clients and prospects with a carefully thought out plan regarding the applicable method changes and the potential impact on their 2014 tax liability. Armed with that comprehensive plan—which most likely will include some tax-minimization opportunities—you will demonstrate that you are looking out for his best interests.

Backed by the expertise of Top 100 accounting firm Freed Maxick, CSP360 partners with CPA firms across the country to bring their clients into compliance with the tangible property regulations and identify opportunities for tax minimization. Contact us to learn how we can help you deliver the highest level of value to your clients.

Tags: New Tangible Asset Regs, 263(a) regulations, Don Warrant, tax saving opportunities

How to Quote a 263(a) Project to a Client or Prospect

Posted by Don Warrant on 10/14/14 9:09 AM

To bring clients tax minimization opportunities and get them into compliance, build in enough time to fully test assets and expenses.

263(a)By now, you know that every one of your clients and prospects must comply with the tangible property regulations for the 2014 tax year. But uncertainty about what exactly that compliance project will entail may have kept you from quoting these 263(a) projects.

Ideally, every CPA should start bringing clients and prospects into compliance as soon after the October 15 tax deadline as possible. Every day you delay starting the process will make the 2015 tax-time crunch more onerous.

Some overwhelmed CPAs might be tempted to think that, because a boutique cost segregation provider has performed a review of fixed assets to identify deductions, the compliance problem has already been taken care of. This is a dangerous assumption. These boutique providers are adept at combing through the fixed asset schedule to pick out costs that were previously capitalized and now are eligible to be expensed. But when it comes to identifying costs that were expensed and now must be capitalized, those providers lack the tax expertise (and motivation) to perform that analysis.

Make no mistake; a fixed asset review is not enough to bring your clients or prospects into compliance with the tangible property regulations. As the signer of your client’s tax return, you need assurance that the client is fully in compliance with the tangible property regulations.

Unless your client’s engineered tax solutions provider also comes to the table with deep knowledge of tax law and method changes, you will need to build into your quote many hours of your own time to examine and analyze the impact of these complex regulations.

What You Need to Do to Bring Clients Into Compliance

When it comes to your more complex clients and prospects who own multiple commercial properties, the hours required for a 263(a) compliance project can really add up—in some cases to a hundred hours or more. The project essentially consists of three phases:

Phase 1—Information Gathering

During the initial information-gathering phase, you perform a preliminary assessment of the extent of the regulations’ impact for each of the five primary sections of the regulations (materials and supplies, de minimis amounts, amounts paid to acquire or produce tangible property, improvements to tangible property, and dispositions).

This analysis requires access to both the fixed asset schedule and the general ledger. What you’re looking for is any large dollar amount that is likely to jump out at an IRS examiner. For example, you’ll want to flag for further analysis any asset on the books with a high net tax basis, such as buildings and leasehold improvements.

Once you have a list of these high-dollar assets and expenses, ask the client or prospect for more information about exactly what type of work was performed. Based on their answers, you should have enough information to identify the method changes that your client will be required to perform, as well as those elections that will save the client money.

This analysis—which can take anywhere from a couple of hours to a couple dozen hours—is necessary before you can accurately quote a fee for the second and third phases of the project. Without this information, you’re really just guessing which of the regulations’ 27 method changes and 7 elections applies.

Phase 2—Analysis

Based on the information gathered in Phase 1, perform tests on those fixed assets and expenses to generate the depreciation amounts and deductions that you will use in your client’s 2014 tax return. Also during this phase, you will prepare Forms 3115 to report method changes. Documentation is critical during this phase to support your position in the event of an IRS examination.

Phase 3—Incorporate method changes

During the final phase of the 263(a) project you assist the client or prospect with updating internal accounting procedures in accordance with these method changes and their own capitalization policies.

A Comprehensive Compliance and Tax Minimization Solution

Overview-of-Annual-ElectionsAnnual_ElectionsBringing clients into compliance with the tangible property regulations is no simple endeavor. An accounting methods specialist will be best positioned to determine which of the 27 method changes is applicable. CPAs who trust that their clients’ boutique providers of engineered tax solutions have the compliance angle covered may be in for a rude surprise when the IRS starts reviewing those tax returns in 2015 and beyond.

Overview-of-Automatic-Method-ChangesBacked by Top 100 firm Freed Maxick, CSP360 provides CPA firms access to deep expertise in tax and accounting methods combined with practical engineering and construction cost knowledge. Contact us to find out how we can help bring your clients fully into compliance with the tangible property rules while also digging deep for tax minimization opportunities.

Tags: 263(a) repair and maintenance review, 263(a) regulations, tax saving opportunities

Why Your Commercial Real Estate Clients and Prospects Should Jump for Joy Over the Final Disposition Regulations

Posted by Don Warrant on 10/7/14 9:27 AM

A clean sweep of old leasehold improvements can make for a shiny tax outlook.

old_leasehold_improvementsDoes your client base (or prospects) include owners of commercial rental property? If so, those landlords should be leaping with joy. If they’re not, it’s probably because you didn’t explain how much money they can save by cleaning up their old depreciable assets accounts.

As your commercial property clients rotate tenants in and out of a space, they usually make improvements for each new tenant. Generally, tenant improvements are depreciated over a 39 year or 15 year period. The tax law allows for the recognition of a loss on the abandonment of leasehold improvements when they are irrevocably disposed of. However, your client may be continuing to depreciate leasehold improvements abandoned in prior years. So that means it’s likely that some depreciable basis for those old assets still remains on the client’s books. But the final disposition regulations allow taxpayers to recognize a loss on the prior year abandonments and removal costs by making a method change for the current tax year. And that means you can delight those clients or prospects with current tax deductions.

Use the Depreciation Schedule to Uncover Tax Savings

To identify opportunities to abandon leasehold improvements, take a look at the client’s depreciation schedule for capitalized “leasehold” and “tenant” improvements.

Once you have a list of these improvements, identify the names of the tenants for whom they were made. (Ideally, your client or prospect has noted the name of the tenant next to the asset on the depreciation schedule.) Compare that list to the current rent roll. Are there certain names that don’t match up? That most likely means that those improvements were for prior tenants. Bring this list to your client or prospect and ask what happened to those improvements. If subsequent improvements have been made to the space, then you have an opportunity to take a current tax deduction for the remaining tax basis in the abandoned leasehold improvement cost or portions thereof.

Remember that your ability to defend any method changes to expense those assets will rest on the quality of the client’s documentation about those improvements, as well as the method used to segregate those costs. While the final disposition regulations allow taxpayers to use “reasonable methods” such as the Producer Price Index, an engineering-based cost segregation will generally result in a more accurate (and generally, higher) number and is more likely to stand up to IRS scrutiny.

Looking to demonstrate to your commercial property owners that you deliver value far beyond compliance? Contact CSP360 to find out how we can position you as a tax-slashing hero through our private-label tax solutions.

Tags: tangible property regulations, Don Warrant, tax saving opportunities

What to Tell Your Commercial Real Estate Clients About Dispositions of Tangible Property

Posted by Don Warrant on 10/2/14 9:17 AM

Use it or lose it: Claim current deductions by cleaning up old assets now.

new_tangible_property_disposition_rulesWith the August 14 release of the final disposition regulations and the accompanying implementing procedure changes, commercial real estate owners and their CPAs received some welcome news.

Property owners can continue to make a late partial disposition method change when filing 2014 tax returns. Unfortunately, after 2014, taxpayers can no longer make late partial disposition method changes. However, taxpayers can continue to claim a loss on the disposition of a portion of an asset when the disposition occurred during the current tax year.

Act Now or Miss this Opportunity Forever

The ability to recognize a loss on the disposition of a structural component that was disposed of in prior years expires for tax years beginning on or after January 1, 2015. Therefore, if your client or prospect replaced structural components of buildings in prior years, they must act quickly to take advantage of this one-time opportunity to generate additional tax deductions for the 2014 tax year.

Partial Dispositions Hold Tax-Minimizing Potential

Generally, the final regs regarding dispositions of tangible property were largely unchanged from the 2013 proposed regulations. Most notably for your clients and prospects that own commercial real estate, this means that they can count on the ability to recognize a loss on the disposition of a structural component of a building when an improvement is capitalized during the current tax year.

For owners of commercial property, this ability to recognize a loss on a “partial disposition” may hold even more tax-saving potential than a repair and maintenance review. That’s because the final tangible property regulations narrowed the definition of unit of property (UOP) for buildings, which may result in the capitalization of more improvements. Historically, property owners couldn’t recognize a loss on the disposition of a structural component of a building. As a result, clients have been depreciating multiple building components.

Now that the IRS and Treasury have said that the building and its structural components (roof, walls, windows, floors, doors, etc.) comprise one UOP and each of the eight building systems comprise separate UOPs, they have made it much harder to justify treating a cost as a deductible expense—but for the first time provide an election to recognize a loss on the disposition of a structural component (e.g., a roof). And in the event that an IRS examination requires the capitalization of a repair, taxpayers may elect to recognize a loss on the disposition of the related structural component on the current year tax return.

Don’t Overlook Removal Costs

There is yet another tax-saving opportunity for your clients and prospects that could be completely missed by CPAs who lack construction and engineering expertise. Disposing of an asset typically involves some removal costs—for example, paying workers to pull up old roof tiles and putting fuel in a dump truck to haul them away. These removal costs can (and should) be deducted along with the remaining basis in the old roof, and they require a separate method change.

If you don’t have access to the construction and engineering expertise required to determine the depreciable basis of disposed assets, then the final disposition rules allow the taxpayer to use a “reasonable method” to determine the asset’s basis. But these methods, including the Producer Price Index, are limited in application and generally do not take into account removal costs.

The Value of Engineering Expertise

What is the original cost basis of the portion of property that was replaced? What was the cost to remove those assets? These are questions that require both detailed documentation and experience with construction and engineering approaches. The tax and cost segregation specialists of CSP360 partner with CPA firms across the country to reduce clients’ tax bills while bringing them into compliance. Find out how with a Deep Dive into our process.

Tags: commercial real estate, tangible property regulations, Don Warrant, tax saving opportunities

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