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