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

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

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

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-actionThe 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-actionAs 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

6 Tips for Explaining Cost Segregation to Commercial Real Estate Clients

Posted by Don Warrant on 2/4/16 9:12 AM

Once you can explain the basic concepts and advantages of cost segregation, the service basically sells itself.

business-handshake.jpgMany of the people who are drawn to study accounting and choose careers in the profession don’t realize that, at some point, their career growth will depend on their ability to sell accounting services. It takes a lot of studying to get a degree, then more studying and significant experience to get a CPA license. Along the way, successful accountants learn that their license doesn’t get them very far if they don’t have projects to work on. And they don’t get projects to work on if they don’t have clients to pay fees for the work.

Cost segregation is a great client offering because it’s relatively easy to explain to property owners and the value it delivers is fairly obvious to most businesspeople. If you have existing commercial real estate clients or even if you need a quick idea to share with someone you meet at a networking event, cost segregation does a pretty good job of selling itself.

Here are 6 tips to help you explain the service to potential clients and grow your practice.

  1. 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.
  2. No amended returns are needed. Sometimes clients will resist filing amended returns. The great news about cost segregation is that it is treated as an accounting method change. That means the modifications can be calculated as far back as the effective date of the law in 1987 and related deductions taken on the current year’s return.
  3. Annual compliance with the tangible property regulations. A proper cost segregation study will assign costs to the major structural components of a building and 8 different building systems. Accurate cost information on these assets is needed each year to comply with the tangible property regulations. This information is useful in determining whether current year construction costs may be expensed or must be capitalized.
  4. Disposition of building property. Effective cost segregation practices make it easier to identify and determine the adjusted basis of building property. The adjusted basis is necessary in order to accurately recognize a disposition for tax purposes.
  5. Small taxpayer safe harbor election. When the cost of tangible personal property is properly segregated from the cost of the building, the tax basis of the building is reduced. In some cases, proper segregation of costs can reduce the cost of a building below the $1 million threshold needed to qualify for the small taxpayer safe harbor election. This safe harbor allows for costs that might otherwise be capitalized as improvements to the building to be expensed as incurred for tax purposes, again accelerating deductions for the client.
  6. Accepted strategy with clear guidelines, not a scam. 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.

Cost Segregation Partnership Opportunity Not everybody is cut out to be a salesperson. Some of us can sell ice to Eskimos, while others can lead horses to water but never get them to drink. Regardless of your skills in sales, it’s always easier to work with a product that sells itself. Cost segregation studies provide such obvious benefits that they make anyone a more effective seller.


Tags: cost segregation, commercial real estate, Don Warrant

Finding Hidden Tax Opportunities for Real Estate Clients

Posted by Don Warrant on 12/22/15 9:06 AM

Just like real estate itself, when you want to find tax opportunities for real estate clients, it’s all about location, location, location.

Hidden_tax_opportunities_real_estateReal estate opportunities often involve hidden tax opportunities. To find those opportunities, you need to know where to look. The location may vary depending on the opportunity and the client, so it’s important that everyone at your firm understand how to search effectively.

Existing Clients

If you have the tax return and depreciation schedules for a client that has significant real estate holdings, you have the key to unlock several different potential deductions. “Significant” in this case doesn’t necessarily mean multiple properties. A non-real estate business that owns its own building may have hidden tax savings locked up in its property just as easily as a landlord. For that matter, even a business that rents its space might have invested in leasehold improvements that qualify for certain credits, deductions or accelerated depreciation.

The first and easiest place to look is on IRS Form 4562, Depreciation and Amortization attached to the tax return. Specifically, look to Part III, Lines 19h and 19i. Amounts listed here for residential rental property and nonresidential real property could indicate that a cost segregation study might be of value. If amounts on these lines exceed $1 million, it’s worth touching base with a client to see if they have ever considered cost segregation. If in fact the amount represents a capital improvement, then consider whether the improvement qualifies for the IRC Section 179D deduction for energy efficient improvements to commercial buildings. In addition, an election to recognize a partial disposition of tangible property should always be considered when capital improvements are made to existing buildings.

It’s also possible that when applying the unit of property rules for buildings, the amounts that were originally reported as capital improvements on Form 4562 should have been claimed as deductible repairs. For example, an amount incurred to replace a portion of a roof may qualify as a repair. However, if the roof was completely replaced, then the election to recognize a partial disposition should be considered for the old roof.

In addition to looking for new opportunities, all of your client-serving professionals should be trained to listen for them as well. If a client is talking about making improvements to real estate, relocating an office or adding a second location, that client needs to know that there are potential tax advantages available based on everything from the location they choose to the materials and fixtures they use. One way to stay ahead of the curve on this is to bring it up every year when you go over the tax return. When you walk through the Form 4562, always remind them that if they are considering any significant changes to real property assets, those opportunities should be reviewed for possible tax advantages.

Prospective Clients

Tax opportunities that relate to real estate provide an excellent foot in the door with potential new clients for 2 reasons. First, most significant real estate transactions are a matter of public record. Second, businesses rarely engage in real estate transactions alone.

The public filings related to real estate purchases and improvements announce to your community just about every project that could lead to tax savings. In most areas, you can subscribe to a service that notifies you when building permits are filed or deeds are recorded. With that information, you can reach out to the relevant parties with a very targeted contact that asks if they have considered all of the possible tax benefits of their new project, or if they have planned the new project in a way that takes full advantage of deductions and credits available.

Cost Segregation Partnership Opportunity The community that supports real estate purchases and improvements can be an excellent source of referrals. Your local construction businesses, loan officers and real estate brokers all have an interest in making sure their clients qualify for as much building as they can afford. The money saved by focusing on real estate deductions and credits could make the difference for a business that is on the verge of a significant improvement.

So whether you’re looking to offer more services to your existing clients or reach out to new clients, real estate tax opportunities can spark an important conversation that often leads to happy clients.

Tags: cost segregation, commercial real estate, Don Warrant

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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