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New Tangible Property Regulations Updates: What CPAs Need to Know

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

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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_update We’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 regulations, Don Warrant, accounting method changes, tangible property, tax accounting

The Research and Development Credit: Opportunities and IRS Examination Issues

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

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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 overwhelming 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.

Nexus

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

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

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

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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

Capitalization

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

Deductions

  • 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, accounting method changes, deductions

IRS Issues Tangible Property Audit Guide to Help Examiners Recognize Tax Issues

Posted by Don Warrant on 11/10/16 9:00 AM

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Tangible Property Regulation Compliance Audits

In September 2016, the IRS released its Audit Techniques Guide (ATG) on Capitalization of Tangible Property which IRS examiners will use to identify potential tax issues when examining taxpayer compliance with the tangible property regulations. With the release of the ATG, it is fair to say that IRS audits of tangible property will begin soon if not already underway.

The 202-page ATG provides useful insight into the questions that examiners will ask and the documentation that they will request. Each chapter concludes with a list of “Audit Procedures,” including specific questions that examiners should ask about the concepts explained in the chapter.

The guide also includes some new examples that offer additional insights and clarification on certain issues. The ATG gets more specific about the treatment of certain types of repairs, noting for instance that the replacement of a roof membrane is not always a repair. A new example clarifies the treatment of an HVAC unit that is part of a multi-unit system. Previous guidance suggested that replacement of one unit in a three-unit system did not constitute replacement of a substantial portion of the HVAC system. The ATG points out that if each unit serves a different part of the building, the replacement of one unit may constitute an improvement to the HVAC system.

The IRS recognizes the importance of cost segregation and its interaction with the tangible property regulations. Specifically, the ATG recognizes the increased importance of cost segregation studies to identify building systems for purposes of applying the improvement rules. Examiners are instructed to request and review all cost segregation studies, past and present in connection with their examination to make sure the study was conducted properly. This information is needed by the examiner to determine the following:

  • Whether the taxpayer changed the classification of property after it was originally placed in service through a cost segregation study
  • How the taxpayer determined the unit of property for buildings and building systems
  • Whether the taxpayer took into account prior method changes that may affect the calculation of the Section 481(a) adjustment for the year of change
  • Whether a prior year cost segregation study was used to determine the adjusted basis of disposed assets
  • Whether the taxpayer is consistent in its treatment of the unit of property for both depreciation/disposition and determination as to repair-expense deduction

The ATG highlights the importance of selecting a cost segregation provider who understands how the tangible property regulations interact with cost segregation studies. All prior year and current year studies are now subject to examination by IRS specialists in connection with tangible property regulation compliance audits. In addition, cost segregation reports should always include information the taxpayer needs to comply with the tangible property regulations. 

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 assets life cycle from acquisition, to repair and maintenance, to disposition. To comply with the regulations, taxpayers either:

  • Filed Form(s) 3115 as required to change accounting methods and received IRS audit protection for all prior years;
  • Followed Rev. Proc. 2015-20 making changes in accounting methods for tangible property starting with the 2014 tax year without receiving IRS audit protection for prior years (See our blog post on the topic.); or
  • Failed to file required Form(s) 3115 (See our blog post on the topic).

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. In addition, the regulations include taxpayer favorable elections and safe harbors. The elections and safe harbors require annual consideration by taxpayers and 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.

How to Prepare for a Tangible Property Regulation Compliance Audit

For many taxpayers and the preparers who serve them, compliance with the tangible property regulations remains a work in progress. With IRS examiners now prepared to begin examining taxpayer compliance starting with the 2014 tax year, it’s time to conduct a tangible property regulation compliance review. We recommend a thorough review of the client’s overall compliance with the tangible property regulations and filing of corrective Forms 3115 in advance of being contacted for audit. The IRS ATG serves as a useful guide for this review.

CSP360, a leading provider of cost segregation and tax minimization services, has developed expert knowledge of the tangible property regulations and implementing procedures, and how the regulations interact with cost segregation studies. Please contact a CSP360 representative for assistance with a 263(a) tangible property regulation compliance review or for IRS audit assistance.

Tags: tangible property regulations, audit guide

12 Services That Cost Segregation Clients Often Need

Posted by Jennifer Birkemeier on 10/18/16 9:02 AM

Helpful Dozen” service offerings can turn a cost seg study into recurring work.

iStock_87208963_SMALL-834353-edited.jpgAccounting success depends almost as much on relationship management skills as it does on knowledge of debits, credits, and principles. You don’t become a trusted advisor just by shaking someone’s hand at a networking event. You need to demonstrate knowledge and a level of service that exceeds what your contact expects in order to convert that person into a client.

We’ve talked frequently about how a cost segregation study can give your practice an edge when it comes to getting that first project with a potential client. The next step is to build on that first engagement with related services based on what you learn in preparing a cost seg study.

Here’s a list of 12 service opportunities that clients might need in order to take full advantage of the study you’ve just completed:

  1. Build new v. acquire existing building and improve analysis—Last year’s PATH Act had a significant impact on the cost comparison between renovating an existing building v. new construction. New construction will not qualify for bonus depreciation treatment. When calculating the cost segregated tax impact of new construction v. renovation, this change may tip the scales toward renovation for some taxpayers.
  2. Qualified property for bonus depreciation and Section 179 expensing—A cost seg study doesn’t just identify assets with different lives that exist within a building. It often identifies assets that may qualify for bonus depreciation deductions, or year-of-purchase expensing under Section 179.
  3. Reclassifying property into 5-, 7-, and 15-year recovery periods—One service that often rolls right out of the cost seg study is the adjustment of depreciation schedules to reflect accurate basis amounts for any systems that were carved out of the building’s basis because they qualified for a different asset life.
  4. Cost seg and IRC section 1031 exchanges are two of the most valuable tax-deferral strategies available to commercial real estate owners. With proper planning, using the two methods can provide a tremendous opportunity for taxpayers to defer income taxes and maximize cash flow through accelerated depreciation deductions.
  5. Estate tax planning—A cost seg performed prior to or for the year of death will benefit the decedent via tax savings and avoid depreciation recapture. And since inherited property is “stepped-up” to fair market value, a cost seg performed on the step-up benefits the heir(s) via additional tax savings. As a result, cost seg should be considered when performing estate tax planning.
  6. Determining the tax basis of disposed property—The tangible property regulations allow taxpayers to recognize a partial disposition of building property (e.g. a roof replacement). Cost seg is an approved methodology for determining the amount of the deduction.
  7. Improvement v. repair analysis—Cost seg is the methodology used to identify and cost the building structure and each building system needed to determine whether a cost was incurred for a deductible repair or a capitalizable improvement to building property.
  8. Tenant improvement costs analysis—Certain tenant improvements may qualify for treatment as a repair under the tangible property regulations. However, before performing the tenant improvement cost analysis, personal property costs must be segregated from real property costs since different rules apply to personal property.
  9. Structuring leases—Under the tangible property regulations, the landlord and tenant have different units of property in which to apply the improvement v. repair analysis. Generally, the analysis will favor the party with the larger unit of property which is most often the landlord. This factor should be considered when structuring leases.
  10. Tax planning in the year of sale—A cost seg study can be performed in the year the building is sold. With proper planning, the benefits of accelerated depreciation deductions could result in a net tax benefit to the seller reducing overall tax liability.
  11. Qualification for the small taxpayer safe harbor election—Qualification for this election is based on the original cost basis of the building not exceeding $1 million. A cost seg study could result in qualification for the election by reducing the cost basis of real property below this threshold.
  12. Federal and state income tax planning—Cost seg should be used for both federal and state income tax planning, especially when the tax rules differ as to the treatment of real and personal property (i.e., recapture rules).

Even when it stands alone, cost segregation can be a valuable practice builder for an accounting firm. But when a firm uses the knowledge gained through a cost seg study to help a business improve its tax position, the service can be just the beginning of a long-term client relationship.

IRS PATH Act Rev-Proc Answers Questions About 2015 for Fiscal Year Filers

Posted by Don Warrant on 10/11/16 9:00 AM

Revenue Procedure 2016-48 provides transition rules for PATH Act depreciation changes.

iStock_61137508_SMALL-006016-edited.jpgWe’ve discussed the effect of the PATH Act on real property clients before on this blog. In those discussions, we’ve noted that the PATH Act became law at the end of 2015 and that it retroactively reinstated certain depreciation provisions that had expired at the end of 2014. Even though retroactive reinstatement was widely expected, those provisions were not available during calendar year 2015 impacting fiscal year filers and short tax years beginning and ending in 2015. Therefore, the IRS provided the following guidance in Revenue Procedure 2016-48:

  • Section 4 provides the procedures for claiming or not claiming bonus depreciation while the provision had lapsed, or who elected to not claim bonus depreciation for a class of property.
  • Section 3 provides the procedures to carryover the amount of qualified real property expensed in a prior year that was limited by the taxable income limitation, to a taxable year beginning in 2015.
  • Section 5 provides the procedures for a corporation to elect to forgo bonus depreciation in order to allow tax credits generated before 2006 to be used.

Bonus Depreciation

The PATH Act retroactively reinstated and extended bonus depreciation for qualified property and made changes impacting improvements to commercial buildings placed in service after December 31, 2015 (please see our prior post). Taxpayers with a fiscal tax year that ended in 2015 or with a short tax year that began and ended in 2015 may not have claimed bonus depreciation during the period in which the provision had lapsed, or may have elected to not claim bonus depreciation for a class of property. These taxpayers have the following options:

  1. Amend the tax return to claim bonus depreciation on qualified assets before filing the return for the fiscal tax year ending in 2016;
  2. File Form 3115 under Section 6.01 of Rev. Proc. 2016-29 with a timely filed tax return for the fiscal tax year ending in 2016 or 2017; and
  3. Revoke the election to not claim bonus depreciation for a class of property by filing an amended federal tax return by the earlier of November 11, 2016, or before filing the return for the fiscal tax year ending in 2016.

Section 179 Expensing

The PATH Act reinstated Section 179 expensing of assets in the year placed in service retroactive to January 1, 2015, and made the provision a permanent part of the Tax Code. The Act did retain the limited applicability of this section to commercial real estate to only “qualified real property,” meaning:

  • Qualified leasehold improvement property,
  • Qualified restaurant property, or
  • Qualified retail improvement property.

The permanent provision allows a $500,000 deduction (up from $250,000), but still phases that deduction out dollar-for-dollar to the extent that property placed in service in the year exceeds $2 million. Both the $500,000 and $2 million are indexed for inflation going forward. If a taxpayer makes this election for qualified real property, the entire cost of the qualified real property is taken into consideration for the annual dollar limitation.

Unused deductions can be carried forward to future years. Prior to the PATH Act changes, the carryforward provision as it applied to qualified real property required that any amount carried forward must be treated as depreciable property placed in service on the first day of the last tax year ending in 2014. The Rev. Proc. allows taxpayers to carryover the amount to any taxable year beginning in 2015.

New Options for Commercial Real Estate Owners

The PATH Act has presented commercial real estate owners with new or expanded options that haven’t been available before. Advisors need to make sure that they and their clients are seeing the big picture when it comes to potential tax-saving opportunities. Under the old version of Section 179, benefits for real estate phased out quickly at a low threshold and the carryforward was limited to no later than 2014. As a result, people have gotten accustomed to not considering it in their projections. The new rules allow an indefinite carryforward and also index the deduction amount and the phase-out threshold for inflation. The deduction remains unchanged for 2016, but the phase-out threshold will increase to $2,010,000.

The PATH Act made bonus depreciation available to more property owners, expanding the previous “qualified leasehold improvement property” restriction to a broader “qualified improvement property” category. As a result, commercial real estate owners should realize even more tax savings over the next four years by engaging cost segregation professionals who can segregate costs to acquire and improve commercial buildings.

As always, CSP360 is ready to help. Some of your clients may have a fiscal year situation that was remedied by Rev. Proc. 2016-48. Our commercial real estate focus makes us an ideal back-office support team when it comes to providing specialized, high-quality service to real estate clients. Please contact us for more information about how we can help you better serve current clients and grow your real estate practice.

Tags: commercial real estate, PATH Act, Revenue Procedure 2016-48

The Top 7 Most Frequent Questions Commercial Property Owners Ask About Cost Segregation

Posted by Jennifer Birkemeier on 4/12/16 9:22 AM

The right responses can help your CPA firm get more cost segregation opportunities and close more cost segregation deals faster

FAQs.jpgIf your firm is offering or going to offer cost segregation services, you’ll be faced with a number of questions from the commercial property owner. Here are some quick FAQs that will help you prepare your responses.

Question 1: Is this a scam?

Cost segregation is an accepted strategy with clear guidelines, has passed scrutiny by the IRS and Tax Courts, and is not a scam.

In our blog post, 6 Tips for Explaining Cost Segregation to Commercial Real Estate Clients, we wrote:

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.”

Question 2: What makes my building(s) eligible for cost segregation?

Cost segregation can be an appropriate tax savings strategy for new building construction, existing property placed in service after 1986, a new real estate purchase, renovation of an existing building, or leasehold improvements which are the unsung heroes of the cost segregation world.

In our blog post Don’t Overlook These 3 Client Transactions that Qualify for a Cost Segregation Study, we highlighted:

  1. Purchase or construction of a building with a cost basis of $1 million or more, but this could be as low as $750,000 for certain types of buildings
  2. Multiple buildings of the same type that, all together, add up to a cost basis of $1 million or more, and
  3. Tenant buildout with a cost basis of $500,000 or more because these projects are likely to be comprised of a higher percentage of Sec. 1245 property that qualifies for 5- and 7-year depreciation.”

Question 3: How much can I save?

Generally, the ROI from a cost segregation study is 10 to 1, but we try to make it closer to 20 to 1.

In our blog post, How to Pitch a Cost Seg Project to a Commercial Real Estate Client or Prospect, we wrote:

When it comes down to it, commercial property owners are most interested in knowing how much they can expect to save on their taxes in the next few years. In general, we find that tax-paying owners of commercial buildings with a tax basis of $1 million or more see accelerated depreciation deductions that add up to at least 10 times the cost of the study. With just a few pieces of data, a reputable and established cost segregation firm can provide a detailed estimate of anticipated tax benefits.”

Question 4: How long does it take?

A cost segregation study typically takes 30 days to complete, unless there are extenuating circumstances (multiple locations, lack of access to information).

Question 5: How does cost segregation relate to compliance with the Tangible Property Regulations?

There is a direct and critical relationship between cost segregation and annual compliance with the Tangible Property Regulations. Effectively, the combination of the annual compliance requirements of the Tangible Property Regulations combined with the data gathered and tax savings power of cost segregation makes for a powerful 1-2 punch.

In our blog post The Complex Process of Simplifying Tangible Property Regulations we wrote:

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.”

Question 6: What happens if I get audited?

Because we have followed IRS Guidelines and have worked with a quality provider, we are confident that the study we do for you will pass IRS scrutiny.

Quality providers deliver substantial authority as required by the IRS. A quality provider will provide some level of support on audit as part of the fee for preparing the study.

And lastly ...

Question 7: Does Your Firm Have the Experience and Expertise to Conduct a Cost Segregation Study?

Even after you’ve convinced your client or prospect about the merit of doing a cost segregation study, you still have one critical question to answer from them: does your firm have the necessary skills, training, and experience to do a cost segregation study that will capture every post tax savings opportunity in an audit compliant manner?

Because most firms don’t have building engineers or construction experts on staff, this could be a tough sell, and a surefire way to lose a client (or face a lawsuit from the client) if the study your firm performs is audited and found to be deficient.

In our blog post, Plan for a Rainy Day, we wrote “… If your client’s cost segregation study fails to hold water, then your client will be handing all of those tax savings back over to the IRS.”

Ouch.

How CSP360 Can Help

It’s likely that if your firm wants to provide cost segregation services, you’ll need to partner with a boutique firm like CSP 360. Regardless, when selecting partner, there’s three questions you’ll want to get answered before you can answer a question from a client or prospect about credentials and credibility:

  1. Does the provider follow the Cost Segregation Audit Technique?
  2. What is the provider’s basis for “substantial authority” as required by the IRS?
  3. Does the provider understand the implications of the Peco Foods, Inc. v. Commissioner case, in relation to purchase contracts?

Cost Segregation Partnership Opportunity We invite you to learn more about CSP360 and the opportunities for us to create a strategic partnership with you to serve commercial property owning clients and prospects in your market. To get a better understanding of our experience and expertise, we invite you to read our related posts about cost segregation, download any of our resources, or call me at (800) 591.0148 today.

Tags: cost segregation, commercial real estate, Jennifer Birkemeier

The 4 Most Horrible Excuses We’ve Heard From CPA Firms About Why They Don’t Want to Do Cost Segregation

Posted by Jennifer Birkemeier on 3/24/16 9:06 AM

It May Be Time for a Second Look

Stop_excuses.jpegThere are a slew of very good reasons why a CPA firm should add cost segregation into its mix of tax services for commercial property owners, but yet, a lot of small and mid-sized firms are reluctant to pull the trigger.

In some cases, it’s a matter of not having enough experience. In other cases, it’s a matter of not having enough bandwidth or resources to perform a cost segregation study that’s compliant with IRS Guidelines. It could even be a matter of the lack of construction or engineering expertise that’s necessary to identify building components eligible for accelerated depreciation.

These are all valid concerns, and each can be easily resolved with a strategic alliance or partnership with an experienced and credentialed cost segregation provider like CSP360.

However, there are still a lot of misconceptions about cost segregation that are holding smaller CPA firms back from delivering tax savings that will delight their clients, while concurrently protecting their client roster from poaching by a larger firm and creating opportunities for new business.

Here’s a list of our four least favorite, horrible excuses:

  1. It’s too risky.

    If you team up with a qualified, credentialed partner, that’s simply not true. They will bring a “just right” combination of experience and expertise to the table, along with a comprehensive way of complying with the IRS’ Cost Segregation Audit Techniques Guide. Also, for those studies they have done, quality providers will offer cost segregation audit defense services at no additional charge.

  2. Our clients’ commercial property is too small to qualify.

    While that may be true, you might also be surprised at what could qualify, and once you look through your roster of commercial property owning clients, you might be delighted by the hidden opportunities. Buildings with a value of $750,000 or over may be eligible, as may buildouts valued at over $500,000, depending upon the taxpayer’s tax bracket.

  3. Not worth it if my client is not going to be holding on to a property for a long time.

    Again, this is not true. A cost segregation study can be done in the year that your client disposes of a property. For example, we did a cost segregation study for a commercial property owner that didn’t have the money to pay taxes on the sale of his property, and used the study to recharacterize the taxable gain and reduce the total taxes due.

  4. I don’t see a value because my clients’ tax savings are really just a matter of a timing difference.

    Cost segregation is built on the time value of money. As we wrote in a previous blog post, 6 Tips for Explaining Cost Segregation to Commercial Real Estate Clients, 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.

How do you really know if you don’t investigate the opportunities?

CSP360 has partnered with quite a few CPA firms that have approached cost segregation with a healthy degree of skepticism and worry. After we partner on a study or two, universally, their skepticism turns into enthusiasm for adding, promoting, and delivering cost segregation services to their current client roster and as a means to attract prospects to their firm.

Cost Segregation Partnership Opportunity If you’re a skeptic, you’ll never know if cost segregation is right for your firm until you do a bit of investigation. Start with some free education, like reading and subscribing to our blog, here. Or, download a couple of our whitepapers, here.

Best of all, we’re only a phone call away and would welcome the opportunity to kick the tires with you. You can do that by calling us at (800) 591.0148, or use this form to initiate the conversation.

Tags: cost segregation, Jennifer Birkemeier

A PATH to Tax Savings: New Law Makes Important Changes to Extended Provisions

Posted by Don Warrant on 3/7/16 9:27 AM

We’ve gotten so used to hearing that these provisions have been extended “as is” for another year that it’s easy to overlook some significant changes for commercial real estate clients in this year’s “extenders” bill.

Clear-Path.jpgIn December of 2015, Congress passed the Protecting Americans from Tax Hikes (PATH) Act of 2015, affecting a number of tax provisions that, until now, have not been permanent parts of the Tax Code. This extenders package is different from many previous ones in that it actually makes some provisions permanent and it makes changes to some provisions that can be helpful to businesses. In particular, some of the changes made to Section 179 expensing and bonus depreciation may be of interest to commercial real estate clients. When combined with the recent tangible property regulations, the new law increases opportunities for your clients to accelerate deductions using cost segregation studies.

Section 179 Expensing

The Section 179 deduction for small businesses was made a permanent part of the tax code at its pre-2015 level of $500,000 per year. The extension is retroactive to 2015. As before, the deduction will phase out on a dollar-for-dollar basis when the cost of eligible property exceeds $2 million. However, the $2 million threshold and the $500,000 deduction limit will now be indexed for inflation beginning in 2016. For the 2016 tax year, no adjustment will be made to the $500,000 deduction, but the phase-out will start at $2,010,000.

The PATH Act did not change the limited applicability of section 179 expensing for commercial real estate. The provision still only applies to “qualified real property,” which is limited to:

  • Qualified leasehold improvement property,
  • Qualified restaurant property, or
  • Qualified retail improvement property.

However, the Act did remove limitations on carrying forward Section 179 deductions that exceeded income in prior years.

A summary of PATH Act changes to Section 179 are as follows:

  • The $500,000 limit is retroactive to 2015 and made permanent going forward;
  • The deduction amount and phaseout threshold are indexed for inflation beginning with the 2016 tax year; and
  • Beginning with the 2016 tax year, the normal Section 179 carry forward provision applies to qualified real property.

Bonus Depreciation Provisions

The PATH Act retroactively extended the bonus depreciation rules for MACRS property with a recovery period of 20 years or less. For property placed in service before January 1, 2016, the act basically extended the rules that had expired at the end of 2014. For property placed in service after December 31, 2015, there are some significant changes to consider.

Bonus depreciation will phase out as follows: 50% for 2015 – 2017, 40% for 2018, and 30% for 2019.

Prior to the PATH Act, bonus depreciation was available to commercial building owners for qualified leasehold improvement property only. Qualified retail improvement property and qualified restaurant property did not qualify unless they were also qualified leasehold improvement property.

Qualified leasehold improvement property placed in service after December 31, 2015 is no longer eligible for bonus depreciation. Instead, a more expansive “qualified improvement property” is eligible for bonus depreciation. Qualified improvement property is an improvement to the interior of a nonresidential real property that is placed in service after the date that the building was placed in service.

As a result of this change, the following requirements no longer apply: 1) the building must be in service for at least three years, 2) the improvements must be made pursuant to a lease, and 3) improvements to common areas are ineligible. However, certain improvements such as enlargements, elevators/escalators, and internal structural framework continue to be excluded. Unfortunately, qualified leasehold and retail improvement property, and qualified restaurant property are not eligible for bonus depreciation unless they are also qualified improvement property.

A summary of the PATH Act changes to bonus depreciation are as follows:

  • The bonus deprecation was extended for five years: 50% (2015-2017), 40% (2018), and 30% (2019);
  • Qualified improvement property placed in service after December 31, 2015 is eligible for bonus depreciation; and
  • Qualified leasehold and retail improvement property, and qualified restaurant property are not eligible for bonus depreciation unless they are also qualified improvement property.

Cost Segregation More Important than Ever

The changes under the PATH Act make it more important than ever to properly classify improvements to commercial buildings. As a result cost segregation specialists will be in high demand to make the following classifications:

  • Repairs expense resulting in an immediate tax deduction;
  • Tangible personal property subject to shorter recovery periods and eligible for bonus depreciation;
  • Qualified improvement property eligible for bonus depreciation
  • Qualified leasehold and retail improvement property, and qualified restaurant property subject to a 15-year recovery period and Section 179 expense election, and qualification for bonus depreciation.

The misclassification of improvement to commercial buildings will likely result in missed tax deductions for bonus depreciation, Section 179 expense, and accelerated depreciation.

New Call-to-action The PATH Act has created additional tax saving opportunities for commercial building owners for a limited time. As a result, it is more important than ever to engage qualified cost segregation professionals to assist with the proper classification of improvements to commercial buildings.

If you would like to talk with a CSP360 cost segregation professional about how these changes may affect your clients, please click the button to schedule a free 15-minute consultation.

Tags: cost segregation, Don Warrant, PATH Act of 2015

PATH Act Extends More than 50 Tax Provisions

Posted by Leia Marino on 2/23/16 9:24 AM

How business owners are impacted by the changes

New Call-to-action As a recent guest on WBEN's Growing Buffalo, Director of Freed Maxick's Tax Practice, Don Warrant, summarized the significance of the Protecting Americans from Tax Hikes (PATH) Act of 2015.

Click here or on the button for Don's take on the act's most important tax extenders for businesses large and small.

Tags: Don Warrant, PATH Act of 2015

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