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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

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, deductions, accounting method changes

3 Ways to Help Your Clients Take Advantage of the Increased De Minimis Safe Harbor Threshold

Posted by Don Warrant on 12/1/15 8:35 AM

IRS Announcement Means Great News For Your Clients Who Do Not Have an Applicable Financial Statement

Raising-the-bar.jpgThe de minimis safe harbor is an elective provision that establishes a threshold below which all qualifying amounts are considered deductible. This provision is intended as an administrative convenience allowing taxpayers to deduct amounts paid for the acquisition or production of new property, or the improvement of existing property that would otherwise be subject to capitalization.

On Nov. 24, the IRS announced an increase in the dollar threshold from $500 to $2,500 for taxpayers who do not have an Applicable Financial Statement (“AFS”). An AFS includes certified audited financial statements. (See IRS Notice 2015-82.) This increase in the dollar threshold is effective for costs incurred during taxable years beginning on or after January 1, 2016.

3 steps CPAs should take with clients who do not have an AFS as a result of this change:

  1. Contact clients before the beginning of the 2016 taxable year.

    A taxpayer electing to apply the de minimis safe harbor may expense amounts paid for the acquisition or production of tangible property that are expensed for book purposes in accordance with accounting procedures in place as of the beginning of the taxable year. Under this election, the taxpayer may not capitalize any amount paid for the acquisition or production of a unit of tangible property nor treat as a material or supply. However, IRC Section 263A may require the capitalization of direct and allocable indirect costs of property produced by the taxpayer.

    For taxable years beginning on or after January 1, 2016, amounts expensed for book purposes that do not exceed $2,500 per invoice, or per item as substantiated by the invoice, may be expensed for tax purposes under the de minimis safe harbor election.

    Determine whether your clients’ book procedures for expensing tangible property should be changed before the beginning of the 2016 taxable year. Although not required, a written policy provides the best documentation in the event of an IRS examination.

  2. Instruct your clients to obtain itemized invoices from vendors and to have transaction costs invoiced separately.

    The dollar threshold is applied on a per item basis when substantiated by the invoice. Therefore, instruct your clients to obtain invoices that substantiate the cost per item.

    Transaction costs are excluded from the per item cost when invoiced separately. Therefore, instruct your clients to have transaction costs such as delivery fees and installation charges billed separately.

  3. Make your clients aware of prior year audit protection.

    Your clients may have adopted accounting procedures in prior years that exceeded the $500 de minimis threshold. Previously, the amounts expensed in excess of $500 were subject to IRS examination. cost segregation guide for CPA firms However, Notice 2015-82 states that the IRS will no longer examine amounts expensed in prior years that do not exceed $2,500 per invoice (or per item as substantiated by invoice) when the amount was expensed in accordance with accounting procedures in place as of the beginning of the taxable year.  

Get your clients and prospects the information they need to reduce their tax burden. If you have questions or want to partner with qualified experts, contact us.

Tags: Don Warrant, deductions, de minimis safe harbor, tangible property

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