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Complying With The Tangible Property Rules

Posted by Don Warrant on 10/21/14 9:17 AM

Don’t let them be fooled into thinking a repairs and maintenance review equals compliance.

There’s a reason that every CPE session you’ve attended in recent months has addressed the tangible property regulations. Compliance with this complex set of rules is mandatory for the 2014 tax year. If your client is not in compliance, and therefore understates taxable income, you as the tax preparer are on the hook for stiff penalties—not to mention the potential loss of a client.

But bringing your client or a prospect into compliance entails a significant amount of your time, not to mention specialized expertise regarding method changes. So how do you convey the importance of complying with these voluminous rules so that those clients are willing—even happy—to pay you for the extensive time that will be required of you?

Following are four things that clients and prospects need to know about 263(a) compliance:

  • 263(a)_compliance“There’s gold in them hills.” While compliance with the tangible property regulations can be an arduous climb, a thorough review by tax and engineering experts can pay for itself by mining opportunities to take current deductions for repairs and dispositions of tangible property.
  • A repairs and maintenance review is not enough. Your clients should know that any report that merely identifies deductions, with no “givebacks” in the form of additional capitalized costs, is unlikely to address the client’s full compliance responsibilities. The tangible property regulations consist of five sections, each of which entails required method changes, as well as optional elections. Identifying previously capitalized costs that are now eligible for current deductions comprises only one-half of one method change (out of a total of 27).
  • That capitalization policy is a good start, but it’s still not enough. Some clients are under the impression that they complied with the new rules when they put in place a capitalization policy last December. While necessary to adopt the de minimis election, the capitalization policy does nothing to address the many other components of this substantial body of regulations.
  • Engineering knowledge is not enough. True compliance with the tangible property regulations requires a combination of deep knowledge of this nuanced area of the tax code. While firms that specialize in cost segregation may sing an alluring tune of tax savings, they may not have what it takes to make sure the clients’ 263(a) compliance requirements are met.

Of course, simply telling your client or a prospect what doesn’t constitute compliance is not going to give you the opportunity to help them with these complexities, and in the process, earn additional revenue. That’s why you need to present clients and prospects with a carefully thought out plan regarding the applicable method changes and the potential impact on their 2014 tax liability. Armed with that comprehensive plan—which most likely will include some tax-minimization opportunities—you will demonstrate that you are looking out for his best interests.

tangible property regs Backed by the expertise of Top 100 accounting firm Freed Maxick, CSP360 partners with CPA firms across the country to bring their clients into compliance with the tangible property regulations and identify opportunities for tax minimization. Contact us to learn how we can help you deliver the highest level of value to your clients.

Tags: New Tangible Asset Regs, 263(a) regulations, Don Warrant, tax saving opportunities

Low-Hanging Fruit: 3 Tangible Asset Safe Harbors That Can Save Your Clients Money

Posted by Don Warrant on 7/29/14 9:44 AM

Taxpayer-friendly safe harbors are easy ways to delight your clients!

tangible asset safe harborsAre you so busy solving complex tax problems that you miss low-hanging fruit right in front of your nose? A number of expanded safe harbors under the new tangible asset regulations represent some simple ways to increase tax savings while achieving compliance—especially for your smaller owners of residential and commercial real estate.

Before you move on to higher-value opportunities for tax minimization, take a look at these three opportunities to save your clients taxes while protecting them from the taxman.

Don’t Miss the De Minimis Safe Harbor Election

Almost every client can benefit from taking the de minimis safe harbor, which now is applied at the invoice or item level (instead of in aggregate). The final tangible asset regulations also removed the ceiling on the de minimis safe harbor election.

Here are the facts: Any taxpayer with an applicable financial statement (AFS) and written accounting procedures that it follows may deduct up to $5,000 per item or invoice for amounts paid to acquire, produce or improve tangible property—without limit. The final regs also allow clients without an AFS to deduct amounts paid up to $500 per invoice or item, if the taxpayer has accounting procedures that it follows and treats those expenses accordingly. (Note that the accounting procedures for these smaller taxpayers do not have to be written.)

The removal of the ceiling and expansion to include clients without an AFS opens up significant opportunities for you to delight your clients with increased tax deductions. And taking refuge under this safe harbor provides you and the taxpayer with a layer of protection if the IRS comes calling.

More Opportunities to Deduct Materials and Supplies

Every commercial property owner has materials and supplies, and now they can deduct even more of those routine items.

The facts: The final tangible property regulations increased the limit for treating an item as a material or supply to $200 (up from $100 under the temporary regs), which means those espresso makers and deluxe nameplates are now fair game. The final regs also retained the 12-month rule, which says that an item with an economic useful life of 12 months of less can be deducted.

The result? Even more tax-minimization opportunities to delight your clients!

Shield Your Small Taxpayers

We all have those clients with just one or two small rental properties. The small taxpayer safe harbor was designed just for these clients, shielding them from having to capitalize costs paid or incurred for repair, maintenance or improvement of building property.

The facts: Owners of buildings with an unadjusted basis of $1 million or less and who generate average annual gross revenue of $10 million or less can deduct any costs paid or incurred for the repair, maintenance or improvement of building property—up to $10,000 or 2% of the building’s unadjusted basis, whichever is less.

Because this election is taken on a building-by-building basis, it represents significant flexibility for commercial or residential real estate owners with multiple smaller properties—which means more ways to reduce taxable income and increase cash flow. The upshot is that if you have these Schedule E property-owners on your client list, the small taxpayer safe harbor will save them money and protect both of you in the event of an IRS audit.

cost segregation guide for CPA firms These expanded safe harbors are the tax regulators’ way of shielding taxpayers (especially small businesses) from the hardships that the tangible property regulations might otherwise impose on them. Make sure that you are looking out for your clients’ best interests by taking advantage of every opportunity to reduce their taxable income and protect them in the event of an audit.

CSP360 can help you delight your real estate clients by finding opportunities to save them money while bringing them into compliance with the tangible property regulations. Contact us to talk about how we can partner to delight your clients through services such as fixed asset reviews and capitalization vs. expense consulting.

Tags: cost segregation, New Tangible Asset Regs

3 Ways CPA Firms Can Generate Revenue with the New Tangible Asset Regs

Posted by Jennifer Birkemeier on 3/31/14 9:27 AM

Rev your growth engine with commercial property owners by expensing their repairs and maintenance.

new_tangible_asset_regsAt long last, the much-debated “repair” regulations are in effect. You know that all of your tangible property-owning clients must comply with the final regs beginning with the 2014 tax year. But have you also considered how you can pump more gas into your revenue-generation machine by helping clients take current tax deductions that were not previously available to them?

Following are three ways you can use the tangible property regs to delight your current and prospective clients and generate more revenue for your firm:

1. Perform a 263(a) repair and maintenance review.

Under the final regulations, a number of repair and maintenance activities, which were previously required to be capitalized, are now currently deductible. For those clients (and prospects) that have been dutifully toeing the line, imagine their delight when you inform them that they will now be rewarded with current tax deductions uncovered by a 263(a) repair and maintenance compliance review.

The opportunity isn’t limited to property owners that replaced a roof or an HVAC unit. The final regs also allow businesses to expense renovation activities. For example, if your client base includes franchise restaurant owners who were recently required to perform a facelift to meet brand standards, those clients might be able to go back and expense those activities under the new regs.

For most commercial property-owning clients, the current-year tax savings of such an exercise can be substantial. In fact, when CSP 360 partners with CPA firms to perform a 263(a) repair and maintenance review, we find that the ROI for the property owner is at least 20-to-1.

2. Open the door with hot prospects.

We all have those ideal prospects that have proven elusive, and there are only so many times that you can approach that prospect with the mantra, “We can do your tax and accounting work faster, better, cheaper.” Breaking through the barrier requires an opportunity that will actually put money into those prospects’ pockets.

The final repair regs provide just such an opportunity. For owners of apartment complexes, assisted living facilities, restaurants, for-profit hospitals, and many other types of property, the final repair regs offer significant tax advantages for renovating, reconfiguring or maintaining their buildings.

To demonstrate that your firm is different from the competition, invite your top 10 to 20 property-owning prospects to a tangible asset seminar presented either by your own CPAs or those of a strategic partner that specializes in tax strategies based on an engineering foundation. Once those targeted prospects learn about the significant tax benefits they can receive by complying with the law—opportunities their current CPA firm did not bring to their attention—they will likely to take a second look at your firm and wonder what other tax-planning insights your firm can offer.

3. Turbocharge tax savings by combining 263(a) with cost segregation studies.

You know the benefits of using cost segregation to accelerate depreciation deductions associated with newly built or acquired property—but we all have those clients who resist cost seg because, “I’m going to get that money anyway, so why should I pay a fee just so I can get it sooner?”

Now you can sweeten the pot by packaging the cost segregation study with a 263(a) repair and maintenance review. Consider a 5-year-old, $3 million assisted living facility. Whereas the tax savings from a conventional cost segregation study will be in the neighborhood of $220,000, by taking advantage of tax deductions for repairs and maintenance (which are outside the scope of a conventional cost seg study), a combined 263(a) and cost seg could boost the total tax savings to $500,000-$600,000.

Clients for whom you have performed a cost segregation before also are ideal candidates for a 263(a) review to produce even more revenue. But don’t drag your feet. Get in front of your clients and prospects now to educate them about this rare opportunity—before your competitors do it first.

CSP360 partners with CPA firms to offer private-label tax solutions such as 263(a) repair and maintenance reviews and cost segregation studies. Contact us or call (800) 591.0148 to learn more about our exclusive strategic partnership program.

Tags: New Tangible Asset Regs, Jennifer Birkemeier

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