Our Team is Your Resource. Value Added Services

Transcription

1 Our Team is Your Resource Established in 1999 with offices across the US, KBKG provides turn-key tax solutions to CPAs and businesses. By focusing exclusively on value-added tax services that complement your traditional tax and accounting team, we always deliver quantifiable benefits to clients. Our firm provides access to our knowledge base and experienced industry leaders. We help determine which tax programs benefit clients and stay committed to handling each relationship with care and diligence. Our ability to work seamlessly with your team is the reason so many tax professionals and businesses across the nation trust KBKG. Value Added Services Research & Development Tax Credits Federal credit worth approximately 10% of every qualified dollar spent on developing brand new or improving existing products, processes, software, and formulae. Fixed Asset Review While a cost segregation study focuses on buildings, a comprehensive Fixed Asset Tax Review encompasses all fixed assets a company owns including real property, machinery, furniture, fixtures, and equipment. Cost Segregation for Buildings and Improvements Any building improvement over $750,000 should be reviewed for proper classification of the individual components for tax depreciation, and retirement purposes. Repair vs. Capitalization Review 263(a) Taxpayers often capitalize major building expenditures that should be expensed as repairs and maintenance such as HVAC units, roofs, plumbing, lighting and more. Retirement loss deductions for demolished building structural components are also identified. 45L Credits for Energy Efficient Residential Developments Newly constructed or renovated apartments, condos, and tract home developments that meet certain criteria are eligible for a $2,000 credit per unit. 179D Incentive for Energy Efficient Commercial Buildings Federal deduction worth $1.80 per square foot of energy-efficient buildings. Available to architects, engineers, design/build contractors and building owners. IC-DISC The Interest Charge Domestic International Sales Corporation (IC-DISC) offers significant Federal income tax savings for making or distributing US products for export. NATIONWIDE SERVICE KBKG.COM COPYRIGHT 2018 KBKG ALL RIGHTS RESERVED. ALLSRV 8/20/2018

2 Industry INDUSTRY MATRIX FOR TAX SAVING OPPORTUNITIES (updated ) R&D Tax Credits Repair/Asset Retirement 45L Tax Credits 179D Tax Deductions Cost Segregation /Fixed Asset Affordable Housing X X X X Agriculture, Forestry & Fishing X X X Architecture & Engineering X X X X X Auto Dealerships X X X Communications & Utilities X X X X Construction X X X Film & Music X X X X X X Financial Services X X X Government Contractors X X X X X Healthcare X X X X Hotels X X X X Logistics & Distribution X X X X X X Manufacturing X X X X X X Mining X X X Multifamily Developers X X X X Oil & Gas X X X Pharmaceutical X X X X X X Professional Services X X X Real Estate X X Restaurants X X Retail X X X X Technology/Software X X X X X X Transportation X X Wholesale Trade X X X X X IC-DISC Call us today at to see how we can help you and your clients better understand these opportunities and secure these specialty tax incentives. 199 DPAD Deduction NATIONWIDE SERVICE KBKG.COM COPYRIGHT 2018 KBKG ALL RIGHTS RESERVED. ALLSRV. 8/20/2018

3 KBKG Service Description & Highlights Applicable Clients & Industries How Much is it Worth? Tax Considerations Research & Development Tax Credits (Federal & State) IDENTIFYING VALUE-ADDED TAX OPPORTUNITIES updated Federal and State tax credit designed to promote innovation. Expenses incurred in the United States and that meet the qualification criteria can result in a credit. Qualifying expenses can include wages paid to employees, supplies used in the research process, and payments made to contractors for performing qualified research. Manufacturing Software Development Architects High Tech Food & Beverage Equipment or tools Life Sciences Agriculture Clients developing brand new products, processes, software, or formula. Clients materially improving existing products, processes, software or formula. Clients that employ those with technical backgrounds (software development, engineering, etc..) Federal Benefit - Roughly 10% of their total Qualified R&D Expenses Ex. Client has $1M/year of wages related to R&D. Benefit = $100k in gross credits per year. Many states also allow an R&D credit. For example, CA R&D Credit is worth an additional 7.5% of Qualified R&D expenses. General Business Tax Credit Dollar-for-dollar reduction in income tax liabilities. 1-year Carryback / 20-year carryforward of unused credits. Qualified small businesses can reduce alternative minimum tax liabilities. Qualified start-up companies can offset up to $250,000 in payroll taxes. Cost Segregation (Federal & State) Allows taxpayers who have constructed, purchased, expanded, or remodeled any kind of real estate to accelerate depreciation deductions by reclassifying building components into shorter tax lives. Any building with over $750k of depreciable tax basis (excluding land). Any leasehold improvement with over $500k of depreciable tax basis (excluding land). Net Present Value is roughly 5% of the total building cost. Ex. $2M office can yield an after-tax NPV of $100k. Reduces AMT Starting in 2018, unused deductions carryforward. Must recapture personal property and bonus eligible assets upon the sale of a building. Any smaller residential rental property with over $150k of depreciable tax basis (excluding land) can utilize KBKG s online software to generate a cost segregation report. Repair v. Capitalization Review Asset Retirement Study (Federal) New rules allow you to assign value to structural components removed from a building and write off the remaining basis! Regs also clarify repair expense treatment of many types of building costs such as HVAC or roof replacements. KBKG also provides compliance consulting for repair and disposition regulations. Any building renovation costs > $400k Retirement Study - Building is renovated AFTER owning it at least 1 year. Building should have >$500K of remaining depreciable basis left. Repair Study - renovations that include roof, HVAC, windows, lighting, plumbing, ceilings, drywall, flooring, etc. Additional Year 1 deductions of 15%-40% of renovation costs (on top of benefits from 1245 reclassification) Ex. Client spends $3M on structural renovations. Additional Year 1 deductions of $450K-$1.2M. Depending on project specifics, may require a separate 3115 if doing concurrently with a depreciation change. Call us today at to see how we can help you and your clients better understand these opportunities and secure these specialty tax incentives. NATIONWIDE SERVICE KBKG.COM COPYRIGHT 2018 KBKG ALL RIGHTS RESERVED. ALLSRV. 8/20/2018

4 KBKG Service Description & Highlights Applicable Clients & Industries How Much is it Worth? Tax Considerations Fixed Asset Tax Review (Federal) IDENTIFYING VALUE-ADDED TAX OPPORTUNITIES (CONT.) updated Comprehensive review of company s entire Fixed Asset listing & supporting documents to assign appropriate tax lives, identify retirements, and correct items that should be expensed. Includes Cost Segregation & Repair analysis. Operations with > $40M in real property or > 500 lines of fixed assets. Retail, Restaurant, Bank and Hotel Chains of 10 or more Manufacturing Utility Companies Net Present Value of 5-8% of total buildingrelated costs. Ex. Manufacturing client has $60M of 39- year fixed assets. NPV Cash value = $3M - $4.8M Reduces AMT Starting in 2018, unused deductions carryforward. Must recapture personal property and bonus eligible assets upon the sale of a building. Residential Energy Credits / Section 45L (Federal / States can have similar programs) Federal credit for developers of Apartments, Condos, or Spec Homes that meet certain energy efficiency standards. Units must be certified by a qualified professional to be eligible. Anyone that has built Apartments, Condos, or Production Home Developments in the last 4 years. Generally, more than 20 units. Federal Credit = $2,000 per apartment/ home unit. Many states have similar credits. Ex. 100-unit apartment/condo can get $200,000 of Federal Tax Credits. General Business Tax Credit Credit is realized when unit is first leased or sold, not placed in service. 1-year Carryback 20-year carryforward. Does not reduce AMT. Subject to passive activity loss rules Credit reduces basis. Commercial Energy Deductions / Section 179D (Federal/ States can have similar programs) Federal deduction for Architects, Engineers, and Design/Build Contractors that work on Public or Government Buildings such as Schools, Libraries, Courthouses, Military Housing etc. Also available to any commercial building owner. 179D for Designers: Architects, General Contractors, Engineers, Electrical & HVAC Subcontractors. Any Building Owner or Lessee: That has constructed a commercial improvement greater than 40,000 SF since 1/1/2006. $.30 up to $1.80 per square foot in Federal Tax Deductions. Ex. 100,000SF building is eligible for $180,000 in deductions. Reduces AMT Deduction reduces basis in real property. Designers must amend open tax years to claim Owners: Can go back to 2006 with Form 3115 to claim missed deductions. CA Competes Credit (State) California income tax credits designed to stimulate growth throughout the state. CA Competes Credit: Growing business clients who anticipate hiring additional employees, constructing new buildings, or investing in new equipment. Must apply for credits. Up to $37,000 per eligible employee, over a 5-year period. Generally, 15-35% of employees qualify. Equipment - Credit is equal to Sales Tax paid. Credits will reduce taxes on owners W2 wages and personal return. Credits flow through to owners. Credits will offset tax at the S-Corp level. IC-DISC Federal Income Tax Incentive (Federal) The IC-DISC provides significant and permanent tax savings for producers and distributors of U.S.-made products and certain services used abroad. Any closely held, privately owned business with over $250,000 in profits from exports Manufacturers Distributors Architects & Engineers Agriculture and Food Producers Software Developers Other Producers Minimum permanent 17% decrease in tax rate on half of export profits. Benefits can be dramatically higher by performing a transaction-by-transaction analysis. Requires annual filing 1120 IC-DISC. No changes to business operations. Benefits begin when entity is formed. Call us today at to see how we can help you and your clients better understand these opportunities and secure these specialty tax incentives. NATIONWIDE SERVICE KBKG.COM COPYRIGHT 2018 KBKG ALL RIGHTS RESERVED. ALLSRV. 8/20/2018

5 KBKG Repair vs. Capitalization: Improvement Decision Tree - Final Regulations Considering the appropriate Unit of Property (UOP), does the expenditure (Last Updated ): KBKG expressly disclaims any liability in connection with use of this document or its contents by any third party. Any US tax advice contained herein was not intended or written to be used, and cannot be used, for the purpose of avoiding penalties that may be imposed under the Internal Revenue Code (IRC) or applicable state or local tax law provisions. This document is for educational purposes only and is not intended, and should not be relied upon, as accounting or tax advice. NATIONWIDE SERVICE KBKG.COM COPYRIGHT 2018 KBKG ALL RIGHTS RESERVED. ALLSRV. 8/20/2018

6 KBKG Building Unit of Property & Major Components Chart updated This chart was created to help users identify building systems & typical major components in real estate assets. Replacing a major component is a capital expenditure while replacing an incidental component can be expensed Building Structure Land Improvements HVAC System Electrical System Plumbing Systems Fire Protection System Security System Gas Distribution System Escalators Elevators Real Estate Major Component (examples) Roof System (membrane, insulation & structural supports) Foundation Other structural Load Bearing Elements, including stairs Exterior Wall System Ceilings Floors Doors Windows Partitions Loading Docks Landscaping including shrubs, trees, ground cover, lawn, irrigation Storm drainage including inlets, catch basins, piping, lift stations Site lighting (pole lights, bollard lights, up lights, wiring) Hardscape (retaining walls, pools, water features) Site Structures (gazebo, carport, monument sign) Paving (roads, driveway, parking areas, sidewalks, curbing) Heating System (boilers, furnace, radiators) Cooling System (compressors, chillers, cooling towers) Rooftop Packaged Units Air Distribution (Ducts, fans, etc) Piping (heated, chilled, condensate water) Service & Distribution (panel boards, transformers, switchgear, metering) Lighting (interior & exterior building mounted) Site Electrical Utilities Branch Wiring (outlets, conduit, wire, devices etc.) Emergency Power Systems Plumbing Fixtures (sinks, toilets, tubs etc.) Wastewater System (drains, waste & vent piping) Domestic Water (supply piping and fittings) Water Heater Site Piping Utilities Sprinkler System (piping, heads, pumps) Fire Alarms (detection & warning devices, controls) Exit lighting & signage Fire Escapes Extinguishers & hoses Building security alarms (detectors, sirens, wiring) Building access & control system Gas piping including to/ from property line & other buildings Stair and Handrail Drive System (motors, truss, tracks) Elevator Car Drive System (motors, lifts, controls) Suspension system (counterweights, framing, guide rails) * Building unit of property (UOP) rules apply to each building structure located on a single property. ** Building system components with a different tax life are separate units of property. For example, a cost segregation study separating HVAC into 5-year & 39-year categories for a restaurant creates two separate HVAC units of property. Lessee of Building Personal Property Plant Property Network Assets Must apply the same units of property above but only to the portion of the building being leased. UOP are parts that are functionally interdependent i.e. placing one part in service is dependent on placing the other part in service. UOP is each component that performs a discrete and critical function. Generally, each piece of machinery or equipment purchased separately. UOP is determined by taxpayer s particular facts Definitions Plant Property Network Assets Major Component Incidental Component Machinery & Equipment used to perform an industrial process such as manufacturing, generation, warehousing, distribution, automated materials handling, or other similar activities Railroad track, oil & gas pipelines, water & sewage pipelines, power transmission & distribution lines, telephone & cable lines; owned or leased by taxpayers in each of those respective industries. Part or combination of parts that performs a discrete and critical function in the operation of the unit of property Relatively small, inexpensive, or minor part that performs a discrete and critical function for the UOP. Generally, not capitalized because of its size, cost, or significance. KBKG is a specialty tax firm that works directly with CPAs and businesses to provide value-add solutions to our clients. Our engineers and tax experts have performed thousands of tax projects resulting in hundreds of millions of dollars in benefits. Our services include Research & Development Tax Credits, Cost Segregation, Repair vs. Capitalization 263(a) Review, IC-DISC, Green / Energy Tax Incentives (179D for Designers, 45L for Multifamily), and Fixed Asset Depreciation Review. KBKG expressly disclaims any liability in connection with the use of this document or its contents by any third party. Any US tax advice contained herein was not intended or written to be used, and cannot be used, for the purpose of avoiding penalties that may be imposed under the Internal Revenue Code (IRC) or applicable state or local tax law provisions. This document is for educational purposes only and is not intended, and should not be relied upon, as accounting or tax advice. NATIONWIDE SERVICE KBKG.COM COPYRIGHT 2018 KBKG ALL RIGHTS RESERVED. ALLSRV. 8/20/2018

7 SOLUTIONS FOR TAX PROFESSIONALS AND BUSINESSES TAX CREDITS INCENTIVES COST RECOVERY BEFORE WE GET STARTED Welcome and thank you for joining KBKG s live webinar We will start the live webinar at 12pm PT 3pm ET For the best audio, dial in using the telephone # provided Please enter questions into the Q&A module Download the slides from KBKG.com/resources Introduction to Cost Segregation and the Impacts of Tax Reform SOLUTIONS FOR TAX PROFESSIONALS AND BUSINESSES TAX CREDITS INCENTIVES COST RECOVERY CS INTRODUCTION TO COST SEGREGATION AND THE IMPACTS OF TAX REFORM All attendees are muted. The webinar will begin promptly at 12 PM Pacific / 3 PM Eastern Download power point slides from KBKG.com/resources

8 Administrative Audio For the best sound, you should dial in and use the provided telephone # for audio. Handout materials: KBKG.com/resources CPE (Continuing Professional Education for CPAs only) Answer all polling questions during the webinar. Questions? Please submit your questions and we will answer as many as time permits. About KBKG Established in 1999 with offices across the US Provide turn key tax solutions to CPAs and businesses Cost Segregation, R&D Tax Credits, Energy Tax Incentives, Repair vs. Capitalization Studies, IC DISC Export Incentives Performed thousands of tax projects resulting in hundreds of millions of dollars in benefits for our clients Diverse mix of tax specialists, attorneys, energy consultants and engineers from various disciplines A preferred provider for thousands of CPAs across the country

9 Sumit Sharma, CCSP Director at KBKG in the Fixed Assets / Cost Segregation practice Prior to KBKG, six (6) years as a manager in PwC Tax Project Delivery Group and five (5) years a boutique appraisal and cost segregation consulting firm Member of the American Society of Appraisers Machinery & Technical Specialties Stevens Institute of Technology Engineering Management ASCSP Certified Cost Segregation Specialist Learning Objectives Upon completion of this course, you will be able to: Explain what cost segregation is, how taxpayers benefit from it, and how it has changed over the years Identify tax issues that should be considered in conjunction with a cost segregation studies Recognize potential impact of cost segregation on estate planning Discuss the impact of tax reform on cost segregation Discuss cost segregation opportunities related to the tangible property regulations and disposition regulations Identify new opportunities to immediately deduct abandoned building components, avoid recapture tax, and expense demolition costs

10 SOLUTIONS FOR TAX PROFESSIONALS AND BUSINESSES TAX CREDITS INCENTIVES COST RECOVERY POLLING QUESTION #1 Cost Segregation Acquired Property* (60% of all studies) New Construction* Remodeled Property* Build outs* * (as far back as 1987) MACRS - GDS 39 - Year Property Year Property 15 - Year Property 7 - Year Property 5 - Year Property 3 Year Property

11 Benefit: Accelerated Depreciation Deductions KBKG, INC. COST SEGREGATION SPECIALISTS Example: Office Building, Current Year Acquisition $5 million office building Without cost segregation costs are depreciated straight line over 39 years With a Cost Segregation Study Of $5 Million: $750,000 over 5-7 years $500,000 over 15 years $5 million recovered over asset class lives $3,750,000 over 39 years Increased Depreciation Deductions in the first 5 years: $930,000 Projected NPV Benefits: $284,000 KBKG, INC. COST SEGREGATION SPECIALISTS

12 Any type of property may be eligible for a study Building Type Apartment Buildings Retail Stores Restaurants Office Buildings Manufacturing Facilities R&D Wineries Grocery Stores Hotels Warehousing Average Re-Allocation 20-35% 20-40% 20-45% 10-25% 20-60% 30-60% 20-45% 25-45% 25-45% 10-25% Other Projects Include: Shopping Malls Airports Sports Facilities Golf Courses & Ranges Auto Dealerships Resorts Healthcare Facilities Medical Centers Industrial Buildings Distribution Centers Auto Service Centers And more Section 1245 Personal Property - examples Track lighting Decorative lights Slat wall paneling Counters Cabinets Removable flooring Appliances

13 Section 1245 Personal Property - examples Plumbing Special piping Electrical wiring Soft Cost Architecture Permitting Land Improvements Includes improvements directly to or added to land, whether such improvements are section 1245 property or Section 1250 property, provided such improvements are depreciable. Examples of such assets might include: Sidewalks Gazebo Sewers Swimming Pool Fences Landscaping Hot Tubs Drainage facilities Waterways Docks Bridges Shrubbery

14 Tax Considerations Depreciation deductions will reduce AMT On new construction, bonus depreciation can apply to reclassified items in a cost segregation study which magnifies the benefit Unused deductions carry forward When building is sold, the taxpayer must recapture depreciation taken on personal property Accounting method changes are addressed with Form 3115 Passive activity rules can offset the benefit of a cost segregation 1031 exchange rules need to be considered Tax Considerations When building is sold, taxpayer must recapture depreciation taken on personal property Personal Property (Sec 1245) recapture is at ordinary tax rates (39%). This is why the hold period should be > 5 years Some 1245 property will lose value quicker than 1250 property upon sale. Mitigates 1245 recapture

15 Passive Taxpayer Self Rental Rule & Grouping Election A taxpayer that rents to a business in which they materially participate is subject to the self rental rule Reg (f)(6) Income is re characterized as non passive Losses are always passive This may limit the benefits of cost segregation Consider paying for leasehold improvements from the operating entity Consider Grouping Election that allows activities to be grouped for tax purposes. Must be made in year building acquired. Planning Opportunity Lease Language Lessee perspective: Lease should state the landlord s allowance is only for 39 year property. Increases the lessee s ability to allocate more value to shorter life property. Lessor perspective: Lease should state the allowance is for a pro rata share of all building components. Allows a lessor to accelerate depreciation on a portion of the 1245 components

16 SOLUTIONS FOR TAX PROFESSIONALS AND BUSINESSES TAX CREDITS INCENTIVES COST RECOVERY POLLING QUESTION #2 Tax Reform Bonus Depreciation 100% bonus depreciation is applicable for assets acquired and placed in service after 9/17/17 and prior to 1/1/23 There is an additional year to place in service long production period property (LPPP) and certain aircraft Long Production Period Property (LPPP) is property: o With a recovery period of at least 10 years or is transportation property o Subject to 263A o With an estimated production period exceeding 1 year and production cost exceeding $1M o Must meet acquired and PISD rules Bonus is now available for used property Phase down through % 60% 40% 20% 0% Before 1/1/2024 Before 1/1/2025 Before 1/1/2026 Before 1/1/

17 Tax Reform Bonus Depreciation New IRC Reg Section 1.168(k) 2 issued on 8/8/18 for property acquired and placed in service after 9/27/17 Currently in comment period and in proposed form Taxpayers can rely on these regulations, but are not required to General Bonus Depreciation Requirements: Must be property of a specified type Original use of the property must commence with the taxpayer or used depreciable property must meet certain acquisition requirements Must be placed in service by the taxpayer within the specific time period Must be acquired by the taxpayer after 9/27/17 IRC Reg Section 1.168(k) 1 generally remains applicable for property acquired and placed in service prior to 9/28/17 Tax Reform Bonus Depreciation Bonus on new AND USED PROPERTY starting in 2018 Qualified property definition was expanded to include both new and new to you property. Original Use ( new ) guidance remains essentially the same as prior guidance under 1.168(k) Used Property ( New to You ) requirements include: Taxpayer or predecessor can not have used the property prior to the acquisition Property is deemed used by the taxpayer prior to the acquisition only if the taxpayer had a depreciable interest in the property at any time before the acquisition (e.g., a taxpayer could have a depreciable interest in their leased space and then acquire the entire building and still meet the definitions of bonus eligibility). The property must not be acquired from a related party, a component member of a controlled group, or in certain carryover basis transactions Regulations note that if a member of a consolidated group acquires property from an unrelated group that acquired property from a different member of the consolidated group, bonus would not be eligible

18 Tax Reform Bonus Depreciation Special rules for fractional interests are distinguished between two separate scenarios: If a taxpayer owned a depreciable interest in a portion of property and subsequently acquires an additional depreciable interest in the same property that additional interest is not treated as having been previously used by the tax payer. If a taxpayer owned a depreciable interest in a portion of a property, sells all or part of that portion, and then subsequently acquires a different portion of the same property, the taxpayer will be treated as having owned previously the used property up to the amount of the portion in which it held a depreciable interest prior to the sale. Series of related transactions rule states: Property is treated as directly transferred from the original transferor to the ultimate transferee, and The relationship between the original transferor and the ultimate transferee is tested immediately after the last transaction in the series. Tax Reform Bonus Depreciation Section 754 Elections This step up can receive the new bonus depreciation As long as it s a new partner coming in. Property not used by the taxpayer before bonus applies Step Up Upon Death Step up on death is specifically excluded from the new bonus depreciation Property received by a decedent bonus depreciation NOT applicable

19 Tax Reform Bonus Depreciation Property of a Specified Type MACRS property with a recovery period of 20 years or less Certain computer software Water utility property Newly added Qualified Film or Television Production Property Newly added Qualified Live Theatrical Production Property Property types removed post 12/31/2017 Qualified Leasehold Improvement Property NO LONGER 15 YEAR PROPERTY Qualified Restaurant Property NO LONGER 15 YEAR PROPERTY Qualified Retail Property NO LONGER 15 YEAR PROPERTY Tax Reform Bonus Depreciation Qualified Improvement Property STILL EXISTS and is defined as an improvement: Made to the interior of a building, After the original building was placed in service, Not an elevator or an escalator, Not an expansion, Non structural in nature The TCJA specifically removed QIP from the list of Property of a Specified Type and did not change the QIP recovery period from 39 years to 15 years. Therefore, QIP is NOT BONUS ELIGIBLE post 12/31/2017. Unfortunately, IRS and Treasury do not have the authority to fix this error. However, the proposed regulations DO confirm that QIP acquired after September 27, 2017 and placed in service before January 1, 2018 is eligible for 100% bonus depreciation, even though it is recovered over 39 years!

20 Tax Reform Bonus Depreciation Property of a Specified Type SPECIFICALLY EXCLUDED from bonus applicability Property required to be depreciated under the alternative depreciation system (ADS) Used predominately outside of the U.S. Tax exempt use property Tax exempt bond financed property Property primarily used in certain public trades or businesses* Property used in a trade or business that has floor plan financing (e.g., automobile dealerships)* * Only applies to property acquired after 9/27/17 and placed in service in tax years beginning on or after 1/1/18. Tax Reform Bonus Depreciation Placed in Service Requirements In order to qualify for 100% bonus depreciation, the property must be placed in service after 9/27/17 and before 1/1/23 (except for LPPP, which is 1/1/24). New regulations are generally the same as existing placed in service rules outlined in 1.168(k) 1(b)(5) o For new construction buildings, we generally look to the date the certificate of occupancy was issued o For acquired property, we look to the ready and available standard Regulations contain specific rules for qualified film or television productions and qualified live theatrical productions

21 Tax Reform Bonus Depreciation Acquisition Date Requirement Three types of effective date acquisition requirements: Acquired existing property o Property will not be treated as acquired any later than the date on which the taxpayer enters in a written binding contract ( WBC ) o Regulations retain prior binding contract definition and further clarify that a letter of intent is not a binding contract. o Detailed guidance on the definition of a binding contract in Reg (k)(2)(A)(iii) and (k)(4) New property constructed new by a 3 rd party o Property that is manufactured, constructed, or produced for the taxpayer by a 3 rd party under a WBC is treated as acquired pursuant to a written binding contract (this is a significant change!) Self constructed property constructed new by taxpayer for its own use o Property is acquired when the taxpayer begins manufacturing, constructing, or producing the property o Optional safe harbor permits a taxpayer to determine the acquisition date as the date on which more than 10% of total construction cost has been incurred ( physical work of a significant nature completed) Tax Reform Bonus Depreciation 1031 Exchanges Cost segregation can still be beneficial on both sides of a real estate exchange KBKG believes there are no material changes regarding the interaction of cost segregation and 1031 exchanges Committee reports suggest there is no intent to change the nature of 1031 transactions for real estate Personal property from cost segregation is considered Real Property under state law Matching of 1245 property is still required to avoid recapture Bonus depreciation would apply to the excess basis in the new property

22 Tax Reform Bonus Depreciation Examples Acquisition Scenario PIS Scenario Bonus Depreciation Applicability Taxpayer enters in a contract to acquire new equipment on 8/1/17 with a 25% restocking fee if cancelled Taxpayer starts construction on new interior improvements using a GC on 10/01/17 Taxpayer acquires a restaurant on 11/1/17 and opens it immediately Taxpayer begins construction on their own property on 9/1/17. On 10/1/17, they have only incurred 8% of the total cost of the project Equipment is delivered and installed on 10/01/17 Work is completed and final C/O is obtained on 1/15/18 LOI signed on 6/1/17 Work is placed in service on 5/15/18 Property is eligible for 50% bonus depreciation Property is eligible for 100% bonus depreciation 100% bonus depreciation for the entire structure Qualified Restaurant 100% bonus depreciation on 1245 property Comment PIS date meets post 9/27/17 requirement but acquisition date fails PIS date and acquisition date are post 9/27/17 PIS date and acquisition date are post 9/27/2017 and pre 12/31/2017 PIS date is post 9/27/17 and less than 10% of self construction was completed by 9/27/17 Tax Reform Interest Deduction Limit Business Interest Expense Limitation Not applicable to businesses with less than $25M in revenue (avg. last 3 years) Electing out of Interest Limitations Real Property Trade or Business (defined in Section 469(c)(7)) may elect out. Must use the ADS system for REAL property o 40 year life on commercial building o 30 year on residential rental o 20 years for Qualified Improvement Property (if corrected) and Land Improvements Bonus depreciation is not available when ADS is mandatory

23 Tax Reform 179 Expensing Sec. 179 allows businesses to deduct the purchase of qualifying equipment and software 2018 Deduction Limit = $1,000,000 (raised from $510K in 2017) 2018 Spending Cap = $2,500,000 (beyond the cap a dollar for dollar reduction in the deduction) New items can be expensed under Sec You ll find these noted in our cost segregation studies. Roofs, HVAC, fire protection & alarm systems, and security systems Only for commercial buildings (not residential) Only for improvements made after the building was first placed in service (originally placed in service by any taxpayer) KBKG Insight: Sec. 179(d)(5) will prevent most non corporate real estate investors from taking advantage of this. Example. Client purchased existing 10 year old building in 2018 for $4M. Before placing it in service, they put in a new roof, HVAC, fire protection, and security system for $500K. All 179 eligible. Tax Reform 179 Expensing 179 Expensing now includes personal property used for furnishing lodging, such as furniture and appliances in hotels, apartment buildings, student housing, etc. KBKG Insight: There s no benefit taking 179 expense on tangible personal with 100% bonus depreciation Taxpayers should therefore consider utilizing 179 expensing on items not otherwise eligible for bonus depreciation, such as roofs and HVAC equipment. This would avoid hitting the 179 max of $2.5M. Please note, this makes them subject to recapture

24 Tax Reform NOLs Net Operations Losses (NOLs) After 2017, NOLs generated may be limited to 80% of taxable income (depending on the taxpayer). They can no longer be carried back. However, NOLs created in 2017 that carry forward can offset 100% of taxable income in future years. May need to track pre/post 2018 NOLs separately Example Taxpayer does not need deductions in 2017 but paid $100k in taxes in the prior year. If they do a cost segregation study for the 2017 tax year, they will create a $500k NOLs they can carry back and get a $100k refund. Remaining $400k of NOLs carry forward and offset 100% of taxable income in future years This opportunity is not available in SOLUTIONS FOR TAX PROFESSIONALS AND BUSINESSES TAX CREDITS INCENTIVES COST RECOVERY POLLING QUESTION #

25 Cost Segregation and Estate Planning: Background When a building owner dies and a property is inherited, any gains built up during the decedent s life are forgiven. Beneficiary receives a step up, which means the property s tax basis is reset to fair market value on the date of death and depreciation starts all over. This provides an opportunity to apply a cost segregation study on the decedent s pre stepped up basis creating a permanent tax deduction. Decedent s Gain Forgiven DECEDENT S TAX RETURN HEIR S TAX RETURN $2M FAIR MARKET VALUE $1M INITIAL INVESTMENT APARTMENT $1.27M Gain Forgiven $728K Undepreciated TIME Purchase Date (2008) Date of Death (August 2015)

26 Heir Starts Depreciation Over Most CPAs already know this is a great candidate for Cost Segregation $2M FAIR MARKET VALUE But it s the original pre stepped up undepreciated basis that has the most value $1M INITIAL INVESTMENT $728K Undepreciated Basis 2008 Purchase Date Date of Death 2015 Case Study Cost Segregation on original pre-stepped up basis $1M INITIAL INVESTMENT COST SEGREGATION $200K 5 YR $728K Undepreciated Basis $100K 15 YR $700K 27.5 YR TIME 2008 Purchase Date

27 Case Study Cost Segregation on original pre-stepped up basis DOD August Must file tax return for income generated Jan thru Aug Cost Seg done and Form 3115 filed: Generates $174,000 catch up deduction (Sec. 481(a)). INITIAL INVESTMENT $728K $554K Undepreciated Basis With Cost Segregation $174K TIME 2015 Tax Return Jan thru Aug Descendant s Tax Return Aug 2015 Heir s Tax Return Case Study Cost Segregation on original pre-stepped up basis Permanent Tax Savings of $68,904 ($174k x 39.6% tax rate) $2M FAIR MARKET VALUE Must be done on final tax return of decedent INITIAL INVESTMENT $554K Undepreciated Basis With Cost Segregation TIME 2015 Tax Return Jan thru Aug Descendant s Tax Return Aug 2015 Heir s Tax Return

28 Heir Starts Depreciation Over $2M FAIR MARKET VALUE After all this property gets stepped up to fair market value for the heir. Can perform a cost seg for the heirs. Additional cost to refresh original cost segregation is nominal. Aug 2015 Repair vs. Capitalization The B A R Test Improvement defined in 1.263(a) 3(d) Betterment Adaptation Restoration

29 Buildings: What is the Unit of Property (UOP)? Building and its structural components is a single UOP 1.263(a) 3(e)(2)(i) Building structure consists of building and its structural components other than the structural components designated as building systems 1.263(a) 3(e)(2)(ii)(B) 1. HVAC 2. Plumbing systems 3. Electrical systems 4. All Escalators 5. All Elevators 6. Fire Protection & Alarm Systems 7. Security systems 8. Gas distribution systems 9. REST OF BUILDING Walls, roof, floors, ceilings, windows, doors, finishes, structure, etc.. Cost Segregation Buckets 5-year 39-year Cost Seg 7-year 15-year 39-year

30 KBKG Enhanced Cost Segregation Studies 39-year Cost Seg Repairs Demo Expense Retirements IRC 48 Property Bonus Rate by Asset Group 5-year 7-year 15-year 39-year Roof Windows Doors Lighting Plumbing Electrical Security Elevators Gas Dist HVAC Ceilings Floors Betterment? Examples Example 1: Replace asphalt shingles with solar shingles Example 2: Extensive renovations to an office space that adds offices, and accommodate more employees Example 3: Asbestos removal not a betterment Because the quality of the building did not increase materially

31 Adaptation The cost of adapting something to a new use must be capitalized as an improvement. Example Taxpayer converts its manufacturing building into a showroom for its business. Replace some lights, paint walls, and replace other components to provide better layout for showroom and offices. Capitalize If taxpayer were only modifying those items for their manufacturing operation, the costs may qualify as a repair deduction Restoration Replacing Major Component Parts that perform a critical function for the building system Example: Lighting, air conditioning, flooring, water heater etc Replacing a large portion of the building system Example: Replacing more than 50% of the lighting

32 Restoration Examples HVAC Systems Office building chiller replaced with comparable unit HVAC system has 1 chiller, 1 boiler, cooling tower, etc. Chiller functions to cool water to generate AC Chiller performs a discrete and critical function of HVAC system Therefore, must Capitalize Assume same as above except there were 4 chillers and only one was replaced. Repair expense Retirements and Dispositions Current regulations allow you to take a loss deduction when you remove components from your building! Example: If you pay $50,000 for all new HVAC units in your building, you need to capitalize that amount. Depreciate that $50,000 over 39 years Figure out how much the old HVAC was not written off and claim all that as an immediate deduction! disposition calculator Can do this on a go forward basis

33 Retirement of Structural Components Example: Taxpayer acquired $5M building in 2010 In 2017 they spent $1M to remodel portion of 2nd floor (ceilings, walls, lighting, plumbing, ducting, electrical wiring, etc.) We determine the original cost of demolished components is $470K (from the original $5M building) Recognize a loss of $404K in 2017 tax year (original cost basis less depreciation already taken) You can only recognize the retirement by taking a partial disposition in conjunction with a timely filed tax return. Otherwise, you forgo the opportunity to recognize the retirement. Retirements create Permanent Tax Savings!! Retirements Convert Recapture tax into Capital Gains If you incorrectly continue to depreciate 1245 and 1250 property that was removed from a building, you pay recapture tax upon sale 1245 recapture is at ordinary rates (35% 39.6%) 1250 recaptured at 25% Capital Gains are typically taxed at 20%

34 Retirements create Permanent Tax Savings!! Previous example $5M building with $470K of retirements. If they continue to depreciate the $470K, they recapture all of it upon sale Let s say $370K of that was 39 year and $100K was 7 year property Recapture Tax = $127,500 ($370K X 25% + $100K X 35%) If they did a retirement study Recapture tax on the $470K = 0 Capital gain tax = $94,000 ($470K X 20%) Permanent tax savings of $33,500 upon sale Removal Costs / Demolition R.R Old rule: Removal costs to replace anything had to be capitalized with the new component. New Rule: Removal costs can be deducted if taxpayer retires old component for tax. Example: Landlord owns three unit commercial building and pays $200K for improvements in each space in year 1. In year 5, one tenant leaves and new tenant requires landlord to gut and renovate the space costing $340K Contractor cost detail shows $40K demolition cost to remove old improvements Landlord can expense the $40K demolition costs and deduct remaining basis in the $200K cost of the old tenant build out

35 Plan of rehabilitation expenses Old rule said that if you did repairs to building as part of bigger rehab project, you had to capitalize. New Rule Repair and maintenance costs not incurred by reason of improvement can be expensed. So as long as the repair work had nothing to do with the improvements, you can expense. Was it necessary to get the improvement done? Example 1 B spends $500,000 to rewire building and for new lights. Because of electrical work, there was $30k of cost to cut some drywall, patch, and paint areas rewired. All $530K is capitalized Example 2 B spends $500,000 to rewire the building and upgrade electrical. B spends $30k to paint and patch areas of the building unrelated to the electrical improvements $30k can be expensed if it was repair unrelated to any improvement SOLUTIONS FOR TAX PROFESSIONALS AND BUSINESSES TAX CREDITS INCENTIVES COST RECOVERY POLLING QUESTION #

36 GAA Election for Demolished Buildings General Rule for Building Demolition Under IRC 280B, the adjusted basis of a building as well as the cost to demolish it needs to be added into the basis of the land. There are no deductions for these often significant costs. Taxpayer receives deductions only upon subsequent sale. GAA Election for Demolished Buildings Tangible Property Regulations provide the opportunity to avoid rolling over a demolished building s remaining basis into land. Taxpayers anticipating the demolition a building may place the building into a single asset General Asset Account (GAA) and continue to depreciate the building even after demolition rather than folding the remaining adjusted basis of the building into land. A taxpayer is not required to terminate the GAA upon demolition of the building. A single asset GAA can be used to a taxpayer s advantage when it is advantageous to continue depreciating the property even after its disposition. If a new building is constructed, the taxpayer is allowed to take depreciation deductions on both the demolished building now in the GAA and the new building

37 GAA Election for Demolished Buildings Caveats The election to place a building into a single asset GAA is only available for the year in which a property is acquired (time period to make late GAA elections has expired). The election to place a building into a GAA is not available for buildings that are acquired and disposed of within the same year. Qualified Improvement Chart Download this helpful chart at:

38 Evaluating a Cost Segregation provider What are the real capabilities of the cost segregation provider you are using? There is a big difference in technical knowledge. The value of Cost Seg is not just about breaking a building down into components! Many low cost or small providers don t have the resources to stay on top of all the tax issues. Is your provider advising you on Situational bonus depreciation rules such as Long Production Period Property, RP rule to componentize your property? Repair vs. Capitalization Regulations? Energy credits for your multi family clients under IRC 45L? Energy tax incentives for your commercial building developers? Tax Considerations of Cost Seg? Property Tax Issues? QUESTIONS & ANSWERS Sumit Sharma, CCSP Director x 754 Sumit.Sharma@kbkg.com kbkg.com/management/sumit Sharma KBKG SERVICES R&D Tax Credits Green Tax Incentives Hiring Tax Credits Cost Segregation Fixed Asset Review IC-DISC Repair v. Capitalization

39 CPE Certificates KBKG Login to solutions.kbkg.com Get CPE certificates Questions about your certificates? CPA Academy Login to your account at CPAacademy.org Fill out evaluation form Get CPE certificates Questions about your certificates?