cost segregation and the tangible property … · 05.20.17 1 cost segregation and the tangible...

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COST SEGREGATION AND THE Tangible Property

RegulationsIMPLEMENTATION FOR 2016-17PUTTING THE PIECES TOGETHER

KEVIN JERRYExecutive Vice President

Cost Segregation Services502-216-5941 [email protected]

Good Morning

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“Eighty percent of success is showing up”.WOODY ALLEN

AGENDAWhat you will hopefully understand after this presentation

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Why the TPR’s were issued and why they CANNOT be ignored.

What is your risk with non compliance?

What must you do to become compliant RIGHT NOW

1.016-3. The risk of doing nothing

Cost Segregation basics and examples

An EASY TPR formula you can now follow moving forward

EASY TO UNDERSTAND safe harbors including the DMSH, RMSH, STSH and PADS

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• CSSI is the nations premier engineering based cost segregation firm.

• We have performed over 16,000 studies. We have never had a study overturned by the I.R.S. We have never missed a deadline. The building basis of our projects range from $200,000 to $950,000,000.

• In 2011 we started receiving calls from CPA’s asking us to calculate late partial asset dispositions and building systems evaluations.

• Because of the complexity, nuances, and a lack of bright lines within the Regulations, we recognized in 2011 that C.P.A.’s and building owners were not going to become compliant without help.

• To become compliant and eliminate Circular 230 risk and 1.016-3 risk, CPA’s are going to need an engineering firm with construction and tax experience. We are your calculation resource.

• We are the calculation resource to help you become compliant.

WHO IS CSSIAnd how did we become the Tangible Property Regulations company?

• In 2015 we partnered with the national authority of TPR implementation and training: Eric Wallace.

“After nearly a decade in the making, the final tangible property regulations have arrived. These regulations will

affect every taxpayer that uses tangible property in its business. – JOURNAL OF ACCOUNTANCY

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WHAT YOU NEED TO KNOW TO BE IN COMPLIANCEFrom the IRS Audit Technique Guide 2016

“Over the years, the standards for applying § 263(a), as set forth in the regulations, case law, and administrative guidance, have proved to be difficult to discern and apply in practice and have led to considerable uncertainty and controversy. To address this discord, in January of 2004, the IRS and Treasury announced their intention to propose regulations providing guidance in the area. See Notice 2004-6, (2004-3 IRB 308)”

The final regulations collectively are known as the “Tangible Property Regulations.” The final regulations provide a general framework for distinguishing capital expenditures from supplies, repairs, maintenance, and other deductible business expenses.

2014 TANGIBLE PROPERTY REGULATIONSQuotes from the IRS Audit Technique Guide 2016

“In anticipation of the final regulations, many taxpayers completed “capitalization to repair” studies and filed accounting method changes to re-characterize previously capitalized costs to deductible repairs”.

“Taxpayers generally made these method changes for years 2006 through 2012. Beginning on or after January 1, 2014, taxpayers are required to comply with the final regulations and are expected to change their accounting methods to implement the final regulations”.

“The examiner should determine whether a repair study was conducted in a prior year, if Forms 3115 were filed to change the tax treatment of repairs, and the amount of the associated § 481(a) adjustment(s).

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WHAT YOU NEED TO KNOW TO BE IN COMPLIANCEFrom the IRS Audit Technique Guide 2016

Section 263(a) generally requires taxpayers to capitalize an amount paid to acquire, produce, or improve tangible property.

§ 1.263(a)-1 provides general rules for capital expenditures, including an election to utilize a de minimis safe harbor.

§ 1.263(a)-2 provides rules for amounts paid for the acquisition or production of tangible property; and

§ 1.263(a)-3 provides rules for amounts paid for the improvement of tangible property. (IRS TPR Audit Technique guide page 3)”

The TPR’s also require knowledge of code sections: 168, 263A, 280B, 165.

“The first problem for all of us, men and women, is not to learn, but to unlearn.”

Gloria Steinem

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Becoming Compliant and Eliminating Risk Your Number One Goal

From the IRS final regulations. Revenue Procedure 2013-17

Every expenditure needs a qualitative and quantitative inquiry.

For example, the following are not in the final TPR criterion and as such, may not rise to the level of being capitalization

Taxpayer spends $100,000 on a building repair Expenditure extended the life of the asset All new roof shingles or a roof membrane was installed Taxpayer added a new air conditioner unit to the five current ones Taxpayer replaced thirty percent of the exterior windows for $75,000 Taxpayer extended the capacity of a component five percent

WHAT YOU NEED TO KNOW TO BE IN COMPLIANCE

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WHAT YOU NEED TO KNOW TO BE IN COMPLIANCEDon’t be fooled

REV-PROC 2015-20

February 13, 2015: IRS issues RP 2015-20 that modified Rev. Proc. 2015-14 to permit a small business taxpayer, (defined as a business with total assets of less than $10 million or average annual gross receipts of $10 million) to automatically opt into the regulations without the filing a Form 3115.RP 2015-20 is written for non-profits and taxpayers with N.O.L.’s or passive activities

to reduce paperwork for Tax Professionals. JUST BECAUSE A 3115 WAS NOT SENT TO THE IRS, DOESN’T MEAN A CHANGE OF

ACCOUNTING IS NOT ON FILE WITH THE IRS. WHICH MEANS THE REGULATIONS CANNOT BE IGNORED. DEPRECIATION SCHEDULES STILL MUST BE SCRUBBED AND THE REGULATIONS FOLLOWED.

WHAT YOU NEED TO KNOW TO BE IN COMPLIANCEWhat makes the regulations so complicated

REV-PROC 2015-20

(a) In general. Except as provided in paragraph 10.11(6)(b) of this APPENDIX, a taxpayer changing to a method of accounting provided in Section 10.11 of this APPENDIX must apply section 481(a) and take into account any applicable section 481(a) adjustment in the manner provided in sections 5.03 and 5.04 of this revenue procedure.

(c) Itemized listing on Form 3115. A taxpayer changing to a method of accounting provided in section 10.11 of this APPENDIX must include on Form 3115, Part IV, line 25, the total section 481(a) adjustment for each change in method of accounting being made. Repairs Final IRS Regulations 9/13/2013

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WHAT YOU NEED TO KNOW TO BE IN COMPLIANCEGame plan for compliance, reduction of risk and moving forward

Request permission by filing 3115s for large taxpayers Scrub depreciation schedules Apply the new capitalization rules against existing assets that do not rise to the new level

of capitalization. Create section 481a adjustments Repairs and Maintenance, Routine Maintenance Safe Harbor Unit of Property (MC 184)

Scrub depreciation schedules for small taxpayers Apply the new capitalization rules against existing capitalized assets Create section 481a adjustments

Moving forward (3 annual elections) Partial Asset Disposition Small Tax Payer Safe HarborDe minimis Safe Harbor

TPRs Have the Following Effectsfor GAAP Reporting Issues

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• The TPRs are highly likely to reduce the taxable income for the current period in which the TPRs are adopted (method changes) or for periods where the annual elections are made.

• Implementing the TPRs also affects recognition and measurement of deferred taxes related to tangible property and the balance sheet classification of deferred taxes.

• The TPRs also affect (a) the timing (as opposed to the amount) of deductions and (b) could affect the amount of the deduction of a tax expenditure (if the TPRs are not properly complied with a taxpayer (TP) could lose some tax deductions permanently.

• Uncertain Tax Positions (UTPs). Taxpayers may take, may miss, may not understand, may misapply, or take tax return positions which are not supportable in comparison to the TPRs

WHAT A&A NEEDS TO KNOW TO BE IN COMPLIANCE

• During 2014 Able Inc. pays $100,000 for many small items, each under $5,000 each

• The CPA does not ask Able about its capitalization policy for books and whether it has a capitalization policy for tax

• Because of this, there was an inconsistency in the capitalization or deduction of these items between book and tax

• The financials were finalized

• Another CPA firm prepares the tax return for Able months later

• Ables’ tax return preparers bring up the issue of the DMSH to the auditors•• Ables’ financials are recalled and reissued to include the DMSH considerations

WHAT A&A NEEDs TO KNOW TO BE IN COMPLIANCE

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Scrubbing Depreciation SchedulesStep One

Eliminating Your Risk for ALL clients

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WORKFLOW FOR BUILDING IMPROVEMENT DECISIONS

DETERMINE THE UNIT OF PROPERTY

STEP 1

THE UNIT OF PROPERTY FOR A BUILDING IS THE BUILDING, BUILDING SYSTEMS AND STRUCTURAL COMPONENTS

“The term “building” generally means any structure or edifice enclosing a space within its walls, and usually covered by a roof, the purpose of which is to provide shelter or housing, or to provide working, office, parking, display, or sales space”. 168

The larger the unit of property, the more likely the expenditure can be expensed.

QUICK TIPThe larger the unit of property, the more likely the expenditure can be expensed.

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If the taxpayer gets the U of P wrong, the application of the new rules could be incorrect

A taxpayer cannot make a determination of whether an expenditure should be capitalized or expensed unless he or she determines what component the expenditure will be compared to. That is the purpose of and the importance of the U of P rules.

QUICK TIPEach building and its structural components (as defined in §1.48-1(e)(2)) is a single unit of property

BUT buildings are broken down into 9 systems within the unit of property

This is about as simple as it gets moving forward

THE UNIT OF PROPERTY FOR A BUILDING IS THE BUILDING, BUILDING SYSTEMS AND STRUCTURAL COMPONENTSAn Example

YU owns 45 condo units in a building consisting of 50 total condos YU acquired the condo units over a period of years

YU does not have one unit of property which has 45 units

YU has 45 separate U of Ps

YU acquires the other 5 condo units. YU can change its U of P from 50 condos to one U of P – if YU changes its U of P accounting method

QUICK TIPThe larger the unit of property, the more likely the expenditure can be expensed.

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QUICK TIPBuildings with additions must be specified as one unit of property.




Unit of Property Declaration to the IRS

“Present method:

The taxpayer owns one building, a commercial strip mall consisting of 120,000 square feet. The building was built in two different stages The first part of the building was built in 1998 consisting of 80,000 square feet and the second part completed in 2004 for 40,000 square feet The taxpayer has been accounting for these as two separate assets”.

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QUICK TIPUnit of property consulting is a great strategy to create incremental consulting revenue.


“Proposed method:

“The taxpayer will account for its building, a commercial strip mall consisting of 120,000 square feet as one unit of property That unit of property will consist of the whole strip mall building, even though built at different times and accounted for on its depreciation schedule as separate assets, as one unit of property and includes the building, its building structures and building systems. If the taxpayer adds additional square footage to the building and that square footage must be capitalized under the rules of 1.263(a)-3, then the additional square footage will be included in the strip mall building and not as an additional unit of property. Additionally, the taxpayer will account for its land improvements consisting of its parking lots, landscaping, and outside lighting as one unit of property, separate from the building unit of property.”


QUICK TIPApartment complexes must be broken down into separate units of property.

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“Proposed method”:

“The taxpayer will account for its apartment complex consisting of twenty five buildings as separate units of property. Each building will be a separate unit of property and will consist of the building, its building structures and building systems. The building structures will also include the carpeting and cabinets installed in the building. The taxpayer will divide its current one line asset on its depreciation schedule into five separate buildings using a reasonable method to divide up that one asset. The reasonable method will employ the square footage of each building compared to the total square footage of all buildings multiplied by the price paid for the apartment complex. Additionally, the taxpayer will account for its land improvements consisting of its parking lots, landscaping, and outside lighting as one unit of property, separate from the building units of property”



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QUICK TIPUnit of property consulting is a great strategy to create incremental consulting revenue.


“Proposed method:

“The taxpayer will account for its building, an office complex consisting of 1,000,000 square feet as one unit of property and includes the building, its building structures and building systems. If the taxpayer adds additional square footage to the building and that square footage must be capitalized under the rules of 1.263(a)-3, then the additional square footage will be included in the office building and not as an additional unit of property. Additionally, the taxpayer will account for its land improvements consisting of its parking lots, landscaping, and outside lighting as one unit of property, separate from the building unit of property.”


QUICK TIPBuildings with additions, no matter how old, should be specified as one unit of property.

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THE UNIT OF PROPERTY FOR A BUILDING IS: THE BUILDING, BUILDING SYSTEMS AND STRUCTURAL COMPONENTS

If carpet is permanently attached it is 1250 property and can be viewed as part of the building. U of P carpet in apartments or commercial buildings is difficult to call 1250 property

Glued carpet on apartment porches can be 1250.

If the carpet is 1245 property, it has to be treated as 1245 property.

If the carpet is 1245 property you determine its appropriate U of P based upon the “functional interdependence” test

If you determine that the carpet in the bedroom is dependent on the carpet in the hall, which is dependent on the carpet in the living room, which is dependent on the carpet in the hall of the apartment building, etc. you can conclude that the carpet U of P is the whole carpeting in the building



Carpeting

WORKFLOW FOR SRUBBING EXISTING SCHEDULES This is about as simple as it gets moving forward

WHICH BUILDING SYSTEM APPLIES AND WHICH COMPONENT IN THE SYSTEM IS BEING

REPAIRED OR REPLACED

STEP 2

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“The final regulations address the request for additional clarity regarding the definition of major component for buildings by adding a new definition for major components and substantial structural parts of buildings.

In the case of buildings, an amount is for the replacement of a major component or substantial structural part if the replacement:

(1) comprises a major component or a significant portion of a major component of the building structure or any building system, or

(2) comprises a large portion of the physical structure of the building structure or any building system”. Final Regulations

The general rule is that major components and substantial portions of a building system will need to be capitalized.

AT RISK OR AFFECTED CLIENTS

• Manufacturing facilities

• Apartment buildings• Fast Food• Hotels

• Warehouses• Office buildings• Restaurants

• Auto Dealers• Strip Centers• Medical Buildings

• Residental Rental Properties• Leasehold Improvements

All taxpayers are affected by the TPR’s according to the AICPA!

QUICK TIPThe 3 year statute of Limitations DOES NOT APPLY. The class life of the asset will rule.

See Suburban and Churchill case cited in Rev. Proc. 2015-13

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WHAT HAPPENS IF YOU DON’T SCRUB?

CAUTION – THERE IS A STICKUnder new regulation Section 1.1016-3:

“Should the IRS audit your client and find that you haven’t gone back and scrubbed the depreciation schedules and if the Service finds assets on the schedule that should have been expensed under the final regulations it can not only deny your ability to expense the item but “can disallow you from continuing to depreciate the item”.


QUICK TIPThis is the “use it or lose it rule” or Accounting 101 “allowed or allowable”


CAUTION – THERE IS ANOTHER STICK

Circular 230

“Section 10.34 of Circular 230 prohibits a preparer from willfully, recklessly, or through gross incompetence, signing a tax return or claim for refund containing a position that the practitioner knows, or reasonably should know, lacks a reasonable basis. Unreasonable tax positions taken on a tax return could also subject taxpayers and their preparers to penalties (e.g., IRC §§ 6662 and 6694)”.



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It puts the client at risk for potentially significant taxpayer penalties:

Taxpayer accuracy penalty (if understatement with negligence or disregard of rules or regulations) - 20% of the amount of the understatement.

It puts the firm at risk for potentially significant preparer penalties:

Unreasonable return position (if position results in an understatement and the preparer knowingly signed a return with a position lacking substantial legal authority) - Per return, greater of $1,000 or 50% of fees charged to prepare the return.

Willful or reckless conduct (if position results in an understatement and the preparer intentionally disregarded the rules or regulations) - Per return, greater of $5,000 or 50% of fees charged to prepare the return.

All taxpayers are affected by the TPR’s according to the AICPA

QUICK TIPCircular 230 risks are worse than 1.016-3



Circular 230

“Under the tangible property regulations, if an accounting method change is required and the taxpayer does not take the necessary steps to make the change (e.g., filing Form 3115 with the proper IRS National Office and also with their tax return), that position would presumptively lack a reasonable basis”. CAMICO



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Your Clients

“Without audit protection of the previous two years AND -481a tax saving opportunities that were overlooked or ignored, your client has every right to dis-engage when these facts come to light”.



Scrubbing Depreciation SchedulesLet’s Keep Moving

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BUILDINGS ARE BROKEN DOWN INTO SYSTEMS

Heating, ventilation, and air conditioning (“HVAC”) systems Plumbing systems Electrical systems All escalators All elevators Fire-protection and alarm systems Security systems for the protection of the building and its occupants Gas distribution system Building structure. The building structure consists of the building

and its structural components including exterior doors, windows, roof, foundation etc.

ALL building systems must be calculated before moving forward. Building systems must be further broken down into major

components that serve a discreet and critical function for comparison.

Building systems are NOT the unit of property



BUILDINGS ARE BROKEN DOWN INTO SYSTEMSExample of an HVAC building system



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COST SEGREGATION STUDY

BUILDING ELEMENTS UNITS OF PROPERTY FROM IRS WEBINAR MARCH 2015

“Cost segregation studies now serve additional purposes. For example, not only do these studies reclassify a building’s components into assets with shorter class lives, but they also identify building systems for purposes of applying the improvement rules.These studies are also used to identify functionally interdependent plant property and to determine individual components or groups of components that perform a discrete and critical function”.

IRS Audit Technique Guide 9/2016

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WORKFLOW FOR BUILDING IMPROVEMENT DECISIONS This is about as simple as it gets moving forward

EXPENDITURE REPLACED OR REPAIRED MUST BE COMPARED TO THE ORIGINAL COMPONENT

STEP 3

IMPROVEMENT STANDARDS

EXPENSE IT UNLESS:R - Restoration - Puts unit of property or building system into its original operating condition from a NON-WORKING condition. If it was in a state of disrepair at the time of purchase, the expenditure MUST be capitalized.A – Adaptation – If the expenditure adapts the unit of property to a new or different use it MUST be capitalized.B – Betterment – Measurably improves the building, building structure or building system. If it measurably increases capacity, size, productivity, efficiency, quality, or output it MUST be capitalized.

I – Major Improvement or Expenditure - If the expenditure is more than 33%-40% of the CURRENT REPLACEMENT cost of the building system component it MUST be capitalized.

Then put the expenditure through the RABI test

QUICK TIPCapitalizing an expenditure is NOT the safe method anymore.“When in doubt. Expense”

Eric Wallace

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“U owns a large office building that it uses to provide office space for employees that manage U's operations The building has 300 exterior windows.

In Year 1, U pays an amount to replace 100 of the exterior windows that had become damaged. At the time of these replacements, U has no plans to replace any other windows in the near future

100 windows do not comprise a significant portion of this major component of the building structure

Final IRS Regulations 9/13/2013

Restorations example 16 – not major component




“1.263-3(a)-3 (j) Example 20 The replacement of two roof-mounted units is not a material addition.

The two replacement units is expected to increase the capacity of the HVAC system 10%.

R is not required to capitalize the amounts paid for these replacements as betterments.Final IRS Regulations 9/13/2013

Improvement example 16. Not a measurable improvement



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1.263(a)-3(j) Example 21 –

S owns a building that it uses in its service business. S conducts an energy assessment and determines that it could significantly reduce its energy costs by adding insulation to its building.

S pays to apply a combination of loose-fill, spray foam, and blanket insulation throughout S's building structure, including within the attic, walls, and crawl spaces S reasonably expects the new insulation to make the building 50% more energy efficient.

S must capitalize as a betterment the amount paid to add the insulation because the insulation is reasonably expected to materially increase the efficiency of the building structure

Final IRS Regulations 9/13/2013

Betterment example 21 – A measurable improvement



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Questions on Compliance and Eliminating Risk?

IMPLEMENTING THE REGULATIONS

WE WILL DETERMINE THE BUILDING SYSTEM AND

PERFORM THE CALCULATIONS TO

DETERMINE THE 481A OPPORTUNITY

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PRESENT THE ANALYSIS TO THE CLIENT WITH THE CPA.

POPULATE AND COMPLETE THE -481A SCHEDULE AND THE ENTIRE 3115

ASSIST THE CPA IN IMPLEMENTING ALL AREAS OF THE TPR’S MOVING FORWARDAND PROVIDE A 20 PERCENT CONSULTING FEE FOR TIME SPENT (REVENUE OPPORTUNITY)

CSSI WILL SCRUB EXISTING SCHEDULES LOOKING FOR LINE ITEMS THAT DO NOT RISE TO THE LEVEL

OF RABI, PAD’S, REMOVAL COSTS AND COST SEGREGATION OPPORTUNITIES

COMPLIANCE

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WHAT YOU NEED TO KNOW TO BE IN COMPLIANCEA real life tangible property study

Multiple Story Apartment Complex Purchased in 1993Cost $1.1 millionImprovements over years of:• $4 million• $160k• $2.7million• $70k• $900k

Created -481(a) adjustments of $1,387,016.00@ 40% Tax rate

Resulted in Tax Savings of $554,000

COST SEGREGATIONResults of Cost Segregation

DENTAL OFFICE #9501 OFFICE CONDO #10,500 OFFICE WAREHOUSE # 9503

Building Cost $324,000 (with-out land)

Tax Savings Benefit: $52,856

Study Fee Before Tax: $3,400

Study Fee After Tax: $2,176

ROI: 24:1

Building Cost $5,246,908 (with-out land)




ROI: 33:1

Building Cost $ 250,176 (with-out land)




ROI: 21:1

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DETERMINE THE UNIT OF PROPERTY, AFFECTED BUILDING SYSTEM.

DOES IT FAIL ANY OF THE RABI TESTS

FILE A 3115 IMMEDIATELYWill a cost segregation study or a PAD and removal calculation save taxes? If so call a cost segregation company for exact calculations.

WHAT IS THE VALUE OF THE BUILDING SYSTEM AND THE EXISTING COMPONENT. Does it serve a major and critical function

CALCULATE THE -481A ADJUSTMENT

STEP 1 STEP 2 STEP 3 STEP 4 STEP 5

Moving Forward into 2017 and Beyond

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Step One:Determine the Unit of Property

Step Two:Do any Safe Harbors Apply?

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Step Three:Does it Rise to the Current Level of Capitalization?

Step Four:What are the Values for Each Building System

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Step Five:If it Requires Capitalization, Can a PAD or Removal

Costs be Utilized

Step One:Determine the Unit of Property

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DE-MINIMIS SAFE HARBOR

DMSH – ANNUAL ELECTION• De minimis Safe Harbor (Acquire or Produce) tangible property• Allows expensing of amounts paid to acquire or produce a unit of

real or personal property, including qualified materials and supplies.• Calculated on an invoice or item level. An invoice MUST be available • Elected annually by including a statement with the taxpayer’s tax

return for the year elected.• Having an Applicable Financial Statement (AFS) makes a big

difference on the limits that can be expensed $500 ($2,500 in 2016) vs $5,000

• The expenditure MUST have a receipt. Taxes and freight on the invoice must be added to the total if they are on the invoice.

• Cite 1.263(a)-1(f)) on addendum to return or check the annual election.

• Book and Tax MUST match.

All Safe Harbors over rule RABI

REVENUE OPPORTUNITYIf the taxpayer can apply for any Federal or State contract work which requires tax returns to be submitted, the returns become an AFS.

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DMSH – ANNUAL ELECTION• “The final regulations provide that, if elected, the de

minimis safe harbor must be applied to all amounts paid in the taxable year for tangible property that meet the requirements of the de minimis safe harbor, including amounts paid for materials and supplies that meet the requirements.

• In addition, the final regulations provide that a taxpayer may not revoke an election to use the de minimis safe harbor.

• “An election to use the de minimis safe harbor may not be made through the filing of an application for change in accounting method”. Revenue Procedure 2013-43




DMSH – ANNUAL ELECTION• To simplify the application of the de minimis rule to

tangible property, the final regulations provide that a taxpayer electing to apply the de minimis safe harbor is not required to include in the cost of the tangible property the additional costs of acquiring or producing such property if these costs are not included in the same invoice as the tangible property.

However, the final regulations also provide that a taxpayer electing to apply the de minimis safe harbor must include in the cost of such property all additional costs (for example, delivery fees, installation services, or similar costs) of acquiring or producing such property if these costs are included on the same invoice with the tangible property.



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SMALL TAXPAYER SAFE HARBOR

STSH – ANNUAL ELECTION• If your building has an unadjusted cost basis of $1M or less, &

less than $10M avg. annual income, a special rule CAN be utilized:

• Can elect “not to apply” improvement rules to eligible buildings if the annual amount spent is less than $10,000 or 2% of unadjusted basis on a building-by- building basis.

• May be written off as repairs.• Example: $300k building = $6,000 limit.• If limit is exceeded, it does not apply to any amounts.• Small taxpayer safe harbor limit is reduced by routine

maintenance safe harbor and De Minimis safe harbor.

• Gross receipts include interest, dividends, rents, royalties, and annuities, regardless of whether such amounts are derived in the ordinary course of the TP’s trade of business

QUICK TIPSTSH is an annual election. The box needs to be checked every year.

THE LIMIT CANNOT BE EXCEEDED. (PERIOD)


QUICK TIPThe STSH is why apartment complexes must be broken down into separate units of property.

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ROUTINE MAINTENANCE SAFE HARBOR

AMAZING OPPORTUNITY • “The 2011 temporary regulations provided that the

costs of performing certain routine maintenance activities for property other than a building or the structural components of a building are not required to be capitalized as an improvement”.

• “Under the routine maintenance safe harbor, an amount paid was deemed not to improve a unit of property if it was for the recurring activities that a taxpayer (or a lessor) expected to perform as a result of the taxpayer’s (or the lessee’s) use of the unit of property to keep the unit of property in its ordinarily efficient operating condition”. IRS Revenue Procedure 2013-43

REVENUE OPPORTUNITYRMSH is the most overlooked aspect of the TPR’s.

Clients will benefit from your expertise and knowledge.

Use the RMSH to create additional consulting time.

Or call me. 502-216-5941

ROUTINE MAINTENANCE SAFE HARBOR

AMAZING OPPORTUNITY • Deductible if you reasonably expect (at time UOP is placed

in service) to perform more than once during the 10 year period from when the building system was placed in service

• Routine Maintenance Safe Harbor does not apply to betterments, adaptations, or some restorations.

• Consider the recurring nature of activity, industry practice, replacement history, manufacturer’s recommendations, and TP’s business needs

• “The final regulations clarify that amounts incurred for activities falling outside the routine maintenance safe harbor are not necessarily expenditures required to be capitalized under §1.263(a)3. Amounts incurred for activities that do not meet the routine maintenance safe harbor are subject to analysis under the general rules for improvements”. Revenue Procedure 2013-43

REVENUE OPPORTUNITYRMSH is the most overlooked aspect of the TPR’s.

Clients will benefit from your expertise and knowledge.

Use the RMSH to create additional consulting time.

Or call me. 502-216-5941

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IMPROVEMENT STANDARDS

EXPENSE IT UNLESS:R - Restoration - Puts unit of property or building system into its original operating condition from a NON-WORKING condition. The expenditure must ameliorate a current condition to be capitalized. A – Adaptation – If the expenditure adapts the unit of property to a new or different use it MUST be capitalized.B – Betterment – Measurably improves the building, building structure or building system. If it measurably increases capacity, size, productivity, efficiency, quality, or output of the UOP it must be capitalized.

I – Major Improvement or Expenditure - If the expenditure is more than 35%-40% of the CURRENT REPLACEMENT.

What are the general rules of improvement?

QUICK TIPCapitalizing an expenditure is NOT the safe method anymore.“When in doubt. Expense”

Eric Wallace

RABI CRITERIA FOR TENANTS AND LANDLORDSThe second step in the compliance process prior to 2015

LEASEHOLD IMPROVEMENTS LEASEHOLD IMPROVEMENTS

In the case of a taxpayer that is a lessee of all or a portion of a building (such as an office, floor, or certain square footage), the unit of property (“leased building property”) is each building and its structural components or the portion of each building subject to the lease and the structural components associated with the leased portion

An amount is paid to improve a leased building property under 1.263(a)-3 if the amount is paid for an improvement, betterment, restoration or adaptation to any of the following:• an entire building• the building structure• any building system that is part of

the leased building

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LEASEHOLD IMPROVEMENTS LEASEHOLD IMPROVEMENTS 110

The following all have to be capitalized:• Landlord spends funds on new TIs

in its new building• Landlord spends funds on new TIs

for a space that it did not lease until years after the other spaces had leased

• Tenant spends funds on TI space that is new space to the tenant

Lessor improvementsRequirement to capitalizeA taxpayer lessor must capitalize the related amounts, that it pays directly, or indirectly through a construction allowance to the lessee, to improve, a leased property when the lessor is the owner of the improvement or to the extent that Section 110 applies to the construction allowance


LEASEHOLD IMPROVEMENTS CODE SECTION 110

• If the amounts are not an “improvement” then the lessor (landlord) does not have to capitalize the expenditure

• If the lease has §110 language in it, the lease expenditures must be capitalized, even if is not an improvement

• If the lease refers specifically to §110 in the lease it must be capitalized• A lease, with renewals cannot be longer than 15 years (renewal at fair market value

are not “renewals”) or it is not a 110 lease no matter what it says• Generally, if the amounts paid are not an improvement then the lessor does not have

to capitalize the expenditure — BUT if the lease has 110 language in it, the lease expenditures must be capitalized, even if the expenditures are not an “improvement”

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Questions on Unit of Property?RABI?

Next StepDo Any Safe Harbors Apply

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DISPOSITION OF AN ASSET

PAD – ANNUAL ELECTION• Determination of basis of disposed asset IN THE CURRENT TAX

YEAR• Calculate the value of the asset using the current value then

PPI rollback to the original year. This assumes the replacement expenditure is not a betterment or restoration. If it is, then a pro rate allocation is the method but the process is the same.

• Once the value is determined, calculate the RDB by using the same method and convention as the building. Including bonus.

• Engineered cost segregation is a CERTAIN METHOD for calculating PAD’s

• MC 205 for the disposition of a whole (separately stated) asset can used anytime, not just during the year of removal.

• Did everyone take late partial dispositions in 2014??

Partial Asset Disposition

REVENUE OPPORTUNITYCall CSSI for the calculation of a PAD

Add this to your consulting fees

DISPOSITION OF AN ASSET

PAD – ANNUAL ELECTION• Method Change 198• If a taxpayer misses a PAD for the replacement of

a portion of an asset, the taxpayer may make the PAD election DURING AN AUDIT by filing an application for change in accounting method 198, provided the original asset of which the disposed portion was a part, was owned by the taxpayer at the beginning of the year of change.

Partial Asset Disposition

REVENUE OPPORTUNITYCall CSSI for the calculation of a PAD

Add this to your consulting fees

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REMOVAL COSTS

NOT REQUIRED TO BE CAPITALIZED Determination of basis of disposed asset The calculation must be an IRS approved method The IRS and the Treasury Department have determined

that the Producer Price Index for Finished Goods more accurately reflects inflation for capital expenditures.

The removal costs can be written down but a 3115 with MC 21 must be filed with the return

Allow CSSI to calculate this for you

DCN 21

REVENUE OPPORTUNITYAdvise clients to separate ALL removal costs all the time.

Use CSSI to do the calculation if necessary.

Questions Regarding the Safe Harbors

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A Recap Moving Forward

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DETERMINE THE UNIT OF PROPERTY, AFFECTED BUILDING SYSTEM.Does it serve a major and critical function?

DECIDEDoes the expenditure make the component better, faster, bigger or better in a measurable way or ameliorate an existing condition. No? Expense it. Yes, move to Step 4

DETERMINEWill a cost segregation study or a PAD and removal calculation save taxes? If so call CSSI for exact calculations.

SAFE HARBORS

Does the expenditure fall under the clients DMSH,RMSH or STSH? If yes, write it down. If not move to Step 3

MAJOR IMPROVEMENTIs the expenditure more than 30% - 40% of the replacement cost? If no write it down. If yes to either 3 or 4 capitalize it and move to Step 5

DECIDEWhich 3115’s need to be filed? Call CSSI and we will generate the entire -481a schedule and complete the 3115

STEP 1 STEP 6STEP 2 STEP 3 STEP 4 STEP 5

“We cannot change the cards we are dealt, just how we play the hand”.

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IMPLEMENTING THE REGULATIONS

WE WILL DETERMINE THE BUILDING

SYSTEM AND PERFORM THE

CALCULATIONS TO DETERMINE THE 481A

OPPORTUNITY.

PRESENT THE ANALYSIS TO THE CLIENT WITH THE CPA.

POPULATE AND COMPLETE THE -481A SCHEDULE AND THE ENTIRE 3115

ASSIST THE CPA IN IMPLEMENTING ALL AREAS OF THE TPR’S MOVING FORWARDAND PROVIDE A 20 PERCENT CONSULTING FEE FOR TIME SPENT (REVENUE OPPORTUNITY)

CSSI WILL SCRUB EXISTING SCHEDULES LOOKING FOR LINE ITEMS THAT DO NOT RISE TO THE LEVEL

OF RABI, PAD’S, REMOVAL COSTS AND COST SEGREGATION OPPORTUNITIES

LET’S PARTNER

KEVIN JERRYExecutive Vice President

Cost Segregation Services502-216-5941 [email protected]

cost segregation and the tangible property … · 05.20.17 1 cost segregation and the tangible...

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