PROPERTY TAX: USE THE IRS REPAIR REGS TO REDUCE ASSESSMENTS

Transcription

1 2014 IPT Property Tax Symposium PROPERTY TAX: USE THE IRS REPAIR REGS TO REDUCE ASSESSMENTS SAM KINSLOW, CMI EXECUTIVE DIRECTOR ERNST & YOUNG HOUSTON, TX (713)

2 2014 IPT Property Tax Symposium 2 Learning Objectives After attending this session, the participant will be able to: Comprehend a foundational understanding of the new IRS Repair Regulations Identify the impacts that the regulations can have on property tax Leverage the regulations to minimize property tax assessments Defend against audits and increased assessments by assesssors

3 2014 IPT Property Tax Symposium 3 Questions To Consider My company/client implemented the new IRS Repair Regulations effective 1/1/2014. How might this impact property taxes? How can I utilize the regulations to improve property tax processes and reduce assessments? Can the way my company/client implemented the regulations have negative consequences on property tax? How might assessors use the regulations to increase assessments?

4 2014 IPT Property Tax Symposium 4 Agenda Summary of Repair Regulations Improvements to tangible property Dispositions De minimis Materials and supplies Opportunities

5 2014 IPT Property Tax Symposium 5 Summary of Repair Regulations IRS Regulations 161 and 263(a) Amounts paid to acquire, produce, or improve tangible property IRS Regulation 168 General asset accounts and dispositions of property Impact on Property Tax The regulations require companies to improve fixed asset detail which property tax professionals have wanted for many years Most companies have implemented the regs on a go-forward basis, some will look- back/revise for a few years, but not for all years Caution! - some companies will implement regs in ways which cause negative consequences for property tax

6 2014 IPT Property Tax Symposium 6 IRS Reg Change Affects All Businesses Owned Property Leased Property Personal Property Real Estate Inventory Supplies

7 2014 IPT Property Tax Symposium 7 Agenda Summary of Repair Regulations Improvements to tangible property Dispositions De minimis Materials and supplies Opportunities

8 2014 IPT Property Tax Symposium 8 Improvements to Tangible Property Taxpayer should capitalize amount that IMPROVES a property if the amount: 1. Is for a betterment 2. Restores the property 3. Adapts the property to a new or different use Impact on Property Tax On a go-forward basis, there should be much better fixed asset detail. The majority of companies will not go back more than two years to add the detail Items that were expensed under the prior rules will likely now be capitalized The above creates opportunity for property tax professionals to more easily scrub the assets and identify non-taxable items

9 2014 IPT Property Tax Symposium 9 Sec 263A (Other Costs) and Removal Costs Section 263A Other Costs (Indirect Costs, Intangibles): Costs that directly benefit or are incurred related to the addition of property should be capitalized Removal Costs When an asset is disposed (even partially), costs of removal are not required to be capitalized Impact on Property Tax On a go-forward basis, there should be greater detail regarding intangibles such as engineering for both real estate and personal property Caution! - Costs for removal of an asset may or may not be excluded by the company under their implementation of the regs

10 2014 IPT Property Tax Symposium 10 Agenda Summary of Repair Regulations Improvements to tangible property Dispositions De minimis Materials and supplies Opportunities

11 2014 IPT Property Tax Symposium 11 Dispositions/Disposals Specific identification of asset required for disposition/disposal Disposition also occurs when asset is transferred to a supplies or scrap account or when a portion of an asset is disposed during a sale, casualty event, like-kind exchange, involuntary conversion, or tax-free transfer Impact on Property Tax Taxpayers are required to proactively track disposals a big win for property tax professionals. Be sure to scrub until you are confident that company is effectively tracking disposals Informed assessors may begin to ask for the detail and amounts in the scrap equipment account for assets that are no longer in service, but still have taxable situs

12 2014 IPT Property Tax Symposium 12 Agenda Summary of Repair Regulations Improvements to tangible property Dispositions De minimis Materials and supplies Opportunities

13 2014 IPT Property Tax Symposium 13 De Minimis Election to Applicable Financial Statements With Applicable Financial Statement Written policy to deduct $10,000 or less Purchase 1,000 computers for $5,000 each Deduct each computer as de minimis Not able to use safe harbor if computers were over $5,000 Without Applicable Financial Statement Written policy to deduct $1,000 or less Purchase 10 computers at $600 each Cannot use safe harbor because each item is above $500 Would be able to deduct if computers were under $500 each Impact on Property Tax Review accounting policies and practices related to new regs to ensure all assets which have taxable situs are reported

14 2014 IPT Property Tax Symposium 14 Agenda Summary of Repair Regulations Improvements to tangible property Dispositions De minimis Materials and supplies Opportunities

15 2014 IPT Property Tax Symposium 15 Materials and Supplies Items acquired to maintain, repair, or improve an asset owned, leased, or serviced by the taxpayer that is not acquired as part of any single unit of property (UOP) Item with economic useful life of 12 months or less Election to capitalize certain materials and supplies now only applicable to rotable, temporary, or standby emergency parts Example: Specific part of a manufacturing machine subject to harsh stresses which require replacement in less than 12 months. Excess of the standard amount of parts needed on hand and held for emergencies may be capitalized Impact on Property Tax Items previously treated as inventory under the old regs may now be classified by the taxpayer as assets ie, rotable or emergency parts

16 2014 IPT Property Tax Symposium 16 Agenda Summary of Repair Regulations Improvements to tangible property Dispositions De minimis Materials and supplies Opportunities

17 2014 IPT Property Tax Symposium 17 Opportunities Fixed Asset Policy Review Real Estate Review Personal Property Review

18 2014 IPT Property Tax Symposium 18 Opportunities Fixed Asset Policy Review Use the Repair Regs as an opportunity to improve fixed asset policies for property taxes: Greater level of detail for the following: Acquisitions Freight, Installation, and sales tax Indirect costs: permitting, appraisals, engineering, title fees, legal Repairs and Maintenance Additions to existing asset must be clearly tied to the original asset Disposals Disposals and partial disposals of existing asset must be clearly tied to the original asset Less bundling of assets or mass asset accounting Capitalization thresholds and disposal policy review opportunity Fixed asset ledger scrubs should be easier

19 2014 IPT Property Tax Symposium 19 Opportunities Real Estate Review The new Repair Regs detailed methods of accounting for indirect costs such as appraisals, title work, re-work, engineering, etc. will be helpful for property tax professionals to exclude non-taxable items from reporting and assessments Caution! The new regs methods of accounting for leasehold improvements could be used by assessors to increase assessments on real estate or personal property (especially in audit states)

20 2014 IPT Property Tax Symposium 20 Opportunities Personal Property Review Scrutinize the Repair Regs policy changes to the Fixed Asset Ledger Look for items that are non-taxable or that no longer have situs at a facility: Sort by Cost From High to Low Sort by Acquisition Date Sort by Account Category and Asset G/L Account Sort by Asset Description Report assets on return using sub-categories The new level of detail should make it easier to identify assets for sub-category reporting Example: Break out the computer components of a digitally-controlled extruder from the heavy equipment portion. Break out the attached conveyor on this same piece of equipment

21 2014 IPT Property Tax Symposium 21 QUESTIONS and DISCUSSION