Build or Renovate? A Building Cost Recovery Analysis May Change Your Answer

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


Everybody loves that “new building” smell, but renovating an existing building may generate more tax savings. Only a building cost recovery analysis can tell you which way to go.

When a business reaches a point where it needs more space, it’s usually a pretty exciting, often frenetic time for the owners and employees. Whether it’s additional offices for new employees, expanded manufacturing and storage facilities for the business’ products, or a combination of both, many businesses don’t even realize that more space is the answer until long after the need has become severe.

At such a crazy time, the last thing many owners might consider is the tax impact of choosing between renovating an existing building or constructing a new building. That can be an expensive mistake.

The PATH Act made some changes to depreciation rules providing businesses that make improvements to the interior portion of existing buildings with opportunities to recover costs quicker than by constructing a new building.

  • The section 179 expensing election is available to expense up to $500,000 of “qualified real property,” a term that limits this immediate tax deduction to qualified leasehold improvement property, qualified restaurant property, and qualified retail improvement property. However, the section 179 expensing election is phased out completely when the costs of eligible property exceeds $2.51 million for the 2016 tax year. The expense limitation and phase-out are adjusted upward for inflation each year.
  • The first year special depreciation allowance, aka “bonus depreciation,” is available for “qualified improvement property” placed in service on or after January 1, 2016. Qualified improvement property is an improvement to the interior of nonresidential real property that is placed in service after the date the building was placed in service. (Certain improvements such as enlargements, escalators/elevators, and internal structural framework are excluded.)

For example, a business with a $10 million budget can use the full budget on constructing a new building or spend $2.5 million to acquire an existing building and $7.5 million on renovations. Although cost segregation can accelerate building cost recovery by assigning property to the property 5-year, 7-year, and 15-year recovery periods, a significant portion of the $10 million construction cost will be assigned to a 39-year recovery period.

If the business acquires and renovates an existing building, in addition to cost segregation of the building acquisition and renovation costs, a portion of the $7.5 million renovation costs will be classified as qualified improvement property and qualified real property. As a result, cost recovery will occur more quickly by acquiring and renovating an existing building than constructing a new building up to a certain cost point. Therefore, it is important to perform a building cost recovery analysis before decisions are made regarding new building construction.

When to Start the Conversation

It is important to raise this issue when you learn that a client is expanding or taking on a new product or process that will require more space or adding employees. When you learn that a client is expanding and needs more space, it’s important to get this information on their radar before decisions are made. Even though construction lead times can be considerable, the decisions that make a difference for tax purposes often happen very early in the process. You don’t want to find out after the fact that a client didn’t perform a building cost recovery analysis before deciding to construct a new building.

Keep in mind that the 50% bonus depreciation is available for property placed in service by December 31, 2017. For qualified improvement property that is placed in service during calendar year 2018 and 2019, the bonus depreciation rates are 40% and 30% respectively. And bonus depreciation will be completely phased out by 2020 (2021 for certain property).

The threshold at which the recovery of costs for new building construction is faster than the recovery of costs to renovate an existing building is based in part, on the price paid for an existing building. The lower the purchase price, the more cost that can be assigned to qualified improvement property and qualified real property to accelerate building cost recovery and tax savings.

Obviously, the acceleration of building cost recovery and tax savings are not the only concern when making the decision, but they can provide a valuable incentive to either reduce construction costs or extend the capital budget.

Need Help with a Building Cost Recovery Analysis?

CSP360 has over 20 years of experience focused on cost segregation services and cost recovery rules. Our cost segregation database makes us the perfect resource to perform a building cost recovery analysis. Contact us to learn more.

Tags: Don Warrant, tax saving opportunities, PATH Act, building cost analysis

Most Significant Items for Tax Practitioners to Consider Before Filing 2016 Tax Returns

Posted by Don Warrant on 3/1/17 9:00 AM


Below, we have compiled a list of the most common and important items that tax practitioners should consider as they request information from their clients to prepare 2016 tax returns. Some of these items are necessary for general tax compliance and others present tax planning opportunities.

  1. Tax Credits: Dollar-for-dollar reduction of tax 
  2. Capitalization: IRC Section 263(a) and 263A requirements to capitalize costs to acquire tangible and intangible property
  3. Deductions: Dollar-for-dollar reduction of taxable income
  4. Automatic Accounting Method Changes: Dollar-for-dollar reduction of taxable income when negative Section 481(a) adjustment
  5. Tax Elections: Each year, tax practitioners must consider a number of available elections and safe harbors, which generally must be made with a timely filed tax return.

Tax Credits

  • Research credit
  • Work opportunity tax credit
  • Small employer health care credit
  • IRC Section 45L tax credit for construction of energy-efficient homes
  • State employment tax credits
  • Fuel tax credits
  • Federal empowerment zones


  • Building improvements
  • Facilitative costs
  • Loan-acquisition costs
  • IRC Sec. 263A (including interest capitalization rules)
  • Non-incidental materials, supplies, and spare parts


  • Routine maintenance safe harbor
  • Abandoned assets
  • Building repairs & maintenance
  • Bonus depreciation (including qualified improvement property)
  • Incidental materials and supplies
  • IRC Sec. 179D – energy efficient improvements to commercial buildings
  • IRC Sec. 199 – domestic production activities deduction

Automatic Accounting Method Changes

  • To deduct prepaid expenses (service contracts, advertising, insurance, postage, travel, subscription, professional fees, property taxes)
  • To correct depreciation methods (cost-segregation study)
  • To correct the depreciation method for pickup trucks that are erroneously treated as luxury vehicles, and
  • To correct the MACRS depreciation method and recovery period for qualified real property (qualified leasehold, retail and restaurant property)

Tax Elections

  • De minimis safe harbor election
  • Safe harbor for small taxpayers
  • Election to capitalize and depreciate repairs
  • General asset account election
  • Partial asset disposition election
  • Election to capitalize and depreciate employee compensation and overhead costs
  • Election to capitalize and depreciate rotable, temporary and emergency spare parts
  • Sec. 179 expense election (including qualified real property)
  • IRC Sec. 1031 exchanges
  • Sec. 179 election for qualified real property
  • Opt out of bonus depreciation for a class of property


Are you looking for a partner to provide cost segregation services and other private-label tax minimization strategies to your clients? CSP360 is the only firm that offers a combination of engineered tax solutions with tax credit/incentive discovery programs; private labeling, and comprehensive business development assistance. Learn more about our unique approach or contact us today.

Tags: tax saving opportunities, deductions, accounting method changes

Explaining Cost Segregation to Clients Can Be as Easy as 1-2-3

Posted by Jennifer Birkemeier on 1/19/16 8:57 AM

Many tax concepts are difficult to explain to clients. Cost segregation can be explained with 3 easy talking points.

Cost Segregation for Clients - CSP 360Albert Einstein has often been quoted as saying, “The hardest thing in the world to understand is the income tax.” That means a couple of things for accountants and tax professionals.

  • Job security, and
  • You spend much of your career trying to help clients understand the hardest thing in the world to understand.

Fortunately, not every section of the Internal Revenue Code is THAT hard to understand. Also, you have resources at your disposal who can help you explain parts of the income tax to clients and to prospects that you hope will become clients. Like this blog post, for instance. It will provide you with 3 easy talking points to explain the value of a cost segregation study to clients who own real property.

  1. Maximize your tax savings by accelerating deductions. Realistically, most clients will hear “bigger deductions on this year’s return” and tune you out after that. You won’t need to show spreadsheets explaining the time value of money and why they save money even though the total amount deducted over the course of the building’s life may not change significantly. That’s not to say you shouldn’t be ready to dive into the details if asked. But start at a high level and see if that’s enough to get someone interested.
  2. A cost segregation study creates its own documentation. Like most conversations about maximizing tax savings, this one will likely raise the specter of the IRS. One of the attractive selling points of a cost segregation study is that the IRS has put out very clear guidance in its “Cost Segregation Audit Technique Guide” that explains how a study should be conducted and how the report should be prepared. It’s possible that the IRS may question the deductions, but your client will already have in hand the exact documentation that the Service needs in order to support the positions taken. Depending on who prepares the study, they may also have professional representation to help them through any examination.
  3. Cost segregation goes way back. Maybe you’ve talked with your clients about amended returns before, or maybe they’ve learned elsewhere that amended returns can typically only be done for 3 years after the original return was filed. But cost segregation is treated as an accounting method change. Clients may not care to learn about the terms or the definitions, but they need to understand this key point. A cost segregation study may help with more than just accelerating future deductions into the current year. In many cases, it could also lead to the recalculation of prior year depreciation amounts to reflect the acceleration that would have occurred if they had segregated costs initially. That means additional deductions may be available in this tax year for property put in service as far back as 1987. If the segregation study identifies property with less than a 20-year life, bonus depreciation deductions may be available in addition to accelerated amounts.

Obviously, no tax deduction applies to every client all of the time. The good news about cost segregation is that it’s pretty easy to identify the clients who might benefit from a study. And, with these 3 easy talking points, it can be pretty easy to explain the benefits to them. Good luck!

Tags: cost segregation, Jennifer Birkemeier, tax saving opportunities

Ask Your Clients These 5 Questions to Determine If 179D Is For Them

Posted by Jennifer Birkemeier on 9/30/15 8:58 AM

A Few Indicators Will Tell You If Their Deduction Will Be Worth the Cost of the Study

Energy_efficient_buildingWe spend a lot of time talking with CPA firms about section 179D and cost segregation studies. It’s a pretty great job to help accountants and their clients uncover substantial tax savings that they didn’t know were available or didn’t know how to claim. At the same time, we have to remind the folks that we talk with not to get too far ahead of themselves. It’s important to remember that the potential 179D deduction must be large enough to justify the cost of the study needed to claim it. Here are a few questions you can ask to determine if a client is in line for tax savings that warrant a study.

  • What type of improvements were made? Section 179D applies to energy efficient improvements made in 3 different categories:How big is the space? The deduction is calculated based on the square footage of the structure improved, so smaller spaces may not justify the cost of the study. Typically, 30,000 sq. ft. seems to be the threshold at which most Section 179D deductions exceed the cost of the calculation.

    • Lighting
    • HVAC
    • “Envelope,” which includes improvements to the shell of the building that make it more efficient, such as windows, roof, etc.  
  • How much did the work cost? The deduction is also limited to the amount spent on the improvements. It’s important to check the receipts before committing to the study in order to make sure that the potential deduction is large enough.

  • What are the energy efficiency ratings of the old materials removed and the new materials installed? The licensed engineer or contractor who reviews the improvements will make a determination based on the improvement in energy efficiency. The business needs to have enough information about the old and new materials to support that calculation.

The questions above apply to commercial property owners who have made or are considering making energy-efficient improvements to their properties. If you have a client or potential client that is an engineering or architectural firm, there’s a different question to ask that could uncover significant opportunities.

  • Do you serve government clients? If a government makes an energy efficient improvement to a building, it won’t have much use for a 179D deduction. However, the law provides some opportunities for an engineering or architectural firm that designs the energy efficient improvements to a government building to claim the deduction. If your firm serves these professionals, or if it would like to expand into this segment of the market, this is a great question to ask.  

As an accountant, you know better than most how to help a business evaluate the potential costs and benefits of any particular decision. When it comes to performing a cost segregation and claiming a section 179D deduction, these questions should help you make that evaluation quickly and accurately.

Tags: commercial real estate, Section 179D, Jennifer Birkemeier, tax saving opportunities

4 Pieces of Data You Need to Qualify a Cost Segregation Opportunity

Posted by Don Warrant on 5/20/15 9:03 AM

Tax-Saving Formula: A + B + C + D = $$$

cost_seg_tax_savingWe've talked about when cost segregation might not be right for your commercial real estate client or prospect. So how do you know when cost segregation is the right answer?
At CSP360, we rely on a few key pieces of data to estimate the tax savings a commercial property owner can expect as a result of accelerated depreciation. Here are the 3 most important inputs into that equation:
  1. The physical attributes of the property. You’re probably already aware that certain types of buildings naturally have a high proportion of shorter-lived assets. For example, hotels, restaurants, golf clubs and other hospitality-oriented businesses tend to have lots of furniture, fixtures, and other finishing touches that qualify as Sec. 1245 property. Did you also know that location factors large in the cost-benefit equation? If the building is on a city block surrounded by city-owned sidewalks, then the opportunity to take accelerated depreciation for land and land improvements is severely limited.
  1. The federal tax depreciation schedule for the property owner. A cost segregation tax specialist will need to see how the property currently is being depreciated on schedules submitted to the IRS (as opposed to schedules used internally or for financial statement purposes). If the property is primarily being depreciated over 39 and 27½ years, that owner is more likely to be able to reap the benefits of a cost segregation study.
  1. The property owner’s tax-paying history. Clients that expect negative adjusted gross income or those that will only have passive rental income will not be able to benefit from accelerated depreciation deductions.
  1. The tax basis of the property. The cost-benefit calculation generally works out best for buildings with a tax basis of $1 million or more. However, owners of buildings with a high proportion of nonstructural elements (e.g., hotels, restaurants, apartment buildings) often can justify a study with an even lower tax basis.
cost segregation guide for CPA firms Of course, the right answer can’t be boiled down to a simple formula. Every situation is different and depends on many factors, such as how the property was acquired and how long the owner plans to hold it. A successful cost segregation—one that results in the greatest amount of accelerated depreciation that also will stand up to IRS scrutiny—requires extensive knowledge of cost segregation tax law as well as industry-specific engineering expertise. Success also relies on the CPA’s intimate knowledge of the building owner’s specific circumstances and tax situation.
If you think your commercial property owning client or prospect could benefit from a cost segregation study, we can help qualify that opportunity. Request our cost segregation data collection form and get started today.

Tags: cost segregation, Don Warrant, tax saving opportunities

Is 179D Tax Deduction Right For Your Commercial Real Estate Client or Prospect?

Posted by Jennifer Birkemeier on 5/12/15 9:28 AM

Here are 3 pieces of data you need to tell if a 179D study will generate at least 10-to-1 ROI.

179D_tax_deductions_for_commerical_real_estateGreen is the new black, and chances are good that your commercial real estate clients and prospects have replaced windows, HVAC units, or lighting in the past few years with more energy-efficient models.
The status of the 179D tax deduction for energy efficient commercial buildings currently is in limbo for 2015 and beyond. However, this perennial “tax extender” is a popular one that enjoys broad support, and so it will most likely be implemented retroactively for the 2015 tax year.
Digging for just a few pieces of information now will allow you to see if your commercial real estate clients would benefit from this valuable tax deduction (up to $1.80 per square foot) that can generate ROI for the property owner of up to 10 times (or more) the cost of the study.
The pieces of data you will need to perform a 179D analysis include:
  1. Square footage of the building and the energy efficient improvement or addition.
Ask the client or prospect for architectural drawings of the buildings to get an accurate measurement of the overall square footage and the size of the addition or improvement. Generally, because 179D requires an independent certification by licensed engineer licensed and thorough modeling for each individual building, the building should be at least 30,000 square feet for the benefits to outweigh the costs of the study.
  1. Technical specifications on efficiency improvement.
Next, you will need the technical specifications about the energy efficiency of the new unit. The engineer will compare each building’s performance to government standards to determine if it reaches the required threshold of energy savings.
  1. Invoices for energy-efficient upgrades and additions.

Currently, the maximum 179D tax deduction is $1.80 per square foot for buildings that achieve the threshold of 50% energy and power cost savings for the whole building, or $0.60 per square foot for partially qualifying property. However, the deduction is capped at the taxpayer’s actual costs for the improvements. So to determine whether the deduction will or will not be worthwhile, you will need the client’s invoices for the improvement project or new building. 

Do the Benefits of 179D Outweigh the Costs?

Once you’ve gathered all these pieces of data, you can use the U.S. Department of Energy’s 179D calculator to estimate the potential tax savings for your client.
Buildings of at least 30,000 square feet that meet the government’s technical specifications typically generate ROI of at least 10 times the cost of the 179D study. However, since the lookback on this deduction goes all the way back to January 2006, commercial property owners that have performed efficiency upgrades over multiple years might see even better returns, in some cases closer to 20-to-1.
If you would like to evaluate your clients’ previous or upcoming building or renovation projects to determine whether they qualify for the 179D tax deduction, we can help. Contact us to schedule a consultation.

Tags: commercial real estate, Section 179D, Jennifer Birkemeier, tax saving opportunities

New Year’s Resolution for Landlords: Clean-Up Fixed Asset Schedules and Find Tax Benefits

Posted by Don Warrant on 1/14/15 9:13 AM

Landlords should consider whether tenants have removed portions of building components as a result of tenant improvements.

Fixed_Asset_SchedulesFor many, ringing in a New Year includes a list of resolutions to reorganize and clean out unwanted items. For landlords, cleaning up fixed asset schedules could be the best resolution of all. We have identified a common trend with commercial real estate leases that has benefitted many of our clients.

Partial Disposition for Landlords

Many commercial leases require the tenant to make leasehold improvements to the building. Thanks to the new tangible property regulations, when the tenant replaces a building component, the landlord has an opportunity to abandon the original component and write off the remaining tax basis.
For example, say a building tenant replaced the roof in 2013. The new roof would be capitalized on the tenant’s books and will never appear on the landlord’s fixed asset records. But since the old roof is on the landlord’s books, the landlord can file a method change to make a “late” partial disposition election and recognize a loss for the remaining tax basis in the old roof.
There is a danger to landlords in overlooking this opportunity to clean up their fixed asset schedules. If the landlord were to sell the building and have assets on the books that have actually been disposed of, that building owner could potentially have a depreciation recapture—which is taxed as ordinary income--on an asset that the client no longer owns. 

Planning Opportunity

How do you identify these opportunities for your commercial real estate clients? Start by reviewing lease agreements to identify those that require the tenant to make improvements to the building.
Next, review what improvements have been completed by the tenants that would have resulted in the removal of building components. If a tenant has made an improvement that resulted in the removal of a portion of a building component, then the landlord is eligible to recognize a loss for the remaining tax basis.

Act Now to Claim Deductions for Prior Year Partial Dispositions

Remember that 2014 is the only year in which taxpayers can file a method change to make a “late” partial disposition election and recognize a loss for the remaining tax basis of portions of building components disposed of in prior years. So once the 2014 extension deadline passes, the building owner loses forever the opportunity to write off portions of building components abandoned in prior years.
Time is also of the essence going forward. As your client’s tax adviser, you will need to stay on top of tenant improvements each year so that your client can recognize the abandonment of portions of building components in the current and future years on a timely filed original return. The election cannot be made on an amended return.

Give Yourself A Breather

CSP360 Deep Dive Program This clean-up process will take time, since your client may not be readily aware of all the improvements that tenants have made in 2014 and prior years. Therefore, we recommend filing an extension for the 2014 tax year to give yourself more time to identify and recognize partial dispositions of building components.
If you have questions about how your commercial landlords can take advantage of this fixed asset clean-up process, contact us to learn how we can help.

Tags: Don Warrant, tax saving opportunities, fixed asset

Execute on This Triple Play Opportunity Presented By Final Tangible Property Rules

Posted by Jennifer Birkemeier on 12/10/14 11:39 AM

As Senate considers tax extenders bill, learn how to use dispositions and removal costs to enhance tax savings of 179D.

Ever heard the saying that you must give to receive? During this season of giving, CPA firms can help owners of commercial property benefit from this phenomenon when they dispose of tangible property and, as a result, realize lowered tax bills and increased cash flow.

179D Energy Eficiency DispositionsIn fact, this holiday season could be a very happy one indeed if the Senate approves the tax extenders bill (Tax Increase Prevention Act) that passed the House by a wide margin on Dec. 3.

But even if that particular gift is delayed, commercial property owners still have a rare opportunity as a result of the interplay between the 179D federal tax deduction for energy efficient improvements to buildings and the new tangible property regulations. Read more about this triple play in our latest blog post.

Even in the unlikely scenario that Congress fails to extend 179D, your commercial real estate clients still can capture deductions (up to $1.80 per square foot) for energy efficiency improvements placed in service between January 2006 and December 2013.

But why stop there? For every building improvement, the property owner should dispose of old property. And thanks to the final tangible property regulations, those dispositions can result in significant tax savings.

How The Triple Play Works

Consider a hotel that upgraded its lighting to a more energy-efficient system in 2013. How do you turn that expensive renovation into a tax-saving opportunity?

First, you conduct an energy efficiency study and claim a deduction for the new lighting system—for lighting; the deduction is up to $.60 per square foot.

Next, you claim a loss on the disposition of the old lighting and recognize a tax deduction for the remaining basis in that asset. But this is a limited-time opportunity. The Revenue Procedure allows for making a “late partial disposition election” as a change in method of accounting for the 2012, 2013 and 2014 tax years only. So that means that once the property owner’s 2014 tax return is filed, the opportunity to look back to prior year dispositions is gone forever. Ignoring this limited-time opportunity could cost your client tens or even hundreds of thousands of dollars in potential tax deductions.

tangible property regs The final leg of this triple play is the potential opportunity to take a deduction for removal costs. When your client installed new lighting, that property owner most likely also paid to have the old lighting removed and hauled away. Using cost segregation methodology, you can identify removal costs that qualify for current tax deductions.

Recruit the Right Team

Executing a triple play takes skill and precision. Is your firm equipped with the engineering, tax and accounting expertise required to take advantage of these three tax-saving opportunities? Through our CPA Partnership Program, CSP360’s team of tax specialists, engineering professionals and accounting method specialists partners with CPA firms throughout the country. Contact us to learn how we can position you as a tax-slashing hero.

Tags: Section 179D, tangible property regulations, Jennifer Birkemeier, tax saving opportunities, CPA partnership program

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

How to Quote a 263(a) Project to a Client or Prospect

Posted by Don Warrant on 10/14/14 9:09 AM

To bring clients tax minimization opportunities and get them into compliance, build in enough time to fully test assets and expenses.

263(a)By now, you know that every one of your clients and prospects must comply with the tangible property regulations for the 2014 tax year. But uncertainty about what exactly that compliance project will entail may have kept you from quoting these 263(a) projects.

Ideally, every CPA should start bringing clients and prospects into compliance as soon after the October 15 tax deadline as possible. Every day you delay starting the process will make the 2015 tax-time crunch more onerous.

Some overwhelmed CPAs might be tempted to think that, because a boutique cost segregation provider has performed a review of fixed assets to identify deductions, the compliance problem has already been taken care of. This is a dangerous assumption. These boutique providers are adept at combing through the fixed asset schedule to pick out costs that were previously capitalized and now are eligible to be expensed. But when it comes to identifying costs that were expensed and now must be capitalized, those providers lack the tax expertise (and motivation) to perform that analysis.

Make no mistake; a fixed asset review is not enough to bring your clients or prospects into compliance with the tangible property regulations. As the signer of your client’s tax return, you need assurance that the client is fully in compliance with the tangible property regulations.

Unless your client’s engineered tax solutions provider also comes to the table with deep knowledge of tax law and method changes, you will need to build into your quote many hours of your own time to examine and analyze the impact of these complex regulations.

What You Need to Do to Bring Clients Into Compliance

When it comes to your more complex clients and prospects who own multiple commercial properties, the hours required for a 263(a) compliance project can really add up—in some cases to a hundred hours or more. The project essentially consists of three phases:

Phase 1—Information Gathering

During the initial information-gathering phase, you perform a preliminary assessment of the extent of the regulations’ impact for each of the five primary sections of the regulations (materials and supplies, de minimis amounts, amounts paid to acquire or produce tangible property, improvements to tangible property, and dispositions).

This analysis requires access to both the fixed asset schedule and the general ledger. What you’re looking for is any large dollar amount that is likely to jump out at an IRS examiner. For example, you’ll want to flag for further analysis any asset on the books with a high net tax basis, such as buildings and leasehold improvements.

Once you have a list of these high-dollar assets and expenses, ask the client or prospect for more information about exactly what type of work was performed. Based on their answers, you should have enough information to identify the method changes that your client will be required to perform, as well as those elections that will save the client money.

This analysis—which can take anywhere from a couple of hours to a couple dozen hours—is necessary before you can accurately quote a fee for the second and third phases of the project. Without this information, you’re really just guessing which of the regulations’ 27 method changes and 7 elections applies.

Phase 2—Analysis

Based on the information gathered in Phase 1, perform tests on those fixed assets and expenses to generate the depreciation amounts and deductions that you will use in your client’s 2014 tax return. Also during this phase, you will prepare Forms 3115 to report method changes. Documentation is critical during this phase to support your position in the event of an IRS examination.

Phase 3—Incorporate method changes

During the final phase of the 263(a) project you assist the client or prospect with updating internal accounting procedures in accordance with these method changes and their own capitalization policies.

A Comprehensive Compliance and Tax Minimization Solution

Overview-of-Annual-ElectionsAnnual_ElectionsBringing clients into compliance with the tangible property regulations is no simple endeavor. An accounting methods specialist will be best positioned to determine which of the 27 method changes is applicable. CPAs who trust that their clients’ boutique providers of engineered tax solutions have the compliance angle covered may be in for a rude surprise when the IRS starts reviewing those tax returns in 2015 and beyond.

Overview-of-Automatic-Method-ChangesBacked by Top 100 firm Freed Maxick, CSP360 provides CPA firms access to deep expertise in tax and accounting methods combined with practical engineering and construction cost knowledge. Contact us to find out how we can help bring your clients fully into compliance with the tangible property rules while also digging deep for tax minimization opportunities.

Tags: 263(a) repair and maintenance review, 263(a) regulations, tax saving opportunities

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