How One CPA Firm Delighted a Manufacturing Client With $8 Million in Accelerated Depreciation Through Cost Segregation

Posted by Don Warrant on 9/16/14 9:32 AM

Strategic partnership positions firm to earn client loyalty (and $120,000 in fees).

cost_segregation-2As a forward-looking CPA who serves growing businesses and owners of commercial property, you have significant opportunities to delight your clients through reduced tax bills and increased cash flow. Partnering with the right provider of cost segregation and other engineering-based solutions will help ensure that you can deliver the greatest possible amount of tax savings related to tangible property.

Consider the following example:

After a period of more than 20 years of flat or declining revenues, a 100-year-old manufacturer of motor parts was starting to see increasing sales and margins. In fact, business was looking so good that the company was planning to expand into a new $30 million facility.

The spark behind this renaissance was an injection of new leadership. The son of the former owner (and grandson of the founder) had recently taken over and undertaken initiatives designed to improve the business’ margins and position it for growth. As one of these initiatives, the third-generation owner sought out a new CPA firm with the skills and resources to support and enhance this growth. When he asked around for such a progressive CPA firm, he kept hearing the name of one firm—we’ll call them Progressive CPAs.

Tax-Slashing Heroes

Although they are a small firm, Progressive CPAs possesses the tax expertise and mindset that the manufacturer needed to improve margins and profitability. So when the company landed a major account and needed to move into a 250,000-square-foot facility, the owner looked to Progressive for ideas on making the cost of the expansion more manageable.

The company’s newly profitable status was about to trigger a hefty tax bill, which would swallow up the cash the company would need build the new plant. And after 20 years of almost zero retained earnings, and a new leader at the helm, creditors were not exactly lining up at the door with generous terms.

But Progressive CPAs had a secret weapon in their back pockets in the form of a strategic partnership with CSP360. Through this partnership, Progressive has total access to CSP360’s 15-plus years of experience helping commercial property owners accelerate depreciation deductions and identify other tax-minimization opportunities based on building, acquiring and improving real estate and other tangible property.

Tapping into this extensive experience and research, Progressive was able to identify more than $8 million in accelerated depreciation deductions for the manufacturer, plus additional current-year deductions based on a 263(a) repair and maintenance review. Those tax savings freed up cash that the company needed for those capital expenditures, which put a big smile on everyone’s faces.

And what made Progressive CPAs smile? True, they earned a handsome engagement fee of $120,000 for the project. But even better, the CPA firm proved to this new client that it could live up to its name by delivering progressive tax solutions.

The Secret Weapon: A True Partnership

The secret weapon that enabled the CPA firm to earn this manufacturer’s loyalty and a hefty engagement fee was a strategic partner who is truly integrated with the firm and operating as an extension of the firm—not simply a vendor looking to sell a project.

When the expansion project came up, Progressive CPAs didn’t have to call around to multiple cost seg vendors, seek quotes, and verify credentials. The firm had already fully vetted CSP360’s tax and engineering expertise, backed by more than 15 years of research on tax code and case law. And so they could be confident that the manufacturing client was in good hands, and they even trusted CSP360 to represent the firm at client meetings. That sort of trust does not come from a vendor relationship—only from a true strategic partnership.

CSP360 can help you achieve the same types of results with your commercial property owners. Let us take a Deep Dive through your client list to uncover opportunities to slash your clients’ tax bills and strengthen your client relationships.

Tags: cost segregation, Don Warrant

3 Most Important Things to Tell Your Clients About the Tangible Property Regulations

Posted by Don Warrant on 9/9/14 9:37 AM

Lead with tax savings on past repairs and maintenance, and close with ways to minimize taxes in the future.

Section_162(a)As a CPA in touch with your commercial real estate client base, you know that the final tangible property regulations represent significant opportunities to uncover tax savings for those clients while bringing them into compliance with IRC Section 263(a) and Section 162(a).

We CPAs tend to get so excited about these opportunities that we sometimes get a little “geeky” about the regs. But the fact is that clients really don’t care about all the minutiae of tax law. All they care about is how they can save money on their tax bills, increase their cash flow, and do it without Uncle Sam slapping them with penalties and interest.

With those goals in mind, here are the three most important things you should tell your clients about the tangible property regulations:

  1. Tax savings could far exceed the costs of compliance. Telling a story of tax-minimization is sure to make your clients’ eyes light up. The Treasury expects every taxpayer with fixed assets to conduct a review of their accounting for tangible property and file at least one Form 3115 with their 2014 return. But rather than lead with a dreary tale of compliance, talk up the tax savings. Review the client’s fixed asset schedules now to identify those repairs they were previously capitalizing. And while you’re at it, take a look at opportunities to accelerate depreciation deductions.
  1. 263(a) and cost segregation go together like peanut butter and chocolate. For commercial property owners, the first step in complying with the tangible property regulations is to segregate out the eight building systems from the building and its structural components. Clients that have already had a cost segregation study performed are that much closer to 263(a) compliance and identifying opportunities to deduct repairs that were previously capitalized. For clients that have not benefited from a cost segregation study in the past, now might be an ideal time to do so. The engineering analysis required for a cost seg is the same as that required under the 263(a) system break-out, so why not take that extra step of identifying 1245 property that qualifies for accelerated depreciation?
  1. These rules provide a roadmap to future tax savings. Now that we have final rules defining unit of property and tests for repairs vs. improvements, you can help your clients plan their future renovation activities so that they qualify as deductible repairs.

Remember: These are just the highlights. The final tangible property regulations contain a plethora of opportunities to deliver tax-saving value to clients while bringing them into compliance. Taking advantage of these opportunities requires engineering expertise. If you are interested in partnering with CSP360 to help improve your clients’ current and future cash flow, contact us to request a Deep Dive into our process.

Tags: 263(a) regulations, Don Warrant, Section 162(a), tax savings from repairs vs capitalization

3 Ways Your CPA Firm’s Clients Can Make Costly Mistakes Under the Tangible Property Regulations

Posted by Don Warrant on 9/2/14 10:29 AM

You can help them avoid these mistakes through proactive tax planning.

Tangible_Property_RegulationsIn previous blog posts, we have regaled you with the many ways that your commercial real estate clients can benefit from the final rules regarding tangible property accounting. Well, there are also some ways that those same clients can shoot themselves in the foot.

Here are the biggest mistakes that we see clients making with regard to the tangible property regulations:

1. Clients think they can comply with only a portion of the rules.

The U.S. Department of Treasury has been very clear: Taxpayers cannot pick and choose which portions of the tangible property regulations with which they will comply. Some clients simply want to change their fixed asset accounting to comply with the rules going forward, without bothering to address past expenses that were improperly classified. Doing so puts your client at risk of having adopted an impermissible method change for the property. Taxpayers are required to consider both capitalized repairs that may be deducted as well as expensed costs that must be capitalized for the building.

2. They ignore low-hanging fruit.

The final tangible property regulations include several taxpayer-friendly safe harbors. The de minimis safe harbor election, routine maintenance safe harbor and small taxpayer safe harbor all shield taxpayers from IRS scrutiny. Of course, not every client will qualify for these safe harbors, but it is your job to see if they do qualify for these simple ways to increase tax savings while staying in compliance.

3. They don’t want to clean up their depreciation schedules.

For the first time—and most likely a limited time—proposed regulations allow taxpayers to take current deductions for previously disposed assets that are not yet fully depreciated. While making a “late partial disposition election” is purely optional, those who hesitate may lose the opportunity. The final regulations are expected to allow taxpayers to make late partial disposition elections for the 2014 tax year. Currently, the election is only available for the 2013 tax year.

As your clients’ trusted tax advisor, it is your responsibility to keep them from making these costly mistakes. We recommend that you conduct a mid-year review of your clients’ accounting methods for tangible property to determine the method changes and elections necessary to comply with the final regulations. It is likely that the tax-minimization benefits will outweigh the costs of compliance.

If you need support from a strategic partner with a deep knowledge of the tangible property regulations and the engineering expertise required to uncover the maximum tax savings, contact us or request a Deep Dive into our process.

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

5 Questions to Uncover a 263(a) Opportunity

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

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

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

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

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

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

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

Act NOW on 179D Opportunities for Commercial Real Estate Owners

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

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

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

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

263(a) Reviews Can Turn Up 179D Opportunities

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

What About Those Old Fixtures?

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

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

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

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

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

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

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

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

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

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

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

The Good News About Buildings

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

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

Limited Time Opportunity to Write Off Old Components

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

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

Cost Segregation Expertise Needed

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

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

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

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

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

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

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

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

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

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

Hiding in Plain Sight

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

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

Step-Up to Accelerated Depreciation Deductions

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

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

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

Joined At the Hip: 1031 Exchange and Cost Seg

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

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

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

Tags: cost segregation, Don Warrant

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

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

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

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

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

Don’t Miss the De Minimis Safe Harbor Election

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

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

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

More Opportunities to Deduct Materials and Supplies

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

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

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

Shield Your Small Taxpayers

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

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

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

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

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

Tags: cost segregation, New Tangible Asset Regs

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

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

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

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

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

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

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

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

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

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

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

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

2. Start with the big fish.

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

3. Create templates and checklists to facilitate compliance.

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

4. Turbocharge tax savings.

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

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

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

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

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

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

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

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

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

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

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

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

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

Dealing with Client Resistance

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

“Why do I have to do this?”

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

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

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

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

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

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

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

Get More Help

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

Tags: tangible property regulations, Don Warrant

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