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3 Things to Tell Clients About Tangible Property Regulations

Posted by Don Warrant on 9/9/14 9:37 AM

Lead with tax savings on past repairs and maintenance, and close with ways to minimize taxes in the future.

Section_162(a)As a CPA in touch with your commercial real estate client base, you know that the final tangible property regulations represent significant opportunities to uncover tax savings for those clients while bringing them into compliance with IRC Section 263(a) and Section 162(a).

We CPAs tend to get so excited about these opportunities that we sometimes get a little “geeky” about the regs. But the fact is that clients really don’t care about all the minutiae of tax law. All they care about is how they can save money on their tax bills, increase their cash flow, and do it without Uncle Sam slapping them with penalties and interest.

With those goals in mind, here are the three most important things you should tell your clients about the tangible property regulations:

  1. Tax savings could far exceed the costs of compliance. Telling a story of tax-minimization is sure to make your clients’ eyes light up. The Treasury expects every taxpayer with fixed assets to conduct a review of their accounting for tangible property and file at least one Form 3115 with their 2014 return. But rather than lead with a dreary tale of compliance, talk up the tax savings. Review the client’s fixed asset schedules now to identify those repairs they were previously capitalizing. And while you’re at it, take a look at opportunities to accelerate depreciation deductions.
  1. 263(a) and cost segregation go together like peanut butter and chocolate. For commercial property owners, the first step in complying with the tangible property regulations is to segregate out the eight building systems from the building and its structural components. Clients that have already had a cost segregation study performed are that much closer to 263(a) compliance and identifying opportunities to deduct repairs that were previously capitalized. For clients that have not benefited from a cost segregation study in the past, now might be an ideal time to do so. The engineering analysis required for a cost seg is the same as that required under the 263(a) system break-out, so why not take that extra step of identifying 1245 property that qualifies for accelerated depreciation?
  1. These rules provide a roadmap to future tax savings. Now that we have final rules defining unit of property and tests for repairs vs. improvements, you can help your clients plan their future renovation activities so that they qualify as deductible repairs.

CSP360 Deep Dive Program Remember: These are just the highlights. The final tangible property regulations contain a plethora of opportunities to deliver tax-saving value to clients while bringing them into compliance. Taking advantage of these opportunities requires engineering expertise. If you are interested in partnering with CSP360 to help improve your clients’ current and future cash flow, contact us to request a Deep Dive into our process.

Tags: 263(a) regulations, Don Warrant, Section 162(a), tax savings from repairs vs capitalization

Find Tax Savings for Clients with Section 162(a):Improvements to Tangible Property (Part 1)

Posted by Jennifer Birkemeier on 5/7/14 9:11 AM

Use 3-part test to uncover potential goldmine of Section 162(a) deductions.

Final_Tangible_Property_RegulationsWhile the final tangible property regulations are complex and require a significant amount of work to bring your clients into compliance, they also hold great tax-saving potential for clients who own commercial real estate—especially office space, retail, hotels, restaurants and other types of property that require frequent upkeep.

In this series of posts, we will share actionable ideas about how you can deliver value to your clients while putting them in compliance. In our first post, we address the area of improvements.

Under the final tangible property regulations (T.D. 9636), we now have more clearly defined rules regarding whether your clients’ expenditures constitute a deductible repair under Code Section 162(a), or whether they must be capitalized under Code Section 263(a).

At the heart of the determination is whether that amount was paid to “put” a unit of property (UOP) into efficient operating condition (i.e., improvement), or whether it was made to “keep” it there (i.e., repair or maintenance). The expense must clear a series of hurdles to reach the conclusion that it is a currently deductible repair.

Three-Part Improvement Test

While the regulations don’t offer any bright-line dollar amounts to determine whether an expense is a deductible repair or a capital improvement, they do provide a series of tests to help make the determination. These tests essentially boil down to the following questions:

  1. Does the amount paid add to the value of the UOP (i.e., betterment)?
  1. Is the expense intended to adapt the UOP to a new or different use not consistent with the ordinary use of the UOP at the time it was originally placed in service (i.e., adaptation)?
  1. Does the expense substantially prolong the useful life of the property (i.e., restoration)?

Remember: If the answer to any of these questions is “yes,” then the expense must be capitalized.

Final Tangible Property Regulations The Opportunity: Deducting Repairs Past, Present and Future

Every taxpayer is required to conduct a review of their accounting for tangible property and file Form(s) 3115 to show their efforts to comply with the final rules. Why not uncover tax savings at the same time that you are bringing your clients into compliance? Armed with this new three-part test, you are in a position to review your property-owning clients’ past expenditures–potentially going all the way back to 1987.

You can also consult with those clients to plan future renovation activities that qualify as deductible repairs and maintenance rather than improvements that must be capitalized. By taking this proactive planning position, you can help your clients create a continual stream of deductions while staying in compliance with the tangible property rules.

To find tax-saving opportunities for your clients while bringing them into compliance with the final tangible property regulations, you need the support of specialists who have conducted extensive research into the areas of fixed asset accounting. Contact CSP360 and ask about how we can help you improve your clients’ current and future cash flow through a 263(a) repair and maintenance review.

Tags: tangible property regulations, Jennifer Birkemeier, Section 162(a)

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