Cost Segregation: More Important Than Ever?

Posted by Don Warrant on 11/15/18 4:26 PM

cost-segregation-more-important-than-everYou and your clients may be thinking that the proposed tax reforms will impact the utilization of cost segregation. Will the proposed changes to the tax law make cost segregation obsolete?

In recent years, the IRS and U.S. Treasury have created complexities when determining the proper tax treatment of expenditures related to commercial buildings. This is the result of the interaction of the federal cost recovery rules, the tangible property regulations, and the classification of improvements to commercial buildings as “qualified improvement property” and/or “qualified real property.” As a result of these changes, cost segregation has become more important than ever!

The capitalization or expensing of costs in the current year impacts the treatment of similar costs in future years under the tangible property regulations. Therefore, it is important to make the right decisions when capitalizing or expensing costs. Cost segregation is an important tool used to make these decisions.

If and when tax reform does occur, there will likely be many states that do not conform to the federal rules, or may transition over a period of years. As a result, cost segregation will continue to fulfill an important role in those states. 

In addition, as we have written before, there are many compelling reasons to perform cost segregation. Many of those reasons are discussed below.

2015 PATH Act

The Protecting Americans from Tax Hikes (PATH) Act of 2015 had a significant impact on the importance of using cost segregation specialists to compare the tax benefit of renovating an existing building vs. building construction. Since building construction doesn’t qualify for bonus depreciation, renovating existing buildings can generate significant tax savings, creating a source of funds to finance the project.

Other important uses of cost segregation include:

  • Bonus Depreciation and Section 179 Expense. A cost segregation study identifies “qualified property” for bonus depreciation and year-of-purchase expensing.
  • Accelerated Tax Deductions. A cost segregation study creates accelerated tax deductions by accelerating the period over which the cost of assets are recovered for tax purposes. Assets identified in a cost segregation study are reclassified from a 39-year cost recovery period to a 5-year, 7-year, or 15-year cost recovery period.
  • Tax Deferred Exchanges. The IRC Section 1031 exchange provision is a valuable strategy to defer the recognition of gain on the sale of buildings. Cost segregation used in connection with a tax deferred exchange can generate tax savings in addition to tax deferral.
  • Estate Tax Planning. A cost segregation study can be used to generate tax savings for both the decedent and the heirs of real estate by segregating costs for both parties before and after the date of death.
  • Partial Disposition of Building Property. Cost segregation is generally necessary to determine the adjusted tax basis of the portion of building property that was partially disposed of in connection with the partial disposition election.
  • Improvement vs. Repair Analysis. Cost segregation is generally necessary to determine whether expenditures improve or repair the building structure or any building system, and to determine the appropriate unit of property.
  • Tenant Improvement Costs Analysis. Cost segregation is often necessary to segregate the cost of tenant improvements between building property and tangible personal property, and to determine which expenditures are capital improvements or repairs.

Other uses of cost segregation include tax planning in the year of a building’s sale, to qualify for the small taxpayer safe harbor election, and for federal and state income tax planning. 

In summary, cost segregation is more important than ever, especially for buildings placed in service in years preceding any federal or state tax reform that reduces tax rates.

CSP360 is ready to assist you and your clients with these important uses of cost segregation, and to generate tax savings for your clients.

Tags: cost segregation, cost segregation study, tangible property regulations, tangible property

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

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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