The Final Tangible Property Regulations - Are You Informed?
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On September 13, 2013, the IRS issued final regulations affecting costs to acquire, produce, or improve tangible property and re-proposed regulations affecting disposition of tangible property. The final regulations are effective for taxable years beginning on or after January 1, 2014. These regulations will affect all taxpayers that acquire, produce or improve tangible property.
Please check out our recent webinar that highlights the significant changes from the 2011 temporary regulations and discusses implementation planning.
Background and update
Materials and supplies
2013 may be the last opportunity for taxpayers to take advantage of bonus depreciation, an enhanced Code Section 179 expensing deduction, and Code Section 179D deduction for energy efficient improvements to commercial buildings.
By: Jennifer A Birkemeier, CPA
Senior Manager, CSP360
Taxpayers considering making significant capital investments in property in the near future should consider making such investments by December 31, 2013 to enjoy these lucrative tax benefits. These tax benefits may allow the entire cost to be expensed for the 2013 tax year instead of a deduction claimed over a period of years under the MACRS depreciation rules. Given the tax increases and new taxes effective beginning with the 2013 tax year, the ability to deduct capital investments in property could result in a significant tax savings.
Bonus depreciation, as defined in Code Section 168(k), was first introduced in 2001 and has been extended & enhanced several times over the past 12 years. This tax incentive allows for a percentage of an asset’s basis, currently 50%, to be expensed immediately while the remaining basis is depreciated over the MACRS recovery period. If the law is not extended, bonus depreciation will not be available for property placed in service after December 31, 2013. To qualify for bonus depreciation, the asset must qualify as new property that has not been previously used by another taxpayer.
Code Section 179 currently allows a taxpayer to expense up to $500,000 of qualifying property placed in service during the 2013 tax year. The property must be personal property and the maximum amount of qualifying property that a taxpayer may place in service during 2013 is $2,000,000 before the deduction begins to phase out. Beginning with the 2014 tax year, the Code Section 179 deduction will be lowered to $25,000. The ability to expense up to $500,000 has helped many taxpayers decide to proceed with asset acquisitions in 2013.
Taxpayers have the opportunity to receive immediate tax deductions for energy efficient improvements that they have made to a building since 2006. Code Section 179D provides a deduction of up to $1.80 per Square Foot for energy efficient lighting, HVAC and building envelope improvements that a taxpayer has placed in service by December 31, 2013. There is also an opportunity to review improvements since2006 and claim deductions that a taxpayer may have missed. There are several requirements to receive the Code Section 179D deduction that include receiving a specific certification from a qualified individual. In addition, for government owned buildings the deduction can be allocated to the architect or engineer who is primarily responsible for the design of the energy efficient improvements.
CSP360 is a subsidiary of Freed Maxick, CPAs in Buffalo NY. Freed Maxick CPAs is a Top 100 accounting Firm, and one of the leading providers of Cost Segregation and consulting services. Our philosophy is to offer clients a 360 approach to a taxpayer’s fixed assets; pairing engineering and LEED specialists with accountants for a truly unique tax advisory team. Since 1995, our in house team has provided specialty studies to CPAs in a private label arrangement. Products include Cost Segregation, Code Section 179D Energy Studies and Code Section 263(a) repair studies. CSP360 is Circular 230 compliant and has proven methodologies that are sustainable in the event of an IRS examination. To learn more about our unique approach click here.
While the IRS has reported on repairs regulations before, this is the first time they are issuing them in final form. The IRS reports that the final repair regulations will affect all taxpayers that acquire, produce, or improve tangible property. The final regulations provide a lot of technical information that taxpayers have to comprehend and incorporate into their accounting systems. While this may be tedious and feel overwhelming, the regulations do provide some positive benefits for taxpayers. The Treasury has included some of the comments they received into the final regulations in an attempt to reduce the time required to comply with the new regulations.
New safe harbor for routine maintenance for buildings
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. Due to the comments received by Treasury, the final regulations contain a safe harbor for routine maintenance for buildings.
The final regulations use 10 years as the period of time in which a taxpayer must reasonably expect to perform the relevant activities more than once.
Routine maintenance can be performed any time during the life of the property, provided that the activities qualify as routine under the regulations.
For purposes of determining whether a taxpayer is performing routine maintenance, the final regulations remove the taxpayer’s treatment of the activity on its applicable financial statement from the factors to be considered.
The final regulations clarify the applicability of the routine maintenance safe harbor by adding three items to the list of exceptions from the routine maintenance safe harbor:
Amounts paid for a betterment to a unit of property
Amounts paid to adapt a unit of property to a new or different use
Amounts paid for repairs, maintenance, or improvement of network assets
The good news for taxpayers
The final regulations do not provide a bright line test when determining whether improvements need to be capitalized or expensed. Meaning- the IRS regulations give examples but no hard numbers. While some taxpayers like the subjective nature of the rules; many taxpayers do not want to burn up resources training their staff, or have to battle the IRS regarding expenditures that have to be capitalized upon an examination. The inclusion of a “safe harbor” for repairs and maintenance on buildings should alleviate some of these difficulties when applying the improvement standards for restorations to building structures and systems.
Many taxpayers are turning to experts in the field in an attempt to maximize their tax deductions and reduce the total burden of complying with the regulations. This is where a Cost Segregation Analysis is beneficial. Cost Segregation analyses include a thorough review of the property to accurately depreciate the assets and accelerate tax deductions. They also include an intensive review of all blueprints and site visits to verify the assets and determine the quality of those assets. The professionals performing these analyses have an intimate knowledge of the building and building systems and will provide valuable insight when examining repair and maintenance costs to determine if they must be capitalized or expensed.
CSP360 is a subsidiary of Freed Maxick, CPAs in Buffalo NY. Freed Maxick CPAs is a Top 100 accounting Firm, and one of the nation’s leading providers of Cost Segregation and consulting services. Our philosophy is to offer clients a 360 approach of a taxpayer’s assets; pairing engineering and LEED specialists with accountants for a truly unique tax advisory team. Since 1995, our in house team has provided specialty studies to CPAs in a private label arrangement. Products include Cost Segregation, 179D Energy Studies and 263a Repair and Maintenance Review. CSP360 is Circular 230 compliant and has proven methodologies that are sustainable on IRS examinations.
To learn more about our unique approach click here
By Jennifer Birkemeier, CPA
In December of 2011, temporary regulations (T.D. 9564) were published. These regulations will affect taxpayers that acquire, produce, or improve tangible property. They also mean potential significant tax savings for taxpayers.
One purpose is to clarify Sec. 263(a) of the regulations for capital expenditures, which make available tax benefits to commercial property owners through favorable rulings on building improvements and repairs. The building structure and its building systems might include: heating ventilations, electrical systems, all escalators, plumbing systems, HVAC systems, fire protection and alarm systems.
There is a process in finding these benefits, and it starts with a Cost Segregation study. The Cost Segregation study allows the commercial property owner to take advantage of the new capital improvement guidelines. This is done through qualitative tests; performed based on the cost of the unit of property and the current expenditures, and is either capitalized or expensed. While most owners want the expense, the unit of property must be defined in order to allow for this option. The new regulations will allow for expensing the repairs and maintenance to the unit once it’s defined.
Cost Segregation Studies
Cost Segregation studies help to define the units of property for the owner. In addition to this, the study can correctly identify “disposed of building components”.
Why is this an important aspect of the study? The Tangible Property regulations now allow for disposed of building components to be deducted up to their remaining depreciable basis. If a cost segregation study is not conducted than the costs of the disposed building components can’t be correctly identified, resulting in no deduction for the commercial property owner.
The Cost Segregation Partners of Freed Maxick CPAs is one of the nation's leading providers of Cost Segregation and consulting services to real estate owners. Our philosophy is to offer clients an experienced team of professionals who take a 360 degree view of a taxpayer’s assets. This helps our team identify credits and incentives that the taxpayer may benefit from. To learn more about our unique approach click here.
Jennifer A Birkemeier, CPA, Senior Manager, CSP 360 has passed the American Society of Cost Segregation Professionals (ASCSP) Member Exam. The exam is one of several available from the organization, which was formed with the goal of establishing a measurable standard by which cost segregation consultants can be evaluated both from a business practice standpoint as well as actual quality of deliverables.
(ASCSP) was established as a non-profit corporation in response to the growing need for education, credentials, technical standards and a Code of Ethics within the cost segregation industry. The ASCSP's goal is to provide its members with educational programs and continuing education programs; create and maintain minimum quality standards, and provide a Code of Ethics.
LEED credential holders have a deep understanding of the most current green building principles and practices, and show a clear commitment to professional growth in the field. LEED Green Associates earn their credential by passing a two-hour, computer-based exam comprising 100 randomly delivered multiple-choice questions.
CSP 360 is headquartered in downtown Buffalo, NY and is one of the nation's leading providers of cost segregation and consulting services to real estate owners. CSP 360 also assists accountants and CPA firms in providing cost segregation services to their qualified clients who have constructed, bought, expanded or remodeled real estate.
Over the past year, commercial and industrial buildings used approximately 50% of the energy in the U.S. economy. Building on the American Recovery and Reinvestment Act, operations can be made more efficient using cost effective efficiency improvements. The “Better Buildings” initiative gives commercial and industrial builds a chance to increase efficiency 20% by 2020. These changes are built into the President’s 2014 Federal budget, which includes a proposed tax change to modify and permanently extend the 179D Energy Efficient Commercial Building Deduction. There are various strategies to the initiative.
Streamlining Green Energy Incentives for Commercial BuildingsIn order to encourage businesses to go green, a number of financial measures are being explored. Progress has been made by proposing updates to the rules for the 179D tax deduction. The Federal Government is looking to redesign the current deduction to be more generous which will encourage building owners and real estate investment trusts (REITs) to retrofit their properties.
The proposal would raise the current maximum deduction for energy efficient commercial building property to $3.00 per square foot. The maximum partial deduction allowed with respect to each separate building system would be increased to $1.00 per square foot. For taxpayers that simultaneously satisfy the energy savings targets for both building envelope, HVAC, and lighting systems, the proposal would increase the maximum partial deduction to $2.20 per square foot.
The proposal also provides a new deduction based on energy savings realized from retrofitting an existing building. The deduction would be capped at 50 percent of the total cost of implementing the plan. The deduction would be allowed on a sliding scale ranging from $1.00 per square foot of retrofit floor area, for energy savings of at least 20 percent, up to $4.00 per square foot of retrofit floor area, for energy savings of 50 percent or more. Sixty percent of the deduction would be available when the property is placed in service and would be based on the projected energy savings performance of the commercial building retrofit plan. The remaining 40 percent of the allowable deduction would be available at a later point and would be based on actual energy savings performance of the retrofit plan.
Do you know what deductions are available for your business?CSP360 is one of the nation’s leading providers of cost segregation and consulting services to real estate owners. Our philosophy is to offer clients an experienced team of professionals who take a 360° view of a taxpayer’s assets. This helps our team identify credits and incentives that the taxpayer may benefit from. Contact usto learn more!
It’s always a benefit to business and real estate owners to uncover ways to save money. Did you know that the tax depreciation records of golf course owners likely contain a tax deduction that can be claimed for the 2012 tax year?
The tax deduction is claimed by adopting specific sections of the temporary repair regulations that were issued in December 2011. The IRS is allowing taxpayers to adopt specific sections of these regulations for their 2012 tax year and to defer other sections that may result in income until the 2014 tax year. Specific sections of these regulations allow taxpayers to claim a deduction for assets that are now reclassified as repairs, routine maintenance, or were disposed of before 2012.
It’s a lot of information to wade through, but CSP 360 and their affiliate Freed Maxick CPAs can help country clubs and golf course owners navigate through the complex regulations.
Get the Tangible Property Q&A now to learn more!
Check out a few examples of how we can help:
1) Tax Deductions: Golf course owners that capitalized improvements to buildings and the course since 1987, likely removed or abandoned assets as a result. The remaining tax basis in these assets and perhaps, the costs of removal, can be claimed as a tax deduction for 2012 tax year.
For another example, let’s assume during 2008 that $1 Million of structural improvements were made to a club house facility and $1 Million of land improvements were made to the golf course bringing the total investment to $8 Million. A cost segregation specialist identifies $1 Million of tax basis remaining in the real and personal property disposed of in conjunction with the improvements.
Result? The golf club owner is entitled to claim a $1 Million tax deduction for the 2012 tax year.
2) Regulation Changes: All golf course owners should prepare for other changes under these regulations which may affect current accounting policies and procedures. For example, a golf course owner that has historically expensed assets for tax purposes based on their book capitalization policy may need to act before 2014 to be able to continue to deduct assets under this policy beginning in 2014. In addition, all golf course owners will be required to review their treatment of materials and supplies and repairs in order to comply with the new repair regulations.
3) Uncovering Cash Flow: For example, let’s assume a club house was constructed and placed in service during 2004 with an original cost of $2 Million and the golf course was constructed with an original cost of $4 Million for a total capitalized cost of $6 Million. A cost segregation study reclassified $2.4 Million of the capitalized cost as land improvements and tangible personal property.
Result? This reclassification results in a $1.5 Million tax deduction for 2012 providing additional cash flow from the federal and state income tax savings.
CSP 360 is affiliated with Freed Maxick CPAs and is one of the nation's leading providers of cost segregation and consulting services to real estate owners. CSP 360 is the national leader in providing cost segregation services to the golf and hospitality industries. Our experienced team of Construction Engineers and CPAs work in the cost segregation service niche with no outsourcing.
Allow us to show you how our Cost Segregation and CapX services could result in a substantial income tax savings for the 2012 tax year. Contact Us today to learn more about how we can assist.