Cost Segregation: More Important Than Ever?

Posted by Don Warrant on 11/15/18 4:26 PM

cost-segregation-more-important-than-everYou and your clients may be thinking that the proposed tax reforms will impact the utilization of cost segregation. Will the proposed changes to the tax law make cost segregation obsolete?

In recent years, the IRS and U.S. Treasury have created complexities when determining the proper tax treatment of expenditures related to commercial buildings. This is the result of the interaction of the federal cost recovery rules, the tangible property regulations, and the classification of improvements to commercial buildings as “qualified improvement property” and/or “qualified real property.” As a result of these changes, cost segregation has become more important than ever!

The capitalization or expensing of costs in the current year impacts the treatment of similar costs in future years under the tangible property regulations. Therefore, it is important to make the right decisions when capitalizing or expensing costs. Cost segregation is an important tool used to make these decisions.

If and when tax reform does occur, there will likely be many states that do not conform to the federal rules, or may transition over a period of years. As a result, cost segregation will continue to fulfill an important role in those states. 

In addition, as we have written before, there are many compelling reasons to perform cost segregation. Many of those reasons are discussed below.

2015 PATH Act

The Protecting Americans from Tax Hikes (PATH) Act of 2015 had a significant impact on the importance of using cost segregation specialists to compare the tax benefit of renovating an existing building vs. building construction. Since building construction doesn’t qualify for bonus depreciation, renovating existing buildings can generate significant tax savings, creating a source of funds to finance the project.

Other important uses of cost segregation include:

  • Bonus Depreciation and Section 179 Expense. A cost segregation study identifies “qualified property” for bonus depreciation and year-of-purchase expensing.
  • Accelerated Tax Deductions. A cost segregation study creates accelerated tax deductions by accelerating the period over which the cost of assets are recovered for tax purposes. Assets identified in a cost segregation study are reclassified from a 39-year cost recovery period to a 5-year, 7-year, or 15-year cost recovery period.
  • Tax Deferred Exchanges. The IRC Section 1031 exchange provision is a valuable strategy to defer the recognition of gain on the sale of buildings. Cost segregation used in connection with a tax deferred exchange can generate tax savings in addition to tax deferral.
  • Estate Tax Planning. A cost segregation study can be used to generate tax savings for both the decedent and the heirs of real estate by segregating costs for both parties before and after the date of death.
  • Partial Disposition of Building Property. Cost segregation is generally necessary to determine the adjusted tax basis of the portion of building property that was partially disposed of in connection with the partial disposition election.
  • Improvement vs. Repair Analysis. Cost segregation is generally necessary to determine whether expenditures improve or repair the building structure or any building system, and to determine the appropriate unit of property.
  • Tenant Improvement Costs Analysis. Cost segregation is often necessary to segregate the cost of tenant improvements between building property and tangible personal property, and to determine which expenditures are capital improvements or repairs.

Other uses of cost segregation include tax planning in the year of a building’s sale, to qualify for the small taxpayer safe harbor election, and for federal and state income tax planning. 

In summary, cost segregation is more important than ever, especially for buildings placed in service in years preceding any federal or state tax reform that reduces tax rates.

CSP360 is ready to assist you and your clients with these important uses of cost segregation, and to generate tax savings for your clients.

Tags: cost segregation, cost segregation study, tangible property regulations, tangible property

Build or Renovate? A Building Cost Recovery Analysis May Change Your Answer

Posted by Don Warrant on 11/15/18 4:26 PM


Everybody loves that “new building” smell, but renovating an existing building may generate more tax savings. Only a building cost recovery analysis can tell you which way to go.

When a business reaches a point where it needs more space, it’s usually a pretty exciting, often frenetic time for the owners and employees. Whether it’s additional offices for new employees, expanded manufacturing and storage facilities for the business’ products, or a combination of both, many businesses don’t even realize that more space is the answer until long after the need has become severe.

At such a crazy time, the last thing many owners might consider is the tax impact of choosing between renovating an existing building or constructing a new building. That can be an expensive mistake.

The PATH Act made some changes to depreciation rules providing businesses that make improvements to the interior portion of existing buildings with opportunities to recover costs quicker than by constructing a new building.

  • The section 179 expensing election is available to expense up to $500,000 of “qualified real property,” a term that limits this immediate tax deduction to qualified leasehold improvement property, qualified restaurant property, and qualified retail improvement property. However, the section 179 expensing election is phased out completely when the costs of eligible property exceeds $2.51 million for the 2016 tax year. The expense limitation and phase-out are adjusted upward for inflation each year.
  • The first year special depreciation allowance, aka “bonus depreciation,” is available for “qualified improvement property” placed in service on or after January 1, 2016. Qualified improvement property is an improvement to the interior of nonresidential real property that is placed in service after the date the building was placed in service. (Certain improvements such as enlargements, escalators/elevators, and internal structural framework are excluded.)

For example, a business with a $10 million budget can use the full budget on constructing a new building or spend $2.5 million to acquire an existing building and $7.5 million on renovations. Although cost segregation can accelerate building cost recovery by assigning property to the property 5-year, 7-year, and 15-year recovery periods, a significant portion of the $10 million construction cost will be assigned to a 39-year recovery period.

If the business acquires and renovates an existing building, in addition to cost segregation of the building acquisition and renovation costs, a portion of the $7.5 million renovation costs will be classified as qualified improvement property and qualified real property. As a result, cost recovery will occur more quickly by acquiring and renovating an existing building than constructing a new building up to a certain cost point. Therefore, it is important to perform a building cost recovery analysis before decisions are made regarding new building construction.

When to Start the Conversation

It is important to raise this issue when you learn that a client is expanding or taking on a new product or process that will require more space or adding employees. When you learn that a client is expanding and needs more space, it’s important to get this information on their radar before decisions are made. Even though construction lead times can be considerable, the decisions that make a difference for tax purposes often happen very early in the process. You don’t want to find out after the fact that a client didn’t perform a building cost recovery analysis before deciding to construct a new building.

Keep in mind that the 50% bonus depreciation is available for property placed in service by December 31, 2017. For qualified improvement property that is placed in service during calendar year 2018 and 2019, the bonus depreciation rates are 40% and 30% respectively. And bonus depreciation will be completely phased out by 2020 (2021 for certain property).

The threshold at which the recovery of costs for new building construction is faster than the recovery of costs to renovate an existing building is based in part, on the price paid for an existing building. The lower the purchase price, the more cost that can be assigned to qualified improvement property and qualified real property to accelerate building cost recovery and tax savings.

Obviously, the acceleration of building cost recovery and tax savings are not the only concern when making the decision, but they can provide a valuable incentive to either reduce construction costs or extend the capital budget.

Need Help with a Building Cost Recovery Analysis?

CSP360 has over 20 years of experience focused on cost segregation services and cost recovery rules. Our cost segregation database makes us the perfect resource to perform a building cost recovery analysis. Contact us to learn more.

Tags: Don Warrant, tax saving opportunities, PATH Act, building cost analysis

Real Estate Tax Strategies: Incentives to Grow Your Practice

Posted by Jennifer Birkemeier on 4/26/17 8:57 AM


All politics is local. Many real estate tax-saving opportunities are as well.

Former Speaker of the House Tip O’Neill famously stressed the idea that “all politics is local.” In this political season, it’s important to remember that many real estate incentives are, as well.

We often stress in this blog that cost segregation is an excellent opportunity to provide additional services to your existing commercial real estate clients and to attract new ones. But if you want to provide the full range of services these clients need, you have to remember that tax incentives and commercial real estate go hand in hand. And not just at the federal and state level. The more local you get, the more an agency or elected official may be willing to support development of specific properties.

You Don’t Have to Be a Business to Have a Business Plan

Local governments frequently maintain an inventory of properties that they would like to see developed or redeveloped. Their business plans often call for experienced commercial real estate investors to lead these projects from the private sector side. In order to attract these investors, authorities are usually willing to discuss additional incentives that may be customized to the needs of each site.

A good starting point is to make contact with the economic development agency for a particular locality. Ask them about neighborhoods or areas within their district that might qualify for federal incentives, like a historic district. Also consider state credits, like New York’s historic tax credits and “brownfield cleanup” programs.

Once you know some of the sites that might qualify for federal and state tax savings opportunities, ask the local authority for information on any specific properties that they might want developed. When you find opportunities that may qualify for multiple credits at various levels, contact your clients who invest in real estate and gauge their interest. Introduce them to the local development agency and suggest a discussion about incentives that might help a city or region turn planned redevelopments into reality.

CSP360 for Real Estate Tax Consulting

As your practice grows, we also want you to think of us as a real estate tax consultant that can help you develop creative, customized ideas that continue to deliver new value to your clients. When it comes to local development, CSP360 can help you with everything from concepts and agendas for meetings with local agencies to actual in-person support for a meeting that your firm hosts.

When it comes to other opportunities to improve your service as an advisor to commercial real estate clients, we have the experience and know-how to help turn your ideas into practical services.

Contact us to get started developing helpful real estate tax strategies for your clients today. Also, don't forget to view our other helpful articles such as, Three Lessons for Building Your Commercial Real Estate Practice Using 179D, to help you grow your real estate practice.

Tags: Jennifer Birkemeier, commercial real estate

Cost Segregation Services: It’s Not Too Late for Your Clients to Qualify for 2016 Tax Deductions

Posted by Don Warrant on 4/13/17 9:00 AM

IRS cost segregation guidance in 2016 and 2017 makes it possible to qualify for 2016 deductions even after January 1, 2017.

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Both the president and the Majority-Republican House of Representatives have proposed significant changes to the Internal Revenue Code (IRC). While they don’t agree on every point, they share a common cornerstone in that both would significantly reduce income tax rates for businesses and individuals. There is no guarantee that a tax rate reduction will occur in 2017, but the Trump administration is on record with a statement that a tax package will be part of its agenda in the first 100 days. That means legislation could be in play before the end of April this year.

In any year, you will generally recommend accelerating deductions (unless certain circumstances exist) based on savings resulting from the time value of the money deducted. That recommendation becomes stronger in a year like 2016, when there’s reason to expect that rates may drop in 2017.

The deductions are worth more in the year of higher rates. Effectively, you have a small window of opportunity to deliver tax benefits that might not be available next year.

Cost Segregation Studies and 2016 Tax Deductions

For the most part, your ability to generate tax deductions for clients for 2016 are generally limited once the calendar year ends. However, recent IRS rule changes make it possible to claim 2016 deductions based on cost segregation studies performed in 2017.

In some cases, a study may even result in tax-reducing amendments to returns already filed for the 2016 tax year. We often hear that clients put off cost segregation studies because the accelerated deductions are “only a temporary timing difference.” At this point, the significant possibility of reduced tax rates in the near future adds incentive in the form of a permanent timing difference to claim available tax deductions in a year with higher tax rates such as 2016.

The result of a cost segregation study performed on building property placed in service in prior years is reported as additional tax depreciation for the 2016 tax year using the automatic change in accounting method procedures outlined in Rev. Proc. 2015-13 and Rev. Proc. 2016-29. Under these procedures, your client automatically has until the extended due date to claim the additional tax depreciation on an original or amended tax return.

Five-Year Eligibility Rule Waiver

In addition, Notice 2017-6 waives the five-year “eligibility rule” that otherwise would prohibit your clients from using the automatic method change procedures to make the same change in method of accounting for a specific item more than once within a five-year period. 

The waiver of the five-year eligibility rule found in Section 5.05 of Rev. Proc. 2015-13 applies to the following automatic changes in accounting method allowed by Rev. Proc. 2016-29: 

  • Section 6.14 for a change in method of depreciation from a permissible method to another permissible method;
  • Section 6.15 for a change in method of accounting for dispositions of a building or structural components;
  • Section 6.16 for a change in method of accounting for dispositions of tangible depreciable property (other than a building or structural components);
  • Section 6.17 for a change in method of accounting for dispositions of depreciable property in a general asset account; and
  • Section 11.08 for a change in method of accounting for tangible property under the final tangible property regulations.

How to Help Give Your Clients the Good News About Cost Segregation Tax Deductions

Actions like these show that the IRS is doing what it can through its guidance channels to facilitate the transition to the tangible property regs. In doing so, the Service is also opening opportunities for you to help your clients claim deductions in 2016 or earlier based on the results of cost segregation studies and related information.

If your practice is currently in the midst of the typical filing season rush but you have clients that could benefit, this could be an excellent time to outsource a cost segregation study to a provider focused on this specialized practice. CSP360’s CPA Partnership Program could be just what you need to deliver this valuable additional service to your clients at a time when your staff is at full capacity.

For more information on the cost segregation services that CSP offers, call Don Warrant, CPA at 716-847-2651.

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Tags: Don Warrant, deductions, cost segregation, cost segregation study

Tangible Property Regulations Compliance: New Client Due Diligence

Posted by Don Warrant on 4/11/17 8:55 AM

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If your firm has taken on new clients since 2014, make sure your new clients are in compliance with the tangible property regulations.


All taxpayers are required to comply with the tangible property regulations for tax years beginning on or after January 1, 2014. These regulations address every phase of an asset’s life cycle from acquisition, to repair and maintenance, to disposition. To comply with the regulations, taxpayers filed Form(s) 3115 to make changes in accounting methods and received IRS audit protection for all prior years, or small businesses elected to change their accounting methods beginning with the 2014 tax year and forgo IRS audit protection for all prior years.

The regulations create new criteria for classifying costs as de-minimis, materials and supplies, and repairs and maintenance, and new rules for the disposition of assets, and include many taxpayer favorable elections and safe harbors. The elections and safe harbors require annual consideration by tax return preparers. Certain elections require a statement to be filed each year with a timely filed tax return and other elections are made by reporting on the tax forms. In addition, certain safe harbors require a change in accounting method to adopt.

New Client Tangible Property Regulation Due Diligence

For each new client, you should maintain documentation in your tax file supporting their compliance with the tangible property regulations as required, beginning with the 2014 tax year. This documentation is needed to support your firm’s tax return signing position and in the event of an IRS examination.

If your new client was a small business that elected to follow the procedures outlined in Rev. Proc. 2015-20, then you should maintain the documentation supporting the method changes required by that procedure which are as follows:

  1. Capitalize costs that facilitate the sale of property per Reg. Sec. 1.263(a)-1(e);

  2. Capitalize amounts paid or incurred to acquire or produce tangible property per Reg. Sec. 1.263(a)-2;

  3. Capitalize or expense amounts that improve or repair a unit of property (UoP) per Reg. Sec. 1.263(a)-3;

  4. Make changes in identifying the UoP per Reg. Sec. 1.263(a)-3(e) or, in the case of a building, identifying the building structure or building systems under Reg. Sec. 1.263(a)-3(e)(2);

  5. Adopt new rules for the identification and disposition of property per Reg. Sec. 1.168(i)-1, 7, & 8; and

  6. Consider new elections and safe harbor provisions that were created in connection with these regulations.

If your new client is unable to provide this documentation or you independently determine that your new client has not complied with the tangible property regulations, then Forms 3115 should be filed with the 2016 tax return. In the case of a small business, any Section 481(a) adjustment calculated in connection with a method change should not precede the 2014 tax year.

Tangible Property Regulation Compliance Assistance

CSP360 has developed expert knowledge of the tangible property regulations and implementing procedures and providing training and reference materials to our strategic partners. Please contact us regarding the benefits of a tangible property regulation compliance review for your new clients.


Tags: Don Warrant, tangible property regulations, tax accounting

Accounting Method Changes: A New Client Strategy Worth Investigating

Posted by Jennifer Birkemeier on 4/5/17 8:52 AM


Choosing the wrong accounting method might not trigger an audit, but it can sure cost a business money.

To sustain organic growth in your firm, you need to find ways to distinguish yourself from your competitors. Sometimes the other firms might make it easy by forgetting to ask an important question or failing to recognize the low hanging fruit of a particular election. But many of the most desirable clients on your wish list will likely be dealing with quality accounting firms that cover the basics pretty well and provide solid advice when it comes to planning.

When you’re up against a quality firm, it helps to have some go-to areas on the tax return where even seasoned professionals miss opportunities. Tax accounting methods is one such area.

The tax accounting method choices that a business makes frequently provide opportunities for improvement for two reasons:

  • Cousins DILLY and SALY: When a firm prepares returns for a business over the course of a few years, it’s easy to fall into the pattern of “do it like last year” (DILLY) or “same as last year” (SALY). Good firms work diligently to make sure their clients incorporate law changes and regulations into their strategies, but they sometimes fail to challenge bedrock assumptions like accounting methods.
  • Bad accounting methods aren’t illegal, just expensive: In most cases, taxpayers choose accounting methods that are permissible under IRS rules. However, either because of poor advice on the choice or a change in circumstances over time, they don’t always choose the one that provides the best result for tax purposes. This choice is unlikely to trigger an audit because the taxpayers aren’t doing anything wrong. They’re just missing a chance to be right and have a lower tax bill.

The best way to review a business’ tax accounting method choices is to look at its returns. However, there are a few questions you can ask and assumptions you can challenge even in casual environments like networking events or golf games.

  • Is your business on the cash or accrual method for tax purposes? Are you required to use that method, or should you review your options? We recently encountered a case where a preparer assumed a business had to be on the accrual method because they had over $5 million in sales, but the tax return preparer hadn’t considered a recent Revenue Procedure that allows the use of the cash method to continue in certain circumstances on up to $10 million in revenue. The tax return preparer didn’t realize they met the requirements, so the company and its owners overpaid their taxes for a number of years.
  • How do you treat property tax and insurance payments? Even businesses that are required to use the accrual method for tax purposes are permitted to use the cash basis for these expenses in certain circumstances.

Once you have a chance to look at the return, there are all kinds of things you can learn. If you’re not familiar with reviewing accounting method choices on tax returns, you can also outsource the review to us or we can train your staff to find the opportunities that potential clients may have missed in this area.

CSP360 professionals bring an in-depth focus to a review of fixed asset schedules and depreciation method changes that few accountants can match. We frequently help our clients deliver value to their clients by identifying the use of impermissible accounting methods, most often by correcting depreciation methods resulting in significant tax savings.

For more information on accounting method changes or to inquire about a review of a taxpayer’s tax accounting elections, please contact us.

Tags: tax accounting, accounting methods, Jennifer Birkemeier

Court Cases Show the Importance of Tax Knowledge in Cost Segregation Studies

Posted by Jennifer Birkemeier on 3/29/17 9:03 AM


You probably know that preparing your clients’ cost segregation studies requires specialized knowledge of their industry. You might not realize, however, the importance of tax knowledge—especially when it comes to conforming the studies to new IRS Audit Technique Guides (ATGs).

Know the Rules Before Making Any Decisions

The Court of Appeals for the 11th Circuit has concluded that for depreciation purposes, a taxpayer couldn’t unilaterally change its original purchase price allocations in two asset purchase agreements entered into in connection with acquiring certain assets.

In Peco Foods, Inc. & Subsidiaries v. Comm., the taxpayer had attempted to make the modifications in order to secure quicker depreciation deductions following a cost segregation analysis. The 11th Circuit agreed with the Tax Court that the law had been applied correctly.

Case background showed that Peco Foods acquired one poultry plant from Green Acre Farm, Inc. in 1995 for $27,150,000 and, in 1998, one poultry plant from Marshall Dublin Food Corp. and Marshal Dublin Farms for $10,500,000. As part of the purchase agreements, both parties agreed to and included a purchase price allocation (PPA) in the purchase documentation.

At issue in the Tax Court case was the classification of a “Processing Plant Building” on one purchase and the “Real Property: Improvements” on the other purchase. Peco initially depreciated these assets as nonresidential real property (39-year) before performing a cost segregation study on each.

The Tax Court ruled the study invalid because of the PPA. The PPA went as far as delineating the costs for items such as specific process-related items, land improvements, buildings and goodwill. Further, the PPA was explicit about the definitions of real and personal property as they pertained to the specific transaction. In addition, the PPA contained specific language that the allocations were to be used for all purposes including financial accounting and tax purposes. The taxpayer also filed the detail listing with their tax return as part of the Form 8594 for their respective year of purchase.

The decision in Peco points out that one must pay attention and know the rules before making decisions on what you put into a purchase agreement, as this can determine your options including whether one can perform a cost segregation study.

The second case, AmeriSouth v. Commissioner, hinged on the allocation of rental real estate assets into appropriate classes for calculating depreciation expense and how a quality study pinpoints all shorter-life personal property, such as furniture, fixtures and equipment, and land improvements, from the longer life 27.5-year residential building life and non-depreciable land. Recently taxpayers have also qualified for 50% and 100% bonus depreciation on any newly placed-in-service personal property and land improvements.

In AmeriSouth, the judge decided that many of the assets of the petitioner’s 40-building, 366-unit apartment complex should be reclassified from personal property to building. AmeriSouth purchased a $10.25 million market-rate apartment complex in 2003 and spent $2 million in renovations. They hired consultants to perform a cost segregation study that resulted in increased depreciation deductions of approximately $1,412,000 from 2003-2005. The IRS commissioner subsequently denied deductions of more than $1 million. AmeriSouth then filed its petition to challenge.

One major point of this case: The court places the burden of proof on the taxpayer to provide support for why an asset should have a shorter depreciable life. AmeriSouth fell short in this area. If they had followed the ATG, the company wouldn’t have taken the position it did.

As we see in AmeriSouth, the taxpayer did not substantiate their position under IRS audit since they had sold the building before trial began. It is unknown how the case would have been decided if the taxpayer had been responsive in this case. AmeriSouth took many positions that most cost segregation providers do not take. An accurate analysis of the statutes and judicial precedent for the positions taken in AmeriSouth could have avoided a costly legal challenge in court.

A Quality Cost Segregation Services Provider Has Quality Tax Experience

Cost segregation services are not just a commodity where your client should pick the lowest bidder. Make sure your clients know that the best way to prepare a cost segregation study based on the latest ATGs is to choose a provider with thorough tax knowledge. If you partner with another firm for this service to clients, understand the credentials of your partner firm and their expertise in cost segregation. Contact us for help.

Tags: accounting methods, cost segregation, cost segregation study, Jennifer Birkemeier

New Tangible Property Regulations Updates: What CPAs Need to Know

Posted by Don Warrant on 3/22/17 8:50 AM


During 2016, the IRS and Treasury issued additional guidance for clients who are required to comply with the final tangible property regulations. These regulations address every phase of an asset’s life cycle—from acquisition, to repair and maintenance or improvement, to disposition. 

All clients that acquire tangible property were required to comply with these regulations beginning with the 2014 tax year by filing Forms 3115 with their 2014 tax returns or, for your small taxpayer clients, by following the procedures outlined in Rev. Proc. 2015-20. 

Fortunately, for those clients who may have missed making a required method change for tangible property or who need to correct a previously filed method change, the IRS is waiving certain eligibility rules that would otherwise prevent your clients from using the automatic method change procedures for the 2016 tax year. However, it is important to file Forms 3115 before being contacted by the IRS for exam to receive audit protection for improper methods used in prior tax years. 

Highlights of the New Tangible Property Regulations

2016_tangible_property_regulations_updateWe’ve prepared a whitepaper with greater detail that you can get here, but we summarize four key changes below: 

Expired Provisions

Two provisions that were available for the 2014 tax year have expired. 

Rev. Proc. 2015-20, allowing your small taxpayer clients to change their methods of accounting for tangible property without filing a Form 3115, only applied for the 2014 tax year. Under this procedure, your small taxpayer clients agreed to change their methods of accounting for tangible property on a cut-off basis without a Section 481(a) adjustment for prior tax years. These clients elected to forgo IRS audit protection for prior tax years. 

In addition, the late partial disposition election method change was only available for the 2012-2014 tax years. 

New List of Automatic Method Changes (Rev. Proc. 2016-29)

On May 5, 2016, the IRS and Treasury issued a new comprehensive list of automatic method changes. One of the most significant changes affects taxpayers who used the property’s tax basis to claim a federal income tax credit or who elected to apply Section 168(k)(4) to claim a refundable tax credit in lieu of bonus depreciation. These clients must now use the non-automatic method change procedures to make a change in accounting method for this property. 

New Audit Techniques Guide

On September 14, 2016, the IRS issued a new Audit Techniques Guide (ATG) on Capitalization of Tangible Property, which helps IRS agents spot potential tax-related compliance issues. The ATG can provide you with insight into the questions that examiners will ask and documentation they will request. 

The IRS has started to examine taxpayer compliance with these regulations. To prepare for an IRS audit, you should keep copies of all Forms 3115 filed by your clients in prior tax years, work papers supporting any Section 481(a) adjustments, and documentation supporting changes in accounting methods. You should also ensure that new accounting methods were adopted in 2014 and consistently followed in subsequent tax years. 

Waiver of the Five-Year Eligibility Rule (Notice 2017-6)

On December 20, 2016, the IRS waived the five-year eligibility rule that would otherwise prevent your clients from using the automatic method change procedures to make the same change in method of accounting for tangible property within a five-year period. The waiver applies to Forms 3115 that are filed for the 2016 tax year. 

The wavier creates an opportunity to re-visit the work that was performed in 2014 to comply with these regulations. Any missed or corrective method changes should be filed with the 2016 tax return while the waiver is in effect. 

Need Assistance? 

CSP360 is well versed in the Tangible Property Regulations and implementing procedures, and the method changes that can result in significant tax savings. If you have any question or concerns regarding compliance with the Tangible Property Regulations, you can schedule a complementary Tax Situation Review with a member of our Tax Team here.

Tags: tangible property, tangible property regulations, accounting method changes, tax accounting, Don Warrant

The Research and Development Credit: Opportunities and IRS Examination Issues

Posted by Don Warrant on 3/15/17 8:55 AM


During 2016, our cost segregation team attended several tax conferences where we received feedback from other tax practitioners around the country regarding their experience with claiming research and development tax credits for their clients. In many cases, the CPA firm commissioned an outside consultant to perform a research credit study, and in other cases their client commissioned the research credit study without their CPA’s knowledge. In both cases, issues arose with those studies upon examination by the IRS.

The tax practitioners we heard from overwhelmingly agree that research and development tax credits (R&D tax credits)—a tax credit for engaging in qualified research activities (QRAs)—can result in significant tax savings for their clients and are worth their time and effort.

R&D tax credits may be claimed by companies based on qualified activities and not necessarily based on the industry in which they operate. For example, CPA firm clients generally interact with customers over the internet, which requires the development of computer software. The IRS recently clarified that the development of customer-facing computer software does not need to achieve a high threshold of innovation test that applies to computer software developed for such internal use as administration functions. This development expands the universe of potential clients for research tax credits significantly.

Issues with R&D Tax Credit Studies

The tax practitioners we heard from shared troubling experiences they have had with studies performed by outside consultants that arose during an IRS examination. The issues we heard relate to research credit studies that were prepared on a contingent fee basis, studies that didn’t establish the requisite nexus between qualified activities and expenses, studies that were commissioned before performing the requisite due diligence to determine whether credit limitations apply, and studies that failed to address the requisite rights and risks in contracted research.

Contingent Fees

A contingent fee is a fee arrangement in which the amount of the fee is dependent on the amount of the R&D tax credit that is generated by the outside consultant. The IRS stated the following when they added research credit claims as a Tier I examination issue: “Thus, a taxpayer faces limited risk when claims are prepared under a contingency fee agreement. Audit teams expend enormous resources perfecting these claims and generally disallowing a large portion of a claim.” As a result, IRS agents are highly skeptical when they are handed a pre-packaged report that was prepared under a contingent fee arrangement.

We heard of a R&D tax credit study that was prepared under a contingency fee arrangement and, after the IRS examination concluded, the contingent fee that was paid for the study exceeded the amount of the research credit that was sustained.


IRC Section 41 requires the taxpayer to identify Qualified Research Expenses (QREs) by business component. Although an outside consultant is not required to use a project-by-project methodology to claim the R&D tax credit, such a methodology provides an accurate measurement of QRAs and direct nexus with QREs, the essential elements of qualifying for the credit. Other cost-capturing methodologies used by outside consultants may not establish the required nexus between QRAs and QREs, and may not be sufficient to meet the taxpayer’s record-keeping requirements under IRC Section 6001.

A common example of the nexus problem is in the case of qualified wages established by capturing W-2 wage amounts by cost center and multiplying a qualified percentage to individual employees' wages or department total wages. The determination of a qualified percentage may be based on time estimates or selected manager’s recollection and may not be supported by measurable corroborative records. In some cases, the percentage is determined and applied to total department wage costs rather than to individual employees.

R&D Tax Credit Due Diligence

Before engaging an outside consultant to perform a R&D tax credit study, the consultant must determine whether any limitations apply. Certain consultants only address QRAs and QREs and ignore the client’s tax situation. In fact, we heard of an instance where a client commissioned a R&D tax credit study directly with an outside consultant without consulting with their CPA. Had the client consulted with their CPA first, they would have learned they couldn’t use research credits due to limitations based on their individual tax situation. Unfortunately, the client paid for a R&D tax credit study that had no monetary value.

Rights & Risk

Clients may engage outside contractors to perform research on their behalf. The payments made to these outside contractors are included in QREs when the client retains rights to use the research and is at economic risk. Therefore, it is imperative that the outside consultant commissioned to prepare a research credit study review contracts with outside contractors to determine who retains the rights to the research and who is at economic risk.

We heard of an instance where the outside consultant didn’t review the contracts and generated a research credit on a contingency fee basis. Upon IRS examination, the IRS agent reviewed the contracts and disallowed over one-half of the original credit. A settlement was reached for the remaining amount.

Research Credit Studies

Now that R&D tax credits are a permanent part of the Internal Revenue Code and the PATH Act enhanced the ability of small businesses to use research credits, the popularity of research credits will continue to grow. However, research credit studies must be prepared in accordance with Treasury regulations to withstand an IRS examination. That means more time must be spent before the study begins to determine whether the client has qualified activities and expenses, has documentation sufficient to meet the requirements of IRC Section 6001 and has requisite rights and risks in contracted research, and whether the client will benefit from claiming research tax credits.

An outside R&D tax credit consultant should always provide a Phase I feasibility study and be commissioned through the CPA firm who has knowledge of the client’s tax situation.

CSP360 partners with CPA firms by providing a Phase I - scoping the potential for research and development tax credits, Phase II - detailed analysis and credit calculations, and Phase III - preparation of the research credit study report in accordance with Treasury regulations. Call Don Warrant at 716.847.2651 or connect with us here to learn more about R&D tax credit services.

Tags: R&D, tax credits, research tax credits, Don Warrant

Most Significant Items for Tax Practitioners to Consider Before Filing 2016 Tax Returns

Posted by Don Warrant on 3/1/17 9:00 AM


Below, we have compiled a list of the most common and important items that tax practitioners should consider as they request information from their clients to prepare 2016 tax returns. Some of these items are necessary for general tax compliance and others present tax planning opportunities.

  1. Tax Credits: Dollar-for-dollar reduction of tax 
  2. Capitalization: IRC Section 263(a) and 263A requirements to capitalize costs to acquire tangible and intangible property
  3. Deductions: Dollar-for-dollar reduction of taxable income
  4. Automatic Accounting Method Changes: Dollar-for-dollar reduction of taxable income when negative Section 481(a) adjustment
  5. Tax Elections: Each year, tax practitioners must consider a number of available elections and safe harbors, which generally must be made with a timely filed tax return.

Tax Credits

  • Research credit
  • Work opportunity tax credit
  • Small employer health care credit
  • IRC Section 45L tax credit for construction of energy-efficient homes
  • State employment tax credits
  • Fuel tax credits
  • Federal empowerment zones


  • Building improvements
  • Facilitative costs
  • Loan-acquisition costs
  • IRC Sec. 263A (including interest capitalization rules)
  • Non-incidental materials, supplies, and spare parts


  • Routine maintenance safe harbor
  • Abandoned assets
  • Building repairs & maintenance
  • Bonus depreciation (including qualified improvement property)
  • Incidental materials and supplies
  • IRC Sec. 179D – energy efficient improvements to commercial buildings
  • IRC Sec. 199 – domestic production activities deduction

Automatic Accounting Method Changes

  • To deduct prepaid expenses (service contracts, advertising, insurance, postage, travel, subscription, professional fees, property taxes)
  • To correct depreciation methods (cost-segregation study)
  • To correct the depreciation method for pickup trucks that are erroneously treated as luxury vehicles, and
  • To correct the MACRS depreciation method and recovery period for qualified real property (qualified leasehold, retail and restaurant property)

Tax Elections

  • De minimis safe harbor election
  • Safe harbor for small taxpayers
  • Election to capitalize and depreciate repairs
  • General asset account election
  • Partial asset disposition election
  • Election to capitalize and depreciate employee compensation and overhead costs
  • Election to capitalize and depreciate rotable, temporary and emergency spare parts
  • Sec. 179 expense election (including qualified real property)
  • IRC Sec. 1031 exchanges
  • Sec. 179 election for qualified real property
  • Opt out of bonus depreciation for a class of property


Are you looking for a partner to provide cost segregation services and other private-label tax minimization strategies to your clients? CSP360 is the only firm that offers a combination of engineered tax solutions with tax credit/incentive discovery programs; private labeling, and comprehensive business development assistance. Learn more about our unique approach or contact us today.

Tags: tax saving opportunities, deductions, accounting method changes

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