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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_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 regulations, Don Warrant, accounting method changes, tangible property, tax accounting

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

Post Tax Season 263(a) Opportunities to Get New Clients from Competitors

Posted by Don Warrant on 5/22/15 9:03 AM

Don’t let competitors use a letter like this to steal your clients.

Most accountants spend the end of April and early May catching their breath and letting the dust settle from the spring filing season. Once you’ve cleaned up and started planning for the summer, remember that there’s a very rare opportunity this year related to the 263(a) tangible asset rules. Taxpayers who timely filed their 2014 federal tax returns receive an automatic extension of time to amend their tax returns to file Forms 3115 and make late elections.
 
Most commercial real estate businesses are likely to see a significant impact from the regs. Given the constant need for repairs, replacements and maintenance on buildings, these clients need to make sure that they have correctly implemented the accounting method changes and claimed the related adjustments. Because the IRS will continue to release guidance even after the filing season has ended, CPA firms should continue to consider this an important topic to discuss with clients. For example, the rules on building refresh’s are still evolving and IRS guidance is expected anytime.
 
You may very well be on top of things and maximizing any 263(a) opportunities for your clients. On the other hand, if you are behind the curve, you’ve opened up a tremendous window of opportunity for a more aggressive competitor to poach clients.
 
Given the complexity of these rules and the fact that significant pieces of guidance have yet to be released, the next few months are a great time for your firm to aggressively reach out to potential clients about their 263(a) opportunities. For example, if they already filed, explain how you can help them capitalize on a missed opportunity under the automatic extension procedures. If they are on extension, then their current tax preparer may not have pinpointed the tax savings opportunities, carpe diem (seize the day)!
 
Here’s what that letter from an aggressive accounting firm to your client might look like.

263a

We’re pretty sure that you would be very displeased if one of your clients got a letter like this, but your clients are fair game for firms that can deliver more tax advantages from an opportunity with an ever closing window.

This opportunity to amend 2014 tax returns under the automatic extension period might be missed by other tax return preparers. But it’s also an opportunity that some of your competitors may seize if you don’t.

If you would like to evaluate your clients’ plan to comply with the new rules for tangible property, we can help. Contact us to schedule a consultation.

For more on this topic, be sure to download our whitepaper, “Using the New Tangible Property Regs to Help Clients and Gain New Business

Tags: 263(a) regulations, tangible property regulations, Don Warrant, accounting method changes, Form 3115

And Here’s the Changeup: IRS Eases Transition to New Accounting Method Rev Proc

Posted by Don Warrant on 2/11/15 9:05 AM

Update: Revised revenue procedure means CPAs can continue to use existing method change templates citing Revenue Procedure 2011-14 for 2014 tax returns.

accounting_method_changes-1On Monday, the IRS followed up its tax-season curveball with a changeup. The Service issued a revised version of the revenue procedure issued on Jan. 16 that gives taxpayers and their tax preparers some welcome news with regard to preparing Forms 3115.

The Latest Ruling on Forms 3115

The revision recognizes that some taxpayers may already have prepared a Form 3115, Application for Change in Accounting Method, for their 2014 tax year with the expectation of using the procedures outlined in Rev. Proc. 2011-14. In addition, the existing Form 3115 and its instructions conform to Rev. Proc. 2011-14. A revised Form 3115 and instructions conforming to the procedures outlined in Rev. Proc. 2015-14 is expected sometime later this year.
 
The final word (for now) on these automatic method changes is that if your clients’ tax year-end falls between May 31, 2014 and January 31, 2015, you can (and should) continue to use the procedures outlined in Rev. Proc. 2011-14 rather than new procedures outlined in Rev. Proc. 2015-13.
 
Overview-of-Automatic-Method-Changes-1So rather than taking valuable time to update your firm’s templates for Form 3115 preparation, you can continue to use your existing templates for clients that fall into the tax years identified above. Other than this latest development, our guidance about these new revenue procedures remains largely unchanged—i.e., stay calm and carry on with tangible property compliance efforts.
 
If you are looking for guidance on these new accounting method change procedures, schedule a consultation with CSP360.

Tags: Don Warrant, accounting method changes, Form 3115

IRS Throws Curveball: Changing Procedures for Accounting Method Changes

Posted by Don Warrant on 1/28/15 9:06 AM

Stay calm and carry on with tangible property compliance; expect revised Forms 3115

accounting_method_changesThe IRS issued two new procedures for accounting method changes just as tax season was heating up, throwing a curveball into steps commercial property owners and their CPAs need to take to comply with the new Tangible Property Regulations.
 
Since the announcement on January 16, CSP360 has been inundated with questions about what these two new revenue procedures mean for CPAs’ efforts to get their clients into compliance. Here’s what you need to know about how to keep your clients happy by staying on the right side of the IRS.
 
  1. Continue calculating those 481a adjustments. We are sure that you have been taking our advice to start early on your 263(a) compliance efforts so you have plenty of time to act on tax-saving opportunities such as the soon-to-be-extinct late partial disposition election. The good news is that all of that work will not be for naught! The new revenue procedures do not change the steps required to bring taxpayers into compliance with the tangible property regulations.
  2. Update templates for making method changes. The primary changes in the new revenue procedures have to do with clarification of the rules for taxpayers who are under examination or in appeals, as well as for foreign corporations and partnerships, and a variety of other changes. These changes affect both eligibility for method changes and for 481(a) adjustments. If your firm uses templates to facilitate Form 3115 preparation, then make sure that those templates are updated to reflect all of these changes. If not, then you could overlook a procedure that could result in filing an improper method change—and potentially higher taxable income for your client.
  3. Expect updated Forms 3115. One consequence of the new procedures is that the existing Form 3115 now requires revision. Don’t be surprised if the IRS issues a revised Form 3115 very soon, as well as a second one specifically customized for use by eligible small taxpayers. Given the likelihood of new forms, consider holding off on filing Forms 3115 as long as possible in the event that you may be required to use the new Forms retroactive to filings since January 16, 2015.
  4. Change in procedures for removals. Remember when we told you that method changes for dispositions of property and for removal of that property must be filed, not only on two separate Forms 3115, but in two separate places? The new revenue procedure consolidates all automatic changes and requires that they all be filed with Ogden, Utah. However, the requirement to file two separate Forms 3115 for removal and disposition of property have not changed.

What Happens If You File Improper Forms 3115?

Our take? Don’t panic!
 
Here are the three things described in the new procedures that could happen if you file an improper Form 3115:

  • The director may make adjustments to bring the change into compliance
  • The director may deny the change in method of accounting and place the taxpayer on the proper method
  • The director may deny the change and require the taxpayer to use the old method
However, we believe the IRS will recognize that these new procedures blindsided the CPA community as we are entering our busiest time. For the most part, we expect that they will fix incorrect filings rather than deny a method change due to a procedural error.
 
Overview-of-Automatic-Method-Changes-1Just keep in mind that if that “fix” involves a positive 481(a) adjustment, then your client could be facing higher taxable income, penalties and interest. The new procedure requires the IRS to apply any adjustment to the oldest period covered by the 481(a) adjustment. The best way to keep your clients happy is to stay on the right side of the IRS by seeking out guidance from accounting methods specialists who can interpret these revenue procedures and file the forms appropriately.
 
If you have questions about how the new accounting method change procedures affect you and your commercial real estate clients, contact CSP360.

Tags: Don Warrant, accounting method changes, Form 3115

Form 3115 Change of Accounting Method Mistakes Could Mean Losing Clients or Censure by the IRS!

Posted by Don Warrant on 12/2/14 9:19 AM

3 deadly pitfalls created by the Tangible Property Regulations and Form 3115.

Here’s a scary scenario: You and your 263(a) strategic partner have done the hard work to identify tax deductions for your clients’ repairs and maintenance or dispositions of tangible property—only to have the IRS come back and disallow those deductions because you made a seemingly innocuous mistake when filing the Form 3115—Application for Change of Accounting Method.

tangible_property_regs-3The hard truth is that most CPA firms are not accounting methods specialists. In fact, until the Tangible Property Regulations were finalized, you may not have had much need to file a Form 3115 with your clients’ tax returns. But suddenly, the IRS expects every property-owning taxpayer to file at least one Form 3115 with 2014 tax returns.

Through a series of revenue procedures, the IRS and Treasury have spelled out the steps they expect taxpayers and their return preparers to follow in order to qualify for automatic method changes. And if you miss one small detail, then:

  • The IRS could deem the method change impermissible, which means that any associated tax deductions would most likely be disallowed. And as a result, your client’s tax bill (along with his ire) will increase.
  • It also means that you, as the return preparer, could be exposed to penalties. In the most egregious cases—if the IRS detects a pattern of improper method changes—you may be contacted by the IRS for a further investigation of your tax practice impacting Form 3115 preparation.

Watch Out for These 3 Pitfalls in Filing Form 3115s

Let’s face it: Revenue procedures are not easy reading for anyone. But our clients rely on us to keep them in compliance with the letter of the law. There is no shortcut for a thorough reading and understanding of these IRS rules, so if your practice does not already have access to accounting methods specialists, then we recommend bringing in that expertise from another source.

Here are just a few of the arcane changes that are all-too-easy to overlook in the voluminous new revenue procedures:

  1. When a cost segregation study and a disposition analysis are conducted on the same building, both method changes should be reported on a single 3115—not two separate forms – to obtain a waiver of scope limitations that could affect the ability to make an automatic method change for the cost segregation.
  2. Method changes for dispositions of property and removal of that property must be filed on two separate Forms 3115. And get this: Those 3115s must be filed in two completely different places—removal costs go to D.C. while dispositions must be filed with Ogden, Utah. Do the two offices ship misfiled returns from one office to the other? Who knows—but do you really want to chance it?
  3. Manufacturers, retailers, and other businesses that are subject to the Uniform Capitalization Rules (UNICAP) must capitalize a portion of costs as year-end inventory and factor that capitalization into the 481(a) adjustment.

Rely on Accounting Methods Specialists

Overview-of-Automatic-Method-ChangesThese seemingly innocuous mistakes—filing one Form 3115 instead of two, or two instead of one—can have serious implications for your clients and for you as the preparer in the form of penalties, back taxes and (scariest of all) censure by the IRS. So cover your bases by seeking guidance from professionals with the experience to interpret these revenue procedures and file the forms appropriately.

Backed by Top 100 firm Freed Maxick, CSP360 has assembled a team of accounting methods specialists who work closely with our cost segregation engineers. So when we partner with CPAs to minimize clients’ taxes through fixed asset reviews, dispositions analysis, cost segregation and energy efficiency studies—we also defend that tax treatment by properly filing Forms 3115 so that those accounting method changes will stand up under IRS review. Contact us to learn how our accounting method change specialists can help you.

Tags: tangible property regulations, accounting method changes

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