3 Things to Tell Clients About Tangible Property Regulations

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

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

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

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

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

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

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

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

Mid-Year Fixed Asset Reviews Make Tax Time Smoother, More Profitable For Clients

Posted by Don Warrant on 7/22/14 9:16 AM

Don’t wait to find tax savings opportunities that will delight your commercial property owning client.

Mid-Year Fixed Asset ReviewWith the 2013 tax season fresh in your memory—or ongoing, as you continue to prepare extended returns—you may not want to think about the 2014 tax season just yet.

But when it comes to finding opportunities to get tax savings or advantages from the new tangible property regulations, CPAs who wait until next spring to review their clients’ fixed asset accounting methods could find their client base poached by competitors who beat them to the punch.

Any time you invest now in 263(a) tax planning will pay big dividends when spring rolls around in the form a smoother, more efficient process for all involved, and even more importantly, the potential for a HUGE check from Uncle Sam for your client.

Now is the time to conduct a mid-year review of your property-owning clients’ fixed asset and depreciation schedules. By investing the time in that review now, you will:

  • Clean up depreciation and fixed asset accounts by adopting new accounting methods and procedures.
  • Identify previously capitalized costs that can now be classified as repairs and eligible to be deducted
  • Make sure clients are following the correct accounting methods and recording fixed assets in accordance with the new regulations and their own capitalization policy—and hence are able to support those current deductions.
  • Present your clients with the opportunity to realize those tax savings on either the extended 2013 return or the 2014 tax return.

Given the new unit of property definitions contained in the tangible property rules, your commercial real estate owning clients are especially likely to require a number of accounting method changes. But these regulations will affect almost every client in one way or another; in fact, Treasury is expecting at least one Form 3115 and at least one election with every 2014 tax return.

Here are 4 steps you can take to facilitate this invaluable review and make your clients happy now.

1. Stratify your clients between small, medium and large.

Whereas your smaller clients might own one commercial property that requires a single accounting method change and an election or two, the large clients are those with multiple commercial properties (such as hotel or office complex owners) who will require a full-blown multi-phase work plan that addresses each area of the regulations.

2. Start with the big fish.

These are the clients who represent the greatest opportunities to realize tax savings—and demonstrate your value. Did a hotel owner replace HVAC units in multiple properties this spring? Did a manufacturer replace expensive batteries in multiple forklifts? Did the owner of an office complex replace a roof? These big-ticket items, which many commercial property owners capitalized in the past, now are likely to qualify as deductible repairs.

3. Create templates and checklists to facilitate compliance.

This is the step that is going to streamline the time you spend on your smaller and medium-sized clients so that you can invest more time with the big fish. There are likely a number of method changes and elections that are applicable to almost all of your clients. For example, most clients will require accounting method changes due to overcapitalization, and many will require method changes for materials and supplies. Or, perhaps you have a number of clients who will adopt the safe harbor for routine maintenance. Prepare these templates now, and you will be significantly closer to identifying tax-saving opportunities once you receive each client’s year-to-date fixed asset schedule.

4. Turbocharge tax savings.

Identifying deductible repairs that were previously capitalized is just the tip of the iceberg when it comes to a commercial property owner’s potential tax savings. By performing a cost segregation study to assign costs to the major structural component and each of the newly defined building systems, those clients could uncover a plethora of opportunities to accelerate depreciation.

Tapping into the engineering expertise of a qualified cost segregation/263(a) specialists is critical to identify costs that kept the building in normal operating condition (as opposed to those costs that improved the UOP). A review of past years’ cost segregation studies may also reveal a number of opportunities to take current deductions for retired assets, including dispositions of leasehold improvement property.

When it comes to uncovering tax-saving opportunities by reviewing your clients’ fixed asset accounting methods, it’s best not to wait until Uncle Sam is breathing down your neck. If you are looking for guidance on conducting a mid-year fixed asset review, contact us to find out how we can help you grow your commercial real estate niche through our CPA Partnership Program.

Tags: commercial real estate, tangible property regulations, Don Warrant, tax savings from repairs vs capitalization

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