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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: tangible property regulations, Don Warrant, tax accounting

Accounting Method Changes: A New Client Strategy Worth Investigating

Posted by Jennifer Birkemeier on 4/5/17 8:52 AM

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Choosing the wrong accounting method might not trigger an audit, but it can sure cost a business money.

To sustain organic growth in your firm, you need to find ways to distinguish yourself from your competitors. Sometimes the other firms might make it easy by forgetting to ask an important question or failing to recognize the low hanging fruit of a particular election. But many of the most desirable clients on your wish list will likely be dealing with quality accounting firms that cover the basics pretty well and provide solid advice when it comes to planning.

When you’re up against a quality firm, it helps to have some go-to areas on the tax return where even seasoned professionals miss opportunities. Tax accounting methods is one such area.

The tax accounting method choices that a business makes frequently provide opportunities for improvement for two reasons:

  • Cousins DILLY and SALY: When a firm prepares returns for a business over the course of a few years, it’s easy to fall into the pattern of “do it like last year” (DILLY) or “same as last year” (SALY). Good firms work diligently to make sure their clients incorporate law changes and regulations into their strategies, but they sometimes fail to challenge bedrock assumptions like accounting methods.
  • Bad accounting methods aren’t illegal, just expensive: In most cases, taxpayers choose accounting methods that are permissible under IRS rules. However, either because of poor advice on the choice or a change in circumstances over time, they don’t always choose the one that provides the best result for tax purposes. This choice is unlikely to trigger an audit because the taxpayers aren’t doing anything wrong. They’re just missing a chance to be right and have a lower tax bill.

The best way to review a business’ tax accounting method choices is to look at its returns. However, there are a few questions you can ask and assumptions you can challenge even in casual environments like networking events or golf games.

  • Is your business on the cash or accrual method for tax purposes? Are you required to use that method, or should you review your options? We recently encountered a case where a preparer assumed a business had to be on the accrual method because they had over $5 million in sales, but the tax return preparer hadn’t considered a recent Revenue Procedure that allows the use of the cash method to continue in certain circumstances on up to $10 million in revenue. The tax return preparer didn’t realize they met the requirements, so the company and its owners overpaid their taxes for a number of years.
  • How do you treat property tax and insurance payments? Even businesses that are required to use the accrual method for tax purposes are permitted to use the cash basis for these expenses in certain circumstances.

Once you have a chance to look at the return, there are all kinds of things you can learn. If you’re not familiar with reviewing accounting method choices on tax returns, you can also outsource the review to us or we can train your staff to find the opportunities that potential clients may have missed in this area.

CSP360 professionals bring an in-depth focus to a review of fixed asset schedules and depreciation method changes that few accountants can match. We frequently help our clients deliver value to their clients by identifying the use of impermissible accounting methods, most often by correcting depreciation methods resulting in significant tax savings.

For more information on accounting method changes or to inquire about a review of a taxpayer’s tax accounting elections, please contact us.

Tags: Jennifer Birkemeier, accounting methods, tax accounting

New Tangible Property Regulations Updates: What CPAs Need to Know

Posted by Don Warrant on 3/22/17 8:50 AM

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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 regulations, Don Warrant, accounting method changes, tangible property, tax accounting

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