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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

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.

Background

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.

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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

2016_tangible_property_regulations_update

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

IRS Issues Tangible Property Audit Guide to Help Examiners Recognize Tax Issues

Posted by Don Warrant on 11/10/16 9:00 AM

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Tangible Property Regulation Compliance Audits

In September 2016, the IRS released its Audit Techniques Guide (ATG) on Capitalization of Tangible Property which IRS examiners will use to identify potential tax issues when examining taxpayer compliance with the tangible property regulations. With the release of the ATG, it is fair to say that IRS audits of tangible property will begin soon if not already underway.

The 202-page ATG provides useful insight into the questions that examiners will ask and the documentation that they will request. Each chapter concludes with a list of “Audit Procedures,” including specific questions that examiners should ask about the concepts explained in the chapter.

The guide also includes some new examples that offer additional insights and clarification on certain issues. The ATG gets more specific about the treatment of certain types of repairs, noting for instance that the replacement of a roof membrane is not always a repair. A new example clarifies the treatment of an HVAC unit that is part of a multi-unit system. Previous guidance suggested that replacement of one unit in a three-unit system did not constitute replacement of a substantial portion of the HVAC system. The ATG points out that if each unit serves a different part of the building, the replacement of one unit may constitute an improvement to the HVAC system.

The IRS recognizes the importance of cost segregation and its interaction with the tangible property regulations. Specifically, the ATG recognizes the increased importance of cost segregation studies to identify building systems for purposes of applying the improvement rules. Examiners are instructed to request and review all cost segregation studies, past and present in connection with their examination to make sure the study was conducted properly. This information is needed by the examiner to determine the following:

  • Whether the taxpayer changed the classification of property after it was originally placed in service through a cost segregation study
  • How the taxpayer determined the unit of property for buildings and building systems
  • Whether the taxpayer took into account prior method changes that may affect the calculation of the Section 481(a) adjustment for the year of change
  • Whether a prior year cost segregation study was used to determine the adjusted basis of disposed assets
  • Whether the taxpayer is consistent in its treatment of the unit of property for both depreciation/disposition and determination as to repair-expense deduction

The ATG highlights the importance of selecting a cost segregation provider who understands how the tangible property regulations interact with cost segregation studies. All prior year and current year studies are now subject to examination by IRS specialists in connection with tangible property regulation compliance audits. In addition, cost segregation reports should always include information the taxpayer needs to comply with the tangible property regulations. 

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 assets life cycle from acquisition, to repair and maintenance, to disposition. To comply with the regulations, taxpayers either:

  • Filed Form(s) 3115 as required to change accounting methods and received IRS audit protection for all prior years;
  • Followed Rev. Proc. 2015-20 making changes in accounting methods for tangible property starting with the 2014 tax year without receiving IRS audit protection for prior years (See our blog post on the topic.); or
  • Failed to file required Form(s) 3115 (See our blog post on the topic).

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. In addition, the regulations include taxpayer favorable elections and safe harbors. The elections and safe harbors require annual consideration by taxpayers and 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.

How to Prepare for a Tangible Property Regulation Compliance Audit

For many taxpayers and the preparers who serve them, compliance with the tangible property regulations remains a work in progress. With IRS examiners now prepared to begin examining taxpayer compliance starting with the 2014 tax year, it’s time to conduct a tangible property regulation compliance review. We recommend a thorough review of the client’s overall compliance with the tangible property regulations and filing of corrective Forms 3115 in advance of being contacted for audit. The IRS ATG serves as a useful guide for this review.

CSP360, a leading provider of cost segregation and tax minimization services, has developed expert knowledge of the tangible property regulations and implementing procedures, and how the regulations interact with cost segregation studies. Please contact a CSP360 representative for assistance with a 263(a) tangible property regulation compliance review or for IRS audit assistance.

Tags: tangible property regulations, audit guide

The Complex Process of Simplifying Tangible Property Regulations (Part 3 of 3)

Posted by Don Warrant on 1/14/16 9:06 AM

2015 Compliance with the Tangible Property Regulations

Tangible Property Regulations - CSP 360As tax advisors begin working with the new rules introduced with Revenue Procedure 2015-20, it’s important to review 2014 returns to understand the choices made by taxpayers, either by filing required Forms 3115 for specific method changes, or adopting all applicable method changes incorporated in Rev. Proc. 2015-20. This post is the third and final of our series on this issue:

  • The first post focused on the method changes that each qualifying taxpayer who followed Rev. Proc. 2015-20 adopted and whether they are in compliance with the regulations.
  • The second post examined the consequences for those taxpayers who were required to file Form(s) 3115 and did not.
  • This post will focus on issues related to complying with the tangible property regulations in 2015.

A Quick Look Back at 2014

Beginning with the 2014 tax year, taxpayers may no longer claim depreciation for repairs and maintenance expenses capitalized in prior tax years. These amounts should have been included in a Section 481(a) adjustment for the 2014 tax year. The election to capitalize and depreciate repairs and maintenance in accordance with book procedures is only available beginning with the 2014 tax year. In order to elect into this treatment each year going forward, taxpayers must file an election statement with the tax return. A failure to file the election statement may result in the loss of depreciation claimed for repair expenditures in the event of an IRS examination.

Likewise, beginning with the 2014 tax year, taxpayers may no longer depreciate assets disposed of in prior tax years that were not removed from the fixed asset records. Treasury Regulation 1.1016-3 provides the authority for the IRS to deny these deductions.

Businesses with tangible property fall into one of the following categories:

  • Small business under Rev. Proc. 2015-20 and did not opt out (Please see Post 1 for discussion.)
  • Properly filed required Forms 3115 for 2014
  • Improperly filed or missed filing a required Form 3115 (Please see Post 2 for discussion.), or
  • Did not file required Forms 3115 for 2014

Tax return preparers who work with businesses that filed Forms 3115 with their 2014 tax returns should review these forms and confirm that the client’s fixed asset records have been updated accordingly. it's also important to make sure that the Form 3115 wasn’t missing information and that the taxpayer didn’t erroneously report a $0 Section 481(a) adjustment. Corrections to Forms 3115 should be made ASAP before discovery by IRS examiners. Otherwise, the taxpayer may have made an impermissible change in accounting method that could result in an additional tax liability as well as potential penalties and interest.

Tangible Property in 2015 and Beyond

Each year, tax advisors serving clients with tangible property will need to review the taxpayers’ treatment of the following:

  • Costs to acquire or produce tangible property,
  • Materials and supplies,
  • Repairs & maintenance,
  • Improvements, and
  • Dispositions of property (including removal costs).

The new methods of accounting required by the tangible property regulations change the way that many businesses treat these types of expenditures beginning in 2014. These changes should be reflected in the 2014 return and all future year returns.

In addition, return preparers should maintain a list of the elections made by the taxpayer each year. The regulations offer a variety of elections that require an annual review, such as:

  • Elections to expense tangible property under the de minimis and small taxpayer safe harbors,
  • Election to capitalize repair & maintenance costs in accordance with book treatment,
  • General asset account elections,
  • Partial disposition elections,
  • Elections to capitalize employee compensation and/or overhead costs as facilitative costs, and
  • Elections to capitalize and depreciate rotable, temporary and/or emergency spare parts when the alternative method of accounting is not used.

Cost Segregation

Cost segregation plays an important role in a business’ compliance with the new tangible property regulations. A cost segregation study identifies the appropriate unit of property needed to apply the new improvement rules to each building system and the major components of the building itself. Any costs incurred to improve real property must be segregated between real and tangible personal property before applying the improvement rules. In addition, cost segregation is necessary to recognize partial dispositions of building structures and systems, and to segregate removal costs from acquisition or production costs.

New Call-to-action As we’ve noted before, it has been clear from the start that these tangible property regulations would have a significant impact on tax accounting methods for businesses. As time passes, we continue to learn even more about how the new rules and the efforts of the IRS to implement them affect small businesses.

To consult with a CSP360 professional about the effect of the rules on your clients in 2015 and beyond, please contact us.

Tags: tangible property regulations, Revenue Procedure 2015-20

The Complex Process of Simplifying Tangible Property Regulations (Part 2 of 3)

Posted by Don Warrant on 1/12/16 8:48 AM

Due Diligence Reviews for Compliance with the Tangible Property Regulations: Missed Forms 3115 or Incorrectly Filed Forms 3115

IRS Form 3115 Filing -  CSP 360The IRS has made several efforts to simplify the process for small businesses to start applying new tangible property regulations, culminating with the release of Revenue Procedure 2015-20. It’s critical to review 2014 returns to understand taxpayers' choices, either by filing required Forms 3115 for specific method changes, or adopting all applicable method changes incorporated in Rev. Proc. 2015-20.

In our previous post, we focused on the method changes that each taxpayer who followed Rev. Proc. 2015-20 adopted and whether they are in compliance with the regulations. This post examines the consequences for those taxpayers who were required to file Form(s) 3115 and did not, or who may have filed a Form 3115 with missing information. The last of the three will focus on issues related to complying with the tangible property regulations in 2015.

Taxpayers Who Failed to File Required Forms 3115

A taxpayer who failed to file a required Form 3115 for the 2014 tax year may file Form(s) 3115 beginning with the 2015 tax year. The same holds true for taxpayers who qualified for Rev. Proc. 2015-20 in 2014 but chose to opt out by filing a statement with their return. The IRS requires that taxpayers continue the use of their current tax accounting methods until the taxable year in which a Form 3115 is properly filed.

If you’re working with a new client who failed to file a required Form 3115 with their 2014 return, you may find a Form 8275-R Regulation Disclosure Statement. If a paid preparer felt that a client had reasonable basis for not filing a required Form 3115, this disclosure statement is filed with the return to avoid the penalties that can be imposed on preparers who prepare a tax return that does not comply with Treasury Regulations.

Automatic Extension of Time to File Forms 3115

Section 6.03(4) of Rev. Proc. 2015-13 provides an automatic six-month extension of time to file Forms 3115. Fiscal year taxpayers may be able to file the required Form(s) 3115 with their 2014 tax return if they are within six months of the original due date of their 2014 tax return.

Correcting a Previously Filed Form 3115

Section 6.03(1)(e) of Revenue Procedure 2015-13 provides the procedures to submit additional correspondence regarding a previously filed Form 3115. For example, if the Form 3115 was missing information or the section 481(a) adjustment was incorrectly reported as $0, then the taxpayer has made an impermissible change in method of accounting. If a taxpayer reported a $0 Section 481(a) adjustment for repairs but in fact, had capitalized repairs in prior years, then corrections to a previously filed Form 3115 should be made since the taxpayer may no longer treat these items as depreciable fixed assets.

It’s important to review the 2014 returns of your clients with the information from this post and our previous one in mind. When onboarding new clients over the next several years, a review of Forms 3115 filed in prior years will continue to be a key step. If it’s there, was it filed correctly? If it’s not there, was the failure to file permitted under Revenue Procedure 2015-20? If the IRS discovers an incorrectly filed Form 3115 before you make New Call-to-action corrections, the IRS can propose examination changes for the oldest year under audit and assess penalties and interest. In other words, the taxpayer may have lost the IRS exam protection that is available when a Form 3115 is properly filed and be exposed to penalties.

Our first two posts on this topic have focused on what to do if you review a 2014 return that doesn’t have a Form 3115 attached, either because the client chose to follow Revenue Procedure 2015-20 or because the client failed to file a Form 3115 that was required by the regulations. Our next post will look ahead to the work that needs to be done for tangible property calculations on Tax Year 2015 returns.

Tags: tangible property regulations, Revenue Procedure 2015-20

The Complex Process of Simplifying Tangible Property Regulations (Part 1 of 3)

Posted by Don Warrant on 1/7/16 8:52 AM

How did Revenue Procedure 2015-20 impact small businesses?

Tangible Property Regulations - CSP 360Throughout the recent implementation of the tangible property regulations, the IRS made several attempts to simplify the process for small businesses to start applying the new rules. These efforts culminated with the release of Rev. Proc. 2015-20 that allowed small businesses to make changes in methods of accounting using a cut-off method without filing a Form 3115.

As the dust settles and tax advisors begin working with the new rules going forward, it’s important to review 2014 returns to understand the choices made by taxpayers, either by filing required Forms 3115 for specific method changes, or adopting all applicable method changes incorporated in Rev. Proc. 2015-20. We’re going to look at this issue in 3 consecutive posts:

  1. This post will focus on the method changes that each taxpayer who followed Rev. Proc. 2015-20 adopted and whether they are in compliance with the regulations.
  2. The next one will examine the consequences for those taxpayers who were required to file Form(s) 3115 and did not.
  3. And the last of the three will focus on issues related to complying with the tangible property regulations in 2015.

2014 Compliance Review

For existing clients or for new clients that you bring in this year, one of the first things you’ll want to review from the 2014 return is the Form(s) 3115 that were or were not filed. If Form(s) 3115 were not filed, then you’ll want to confirm the taxpayer qualified as a “small business” under Rev. Proc. 2015-20 and if so, did they comply with their new methods of accounting for the 2014 tax year. (We’ll cover the “if not” option in the next post.) Form(s) 3115 filed in prior years are important data points for any new client you take on and should be kept as part of your permanent records.

What Impact Does Rev. Proc. 2015-20 Have on Small Businesses?

Taxpayers who followed Rev. Proc. 2015-20 have adopted all method changes that are necessary to comply with the tangible property regulations without benefit of a negative section 481(a) adjustment for amounts paid or incurred, or dispositions, in taxable years beginning before 2014. These taxpayers automatically adopted each of the following methods of accounting, as applicable to their business:

  • #184 – Repairs & maintenance, improvements, routine maintenance safe harbor, and unit of property
  • #185 – Regulatory accounting method
  • #186 – Non-incidental materials and supplies
  • #187 – Incidental materials and supplies
  • #188 – Non-incidental rotable and temporary spare parts
  • #189 – Optional method for rotable and temporary spare parts
  • #190 – Dealer – to deduct costs that facilitate the sale of property
  • #191 – Non-dealer - to capitalize costs that facilitate the sale of property
  • #192 – Capitalizing costs to acquire or produce property
  • #193 – Real property investigatory costs
  • #200 – Permissible to permissible method of accounting for depreciation of MACRS property
  • #205 – Dispositions of a building or structural component
  • #206 – Dispositions of tangible depreciable assets (other than a building or its structural components)

Beginning with the 2014 tax year, small businesses are required to use the new methods of accounting for tangible property listed above. For example, they may no longer depreciate repairs and maintenance capitalized in prior tax years, or assets that were disposed of in prior tax years. Fixed asset records should have been updated accordingly as of the beginning of the 2014 tax year.

Rev. Proc. 2015-20 excluded the following method changes:

  • #7 – Depreciation or amortization
  • #21 – Removal costs
  • #199 – Depreciation of leasehold improvements

Therefore, small businesses may have filed Form(s) 3115 even though they followed Rev. Proc. 2015-20.

Impact on Future Years Returns

Taxpayers that followed Rev. Proc. 2015-20 are required to continue to use the new methods of accounting adopted for the 2014 tax year unless they decide to change their methods of accounting. If a taxpayer chooses to change accounting methods, the change should be made by filing a Form 3115 and calculating a section 481(a) adjustment in a later year. The important thing to remember for clients who opted to rely on Rev. Proc. 2015-20 is that any section 481(a) adjustment is calculated by taking into account only amounts paid or incurred, and dispositions, in taxable years beginning in 2014.

New Call-to-action It has been clear from the start that these tangible property regulations would have a significant impact on tax accounting methods for businesses. As time passes, we continue to learn even more about how Revenue Procedure 2015-20 impacts small businesses.

This article focused on clients who relied on Revenue Procedure 2015-20 and elected to not file Form(s) 3115. Our next post will look more closely at the circumstances of taxpayers who failed to file a required Form(s) 3115 and did not qualify as a “small business” under Revenue Procedure 2015-20.

Tags: tangible property regulations, Revenue Procedure 2015-20

When New Clients Wave Red Flags—2 Signs Your New Client Got 263(a) Wrong

Posted by Don Warrant on 7/22/15 9:07 AM

If you’re onboarding a new commercial real estate client this summer, be sure to check tangible assets on the tax return

tangible_property_regs-4Summer isn’t just about quality time at the pool or the golf course. It’s also about quality networking time focused on growing your practice. Lots of calendar-year taxpayers are coming off of their annual experience with their tax preparers, and some of them are bound to be testing the waters to see if a new accountant might be a better fit. If you’re fortunate enough to be adding clients that own tangible property, especially commercial real estate clients, there are 2 key signs that they may have missed a significant tax-saving opportunity under the new 263(a) regs.
 
1-Does the Return Include a Form 3115?

If your new or potential commercial real estate client has already filed a 2014 tax return, that return should include a Form 3115, Application for Change in Accounting Method. If it doesn’t, the good news is that most clients can still file that form up to the extended due date of the original return. And the even better news is that you will likely be able to help them get a significant refund as a result.
 
2-If the Return Includes a Form 3115, Is There a 481(a) Adjustment?

If you onboard a new client or talk to a potential client who did file a return with a change in accounting method, you need to review that adjustment. The new regs under section 263(a) require affected businesses to change their accounting methods (Form 3115) and to adjust the basis of many existing assets to reflect that change (Form 3115—Part IV, Section 481(a) Adjustment). If you review a return for a new client that includes the change in method but not the adjustment, it’s likely that there is a mistake involved that needs to be corrected before the extended deadline for the return.
 
263(a) opportunities Even if the Form 3115 has been filed and a 481(a) adjustment has been claimed, it’s important to review the previous accountant’s work in calculating the adjustment. The one-time catch up adjustment for businesses that change accounting methods under the new rules has generated more than its share of confusion and errors this year.
 
If you’re looking at new clients that have tangible assets, you might want to consider getting a second opinion on the 481(a) adjustment from CSP360. Our professionals focus on tax issues affecting commercial real estate clients. We have helped many accounting firms that wanted an extra set of eyes on this issue at this critical time. If you have any questions or concerns about how the new rules may have affected your commercial real estate clients or prospects, a consultation with CSP360 could help you to better serve your client.

Tags: 263(a) regulations, tangible property regulations, Don Warrant

Time Is Running Out to Get 263(a) Elections Right

Posted by Don Warrant on 7/14/15 8:59 AM

The Window of Opportunity on These Tax-Saving Elections Closes This Fall

263aThe weather’s heating up. It feels like time for that midsummer lull between the spring tax season everybody knows about and the fall extension deadlines that wreak almost as much havoc on a CPA’s life without the relief of occasional tax jokes from late-night hosts. There’s a big difference this year, though. Any clients with depreciable property on their returns needed to make changes in accounting methods and consider making elections under new regs for their 2014 returns.
 
Taxpayers who already filed their returns can still make changes to those returns to take advantage of the tax saving opportunities or to include a missed election using the automatic extension procedures. Given the scope and complexity of the new rules, it makes sense to take a second look at the returns of your affected clients to make sure that the new rules were followed correctly. With the amount of potential tax savings at stake, you may want to consider having a second set of eyes that are focused on this issue reviewing those returns.
 
Most commercial real estate businesses are likely to see a significant impact from the regs. Given the constant need for repairs, replacements and maintenance on buildings, these clients need to make sure that they have correctly implemented the accounting method changes and claimed the related adjustments. Because the IRS will continue to release guidance this year, CPA firms should continue to consider this an important topic to discuss with clients.
 
If you’re confident that your firm got this complicated compliance initiative right for all of your clients, by all means hit the beach or the mountains or go wherever you need to go to relax this summer. If you’re wondering whether there’s a possibility you may have missed something and you want to consult with a professional who is focused on helping CPAs provide the best service possible to commercial real estate clients, a consultation with CSP360 might make your time off much more relaxing.
 
263(a) opportunities Just remember, the automatic extension procedures don’t close gradually over time and remain open for some people in certain circumstances. This window of opportunity slams shut on the extension date for the original return—either September 15 or October 15 for calendar year taxpayers. If the taxpayer didn’t file a Form 3115 with their 2014 tax return then the taxpayer has effectively made all of the method changes for tangible property without the benefit of a tax deduction. That is most likely not the best option for the taxpayer. Similarly, if the taxpayer filed a Form 3115 with their 2014 tax return reporting a $0 Section 481(a) adjustment, they have not taken advantage of the tax savings opportunities and may not have complied with these regulations. Now is the time to fix those returns if necessary.
 
These normally quiet months for tax practitioners can be a critical time for some clients. If you have any questions or concerns about how the new rules may have affected your commercial real estate clients or prospects, a consultation with CSP360 could help to put your mind at ease.
 

Tags: 263(a) regulations, tangible property regulations, Don Warrant

Post Tax Season 263(a) Opportunities to Get New Clients from Competitors

Posted by Don Warrant on 5/22/15 9:03 AM

Don’t let competitors use a letter like this to steal your clients.

Most accountants spend the end of April and early May catching their breath and letting the dust settle from the spring filing season. Once you’ve cleaned up and started planning for the summer, remember that there’s a very rare opportunity this year related to the 263(a) tangible asset rules. Taxpayers who timely filed their 2014 federal tax returns receive an automatic extension of time to amend their tax returns to file Forms 3115 and make late elections.
 
Most commercial real estate businesses are likely to see a significant impact from the regs. Given the constant need for repairs, replacements and maintenance on buildings, these clients need to make sure that they have correctly implemented the accounting method changes and claimed the related adjustments. Because the IRS will continue to release guidance even after the filing season has ended, CPA firms should continue to consider this an important topic to discuss with clients. For example, the rules on building refresh’s are still evolving and IRS guidance is expected anytime.
 
You may very well be on top of things and maximizing any 263(a) opportunities for your clients. On the other hand, if you are behind the curve, you’ve opened up a tremendous window of opportunity for a more aggressive competitor to poach clients.
 
Given the complexity of these rules and the fact that significant pieces of guidance have yet to be released, the next few months are a great time for your firm to aggressively reach out to potential clients about their 263(a) opportunities. For example, if they already filed, explain how you can help them capitalize on a missed opportunity under the automatic extension procedures. If they are on extension, then their current tax preparer may not have pinpointed the tax savings opportunities, carpe diem (seize the day)!
 
Here’s what that letter from an aggressive accounting firm to your client might look like.

263a

We’re pretty sure that you would be very displeased if one of your clients got a letter like this, but your clients are fair game for firms that can deliver more tax advantages from an opportunity with an ever closing window.

This opportunity to amend 2014 tax returns under the automatic extension period might be missed by other tax return preparers. But it’s also an opportunity that some of your competitors may seize if you don’t.

If you would like to evaluate your clients’ plan to comply with the new rules for tangible property, we can help. Contact us to schedule a consultation.

For more on this topic, be sure to download our whitepaper, “Using the New Tangible Property Regs to Help Clients and Gain New Business

Tags: 263(a) regulations, tangible property regulations, Don Warrant, accounting method changes, Form 3115

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