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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.

Income_tax_123.jpgAlbert 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

Compliance.jpgAs 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

Form-Filing.jpgThe 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?

Time-For-Change.pngThroughout 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

Finding Hidden Tax Opportunities for Real Estate Clients

Posted by Don Warrant on 12/22/15 9:06 AM

Just like real estate itself, when you want to find tax opportunities for real estate clients, it’s all about location, location, location.

Hidden_tax_opportunities_real_estateReal estate opportunities often involve hidden tax opportunities. To find those opportunities, you need to know where to look. The location may vary depending on the opportunity and the client, so it’s important that everyone at your firm understand how to search effectively.

Existing Clients

If you have the tax return and depreciation schedules for a client that has significant real estate holdings, you have the key to unlock several different potential deductions. “Significant” in this case doesn’t necessarily mean multiple properties. A non-real estate business that owns its own building may have hidden tax savings locked up in its property just as easily as a landlord. For that matter, even a business that rents its space might have invested in leasehold improvements that qualify for certain credits, deductions or accelerated depreciation.

The first and easiest place to look is on IRS Form 4562, Depreciation and Amortization attached to the tax return. Specifically, look to Part III, Lines 19h and 19i. Amounts listed here for residential rental property and nonresidential real property could indicate that a cost segregation study might be of value. If amounts on these lines exceed $1 million, it’s worth touching base with a client to see if they have ever considered cost segregation. If in fact the amount represents a capital improvement, then consider whether the improvement qualifies for the IRC Section 179D deduction for energy efficient improvements to commercial buildings. In addition, an election to recognize a partial disposition of tangible property should always be considered when capital improvements are made to existing buildings.

It’s also possible that when applying the unit of property rules for buildings, the amounts that were originally reported as capital improvements on Form 4562 should have been claimed as deductible repairs. For example, an amount incurred to replace a portion of a roof may qualify as a repair. However, if the roof was completely replaced, then the election to recognize a partial disposition should be considered for the old roof.

In addition to looking for new opportunities, all of your client-serving professionals should be trained to listen for them as well. If a client is talking about making improvements to real estate, relocating an office or adding a second location, that client needs to know that there are potential tax advantages available based on everything from the location they choose to the materials and fixtures they use. One way to stay ahead of the curve on this is to bring it up every year when you go over the tax return. When you walk through the Form 4562, always remind them that if they are considering any significant changes to real property assets, those opportunities should be reviewed for possible tax advantages.

Prospective Clients

Tax opportunities that relate to real estate provide an excellent foot in the door with potential new clients for 2 reasons. First, most significant real estate transactions are a matter of public record. Second, businesses rarely engage in real estate transactions alone.

The public filings related to real estate purchases and improvements announce to your community just about every project that could lead to tax savings. In most areas, you can subscribe to a service that notifies you when building permits are filed or deeds are recorded. With that information, you can reach out to the relevant parties with a very targeted contact that asks if they have considered all of the possible tax benefits of their new project, or if they have planned the new project in a way that takes full advantage of deductions and credits available.

Cost Segregation Partnership Opportunity The community that supports real estate purchases and improvements can be an excellent source of referrals. Your local construction businesses, loan officers and real estate brokers all have an interest in making sure their clients qualify for as much building as they can afford. The money saved by focusing on real estate deductions and credits could make the difference for a business that is on the verge of a significant improvement.

So whether you’re looking to offer more services to your existing clients or reach out to new clients, real estate tax opportunities can spark an important conversation that often leads to happy clients.

Tags: cost segregation, commercial real estate, Don Warrant

5 Steps to Build Cost Segregation Into Your Tax Practice

Posted by Jennifer Birkemeier on 12/8/15 8:58 AM

A quality cost segregation study begins with the building plans. A quality cost segregation practice begins with this 5-step plan.

5-StepsWe spend a lot of our time at accounting and tax events talking to professionals about cost segregation. Our discussions often focus on growing their practices. We’ve found that CPAs and tax advisors tend to focus on organic growth in existing service areas or growth through acquisition. When we offer a third alternative, growing the practice by adding cost segregation as a new service line, many express concern that the effort involved in such a task would be better spent on growth in existing service areas. Whenever we hear someone raise that issue, we point out that there are 5 relatively easy steps to getting a cost seg practice up and running at a firm. As we explain those steps, we’ve noticed that a lot of heads start to nod “yes.”

  1. Get Partner Buy-In. We don’t have to tell you that any new offering at your firm will go nowhere until a significant number of partners get on board. The arguments that tend to win them over are an increased revenue stream from existing clients and staying ahead of competitors who might offer this service to your clients. The good news is if you contract with a quality cost seg provider, it’s not unusual for a study to bring in an additional $2,000 per study in revenue from existing real estate clients with little work on the firm’s part. The bad news is that with numbers like that, it’s not hard to imagine that your competitors might gain a foothold with your clients if you don’t offer the service first.
  2. Selecting a Provider. The IRS notes in its “Cost Segregation Audit Technique Guide” that the preparation of a cost seg study requires knowledge of both the construction process and the relevant tax law. Unless your firm has a partner or manager who spent significant time as a construction engineer, you will probably see your ROI on this new service line ramp up much more quickly if you contract with a cost seg provider to do the studies.
  3. Educating Your Staff. Like any new service, your staff needs to understand what it is and how to identify clients who can benefit from it. This is another advantage in hiring a quality provider of cost seg services—a provider will often have CPE prepared for the key individuals at the firm who will speak with clients and targets about the product.
  4. Identifying Clients Who Can Benefit. This topic could be an entire blog post unto itself, and in fact we will be posting a blog to that effect in the near future. The short version is that the information you need to identify existing clients who could benefit from cost seg probably already exists in your system. Most of the information you need to assess the value of a cost seg engagement to your clients is found on their depreciation schedules and Form 4562, Depreciation and Amortization, in Part III. If you have their tax return, you probably have all you need to figure out if the service makes sense for them.
  5. Marketing the New Service to Clients. Once your people know what the service is and how it can help clients, the next step is to tell your clients about it. You need to have quality marketing materials to support the effort, and you need to be ready to answer questions like, “Why isn’t this service included in my return prep fee?” and “How come you didn’t bring this up sooner?” If you build the practice in-house, you need to make sure your people are ready for these questions before they talk to clients. If you contract with a provider, you should expect that provider to deliver customizable marketing materials and training support to make sure the people who sell the new service do so effectively.

Cost Segregation Partnership Opportunity New service lines can be a challenge for any accounting or tax practice. When it comes to cost segregation, these 5 steps can make that challenge much more manageable and help your firm see the return on its investment sooner.

Tags: cost segregation, Jennifer Birkemeier

3 Ways to Help Your Clients Take Advantage of the Increased De Minimis Safe Harbor Threshold

Posted by Don Warrant on 12/1/15 8:35 AM

IRS Announcement Means Great News For Your Clients Who Do Not Have an Applicable Financial Statement

Raising-the-bar.jpgThe de minimis safe harbor is an elective provision that establishes a threshold below which all qualifying amounts are considered deductible. This provision is intended as an administrative convenience allowing taxpayers to deduct amounts paid for the acquisition or production of new property, or the improvement of existing property that would otherwise be subject to capitalization.

On Nov. 24, the IRS announced an increase in the dollar threshold from $500 to $2,500 for taxpayers who do not have an Applicable Financial Statement (“AFS”). An AFS includes certified audited financial statements. (See IRS Notice 2015-82.) This increase in the dollar threshold is effective for costs incurred during taxable years beginning on or after January 1, 2016.

3 steps CPAs should take with clients who do not have an AFS as a result of this change:

  1. Contact clients before the beginning of the 2016 taxable year.

    A taxpayer electing to apply the de minimis safe harbor may expense amounts paid for the acquisition or production of tangible property that are expensed for book purposes in accordance with accounting procedures in place as of the beginning of the taxable year. Under this election, the taxpayer may not capitalize any amount paid for the acquisition or production of a unit of tangible property nor treat as a material or supply. However, IRC Section 263A may require the capitalization of direct and allocable indirect costs of property produced by the taxpayer.

    For taxable years beginning on or after January 1, 2016, amounts expensed for book purposes that do not exceed $2,500 per invoice, or per item as substantiated by the invoice, may be expensed for tax purposes under the de minimis safe harbor election.

    Determine whether your clients’ book procedures for expensing tangible property should be changed before the beginning of the 2016 taxable year. Although not required, a written policy provides the best documentation in the event of an IRS examination.

  2. Instruct your clients to obtain itemized invoices from vendors and to have transaction costs invoiced separately.

    The dollar threshold is applied on a per item basis when substantiated by the invoice. Therefore, instruct your clients to obtain invoices that substantiate the cost per item.

    Transaction costs are excluded from the per item cost when invoiced separately. Therefore, instruct your clients to have transaction costs such as delivery fees and installation charges billed separately.

  3. Make your clients aware of prior year audit protection.

    Your clients may have adopted accounting procedures in prior years that exceeded the $500 de minimis threshold. Previously, the amounts expensed in excess of $500 were subject to IRS examination. cost segregation guide for CPA firms However, Notice 2015-82 states that the IRS will no longer examine amounts expensed in prior years that do not exceed $2,500 per invoice (or per item as substantiated by invoice) when the amount was expensed in accordance with accounting procedures in place as of the beginning of the taxable year.  

Get your clients and prospects the information they need to reduce their tax burden. If you have questions or want to partner with qualified experts, contact us.

Tags: Don Warrant, deductions, de minimis safe harbor, tangible property

The Key Ingredients of a Quality Cost Segregation Study

Posted by Don Warrant on 11/24/15 9:19 AM

A Recipe for Quality as Set Forth by the Chefs at the IRS

Some days tax practice is an art, and some days it’s a science. And every now and then, you get that rare day when it’s as easy as following a recipe. If you want to know if a cost segregation study that you and your client are planning meets the IRS standard for one of these studies, the Service’s “Cost Segregation Audit Technique Guide” spells out a list of 13 elements that contribute to a “Quality Cost Segregation Study.” A “quality” study is accurate and well-documented with respect to:

  • Classification of assets,
  • Explanation of rationale, and
  • Substantiation of asset basis.

In order to be considered a quality study, a cost segregation study should contain each of these principal elements:

  • Preparation by an Individual with Expertise and Experience. Typically, you want someone with a construction background, like a construction engineer, to conduct the study. In addition, someone with experience in cost estimation and allocation should also participate. The study should identify the preparer and describe the person’s relevant credentials, experience and expertise.
  • Detailed Description of the Methodology. The study must describe the methodology used and detail the steps taken to classify assets and determine costs.
  • Use of Appropriate Documentation. Contemporaneous documentation is critical to support classification of assets and determination of costs. Types of documentation may vary based on whether property is new or used and also on availability of original construction documents.
  • Interviews with Appropriate Parties. Contractors, subcontractors, taxpayers and property managers all have something to contribute when it comes to understanding the construction process and the use of the property. These interviews should be conducted and, in accordance with the bullet above, documented.
  • Use of a Common Nomenclature. This element flows out of the first bullet-point. Individuals with a construction background understand that terms used to describe the property should be consistent with blueprints and other project documents.
  • Use of a Standard Numbering System. It’s important to number assets consistent with contract bid documents and pay requests.
  • Explanation of Legal Analysis. A quality study should contain thorough analysis of relevant law, including relevant citations, to support section 1245 property classifications.
  • Determination of Unit Costs and Engineering “Take-Offs.” The process of breaking down total project costs into each unit or class of property must be carefully documented and the methodology used to assign costs to each asset should be clearly explained.
  • Organization of Assets Into Lists or Groups. Asset listings should also tie to the taxpayer’s fixed ledger.
  • Reconciliation of Total Allocated Costs to Total Actual Costs. The best way to confirm the accuracy of the allocations in the study is to reconcile them to actual costs. It’s also important to consider and list separately acquired Section 1245 property to avoid duplication.
  • Explanation of Indirect Cost Treatment. All costs associated with a particular project, both direct and indirect, should be listed and the treatment of indirect costs should be explained. That explanation should include the purpose of the indirect cost, its allocation and any deviations from commonly accepted practice.
  • Identification and Listing of Section 1245 Property. Clearly identify and list 1245 property and show any Section 1250 property that has been reclassified to Section 1245 property.
  • Consideration of Related Aspects. Related audit issues, such as IRC Section 263A, changes in accounting method, and sampling techniques should be addressed in the study. This element should include comments on the treatment of these items for tax purposes, especially if amounts are restated for prior years.

New Call-to-action Almost every business has some unique quirks and unusual processes that come to light when an outsider looks in. The key to translating those processes into a quality cost segregation study is finding a partner with a strong focus on cost segregation and experienced resources who understand both the construction process and the accounting rules associated with real property.

Tags: cost segregation, Don Warrant

There’s More to a Building than Meets the Eye

Posted by Jennifer Birkemeier on 11/18/15 8:56 AM

There’s much to be learned from looking at the building and talking to the folks who constructed and maintained it, but the proof for any deductions will be found in the drawings.

Cost_seg_gold_in_blueprintsMost of us have been through a home inspection when purchasing a residence. You walk through with a professional who is trained and licensed to spot the potential problems that could be lurking behind that beautiful façade you just couldn’t resist. Most home sales are contingent on that professional certifying that the residence is up to code and that any potential structural or systemic problems are brought to light before settlement.

When it comes to understanding the types of assets that make up the structure and systems in a commercial property, a similar type of inspection is needed. The professional who performs that review will do a walkthrough, but the key step in the process will require a look behind the walls and under the floors. In order to find opportunities for accelerated depreciation that may be hidden in 39-year assets, a person with a background in commercial property construction needs to see the blueprints and other schematics that tell the full story of everything in a building.  

A Blueprint for Success

The documentation starts with a blueprint, but effective cost segregation requires even more detail. An experienced construction professional will want to see:

  • Finish Schedules—These provide the specifics on the materials used in the walls and floor coverings. Two wall coverings may look identical to the untrained eye, but one might qualify for a deduction or credit that has previously been missed.

  • Electric Panel Legends—Many outlets and circuits are customized to support specific equipment. Costs associated with that wiring may be deductible over the life of the equipment, which will always be shorter than the life of the building.

  • Plumbing Schematics—Specialized supply and waste lines that support particular functions can also lead to accelerated deductions. Beverage dispensers, grease interceptors and other custom fittings could be depreciated more quickly than the overall property.

  • Tenant-Specific Improvements—If your client rents property to a restaurant, the industrial fans needed for ventilation may be expensed over the life of cooking equipment instead of the building. Hotels or mixed-use properties that include restaurants may have the same hidden savings available. Additional power sources, wall materials and water supply needed to support medical professionals can generate significant cost accelerations.

When Deductions Are Questioned, Plans Are Reviewed

The IRS has put out specific guidance on what should be included in a cost segregation plan. They also have an audit manual for these plans. The first step in an examination of segregated costs is a review of the building plans and schematics. If your client’s deductions get called into question, it’s important to know that the numbers are based on the information that the IRS relies on for verification.

Would You Buy a House Without an Inspection?

cost segregation guide for CPA firms Many of us can look at a house and spot glaring problems. But when it comes to putting your money down and making a purchase, you want the assurance of a professional that you haven’t missed something.  

It’s no different if you want to deliver cost segregation services to your clients. Having a knowledgeable professional review the building plans in addition to an inspection will deliver an accurate, exhaustive list of the costs that can be accelerated.  

Tags: cost segregation, commercial real estate, Jennifer Birkemeier

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