Repair Regulations and your 2013 Tax Returns What You Need to Know Presenter: Roger Upton

Transcription

1 Repair Regulations and your 2013 Tax Returns What You Need to Know Presenter: Roger Upton Who We Are We re made up of tax, construction, and engineering professionals. Years of experience: Cost Segregation Studies since D energy efficiency certifications since 2006 Commercial Property Owners Engineers and Architects for Government owned buildings Repair and Retirement Studies since 2004 Research and Development Credits = over 9,000 Studies completed, along with over 2,800 Form 3115s prepared, since

2 Today s Agenda Why are we here today? Current Status of the Tangible Property Regulations Unwinding the GAA election Making a Late Partial Disposition Election The new Form Reduced Filing Requirement for Small Taxpayers The 3 Safe Harbors Why are we here today? Rev. Proc issued 2/28/14 This revenue procedure allows a late partial disposition election under Prop. Reg (i)-8 or a revocation of a general asset account election under 1.168(i)-1T or Prop. Reg (i)-1 to be treated as a change in method of accounting for a limited period of time. Why the limited period of time? Normally, tax elections can only be corrected by amending returns. The Service is allowing taxpayers to use Form 3115 for these two elections instead of having to amend returns for 2012 &

3 CURRENT STATUS OF THE TANGIBLE PROPERTY REGULATIONS Rev. Proc provides the procedures by which a taxpayer may change to the methods of accounting provided in 1.167(a)-4 and 1.168(i)-7 of the Income Tax Regulations, 1.167(a)-4T, 1.168(i)-1T, 1.168(i)-7T, and 1.168(i)-8T of the temporary regulations, and 1.168(i)-1, 1.168(i)-7, and 1.168(i)-8 of the proposed regulations. This revenue procedure also allows a late partial disposition election under Prop. Reg (i)-8 or a revocation of a general asset account election under 1.168(i)-1T or Prop. Reg (i)-1 to be treated as a change in method of accounting for a limited period of time. 12 Regulation references in the first paragraph! CURRENT STATUS OF THE TANGIBLE PROPERTY REGULATIONS TEMPORARY REGULATIONS issued in December 2012, which apply for tax years beginning in 2012 and 2013 provides the procedures by which a taxpayer may change to the methods of accounting provided in 1.167(a)-4 and 1.168(i)-7 of the Income Tax Regulations, 1.167(a)-4T, 1.168(i)-1T, 1.168(i)-7T, and 1.168(i)-8T of the temporary regulations, and 1.168(i)-1, 1.168(i)- 7, and 1.168(i)-8 of the proposed regulations. This revenue procedure also allows a late partial disposition election under Prop. Reg (i)-8 or a revocation of a general asset account election under 1.168(i)-1T or Prop. Reg (i)-1 to be treated as a change in method of accounting for a limited period of time. 3

4 CURRENT STATUS OF THE TANGIBLE PROPERTY REGULATIONS FINAL REGULATIONS issued in September, 2013 Apply for tax years beginning in 2014, but can be applied to 2012 and 2013 provides the procedures by which a taxpayer may change to the methods of accounting provided in 1.167(a)-4 and 1.168(i)-7 of the Income Tax Regulations, 1.167(a)-4T, 1.168(i)-1T, 1.168(i)-7T, and 1.168(i)-8T of the temporary regulations, and 1.168(i)-1, 1.168(i)-7, and 1.168(i)-8 of the proposed regulations. This revenue procedure also allows a late partial disposition election under Prop. Reg (i)-8 or a revocation of a general asset account election under 1.168(i)-1T or Prop. Reg (i)-1 to be treated as a change in method of accounting for a limited period of time. CURRENT STATUS OF THE TANGIBLE PROPERTY REGULATIONS PROPOSED REGULATIONS (aka Partial Disposition Rules) issued in September, 2013 Apply for years beginning in 2014 but see below provides the procedures by which a taxpayer may change to the methods of accounting provided in 1.167(a)-4 and 1.168(i)-7 of the Income Tax Regulations, 1.167(a)-4T, 1.168(i)-1T, 1.168(i)-7T, and 1.168(i)-8T of the temporary regulations, and 1.168(i)-1, 1.168(i)-7, and 1.168(i)-8 of the proposed regulations. This revenue procedure also allows a late partial disposition election under Prop. Reg (i)-8 or a revocation of a general asset account election under 1.168(i)-1T or Prop. Reg (i)-1 to be treated as a change in method of accounting for a limited period of time. 4

5 Current Status of the Tangible Property Revenue Procedures Temporary Regulations use Rev. Proc & = 19 Method Changes Final Regulations use Rev. Proc & = approximately 30 Method Changes (!) Proposed Regulations per the IRS, the final Regulations are likely to be out in late April or early May, with the Revenue Procedure to follow. Book Now for a Summer CPE Session! Once the Proposed Regs and finalized and their related Procedures are issued (hopefully early this Summer) we will have a great, 2 hour Free CPE session that we will be giving to our CPA clients contact us Now to get your firm on our Summer Tour! Why do this in the Summer? So you have time to mine your clients for opportunities! 5

6 Unwinding the GAA Election Starting in 2012, the IRS is allowing taxpayers to dispose of retired/removed/remodeled parts of their building (Great Tax Savings Opportunity for clients!) To incorporate this change into the current law, the IRS decided to fit this change into the GAA section of the Code. But there were two issues with GAA -the pre-2012 GAA rules did not allow for partial dispositions. -prior to 2012, taxpayers did not elect GAA for any buildings So, the Temporary Regulations revised the GAA rules to allow for the both partial dispositions and GAA elections for buildings. Unwinding the GAA Election The IRS now realizes that the Temporary Reg. rules are both confusing and cumbersome. So Rev. Proc has reversed the changes made by the Temporary Regulations. The good news from this is we no longer have to make GAA elections. 6

7 Unwinding the GAA Election The bad news is that by reversing the Temporary Reg. changes, starting in 2014 partial dispositions will not be allowed for GAA assets. Many taxpayers who placed buildings in GAAs to take advantage of the Temporary rules will want to revoke this election by the due date of their 2014 tax returns. MS Consultants is here to help! We will be ing all of today s participants a boilerplate Form 3115 for this unwinding election that you can use for your clients. Late Partial Disposition Election The Partial Disposition Election is from the Proposed Regulations. Replaces what the IRS was trying to accomplish with the GAA rules. Under the Proposed Regs., only applied to current year dispositions, for years beginning in 2014 PROBLEM #1 how do we recover previous tax year s Retired/Removed/Remodeled building components, especially with the GAA issues previously discussed? 7

8 Late Partial Disposition Election SOLUTION - Rev. Proc is now allowing the Proposed Reg. s Partial Disposition Rule to be applied to both current and prior years dispositions starting in However, the application of the Election to prior year dispositions is only available for tax years beginning in 2012 and 2013! In other words, the IRS is giving taxpayers a small window of opportunity to write off any replaced items that were incurred in previous tax years. Late Partial Disposition Election PROBLEM #2 The IRS wants us to use the Partial Disposition Rules from Proposed (not final) Regs, without any Procedures for guidance! And the Treasury has informed us that they do not anticipate Final Regs and Procedures till late April or May. SOLUTION Extend the tax returns! Gives you time to identify all of your client opportunities, determine the cost basis of the Replaced/Removed/ Remodeled building components, and review the final guidance from the IRS (aka client selling points on why you are extending) Or you can roll the dice by using the guidance in Rev. Proc

9 Late Partial Disposition Election EXAMPLE Taxpayer buys a building in In 2010, they replace the original roof, and capitalize the replaced roof. The taxpayer has been depreciating 2 roofs since The taxpayer can make a Late Partial Disposition Election on their 2013 tax return to write off the removed original roof. This Late Election cannot be made after 2013! OPPORTUNITIES Replaced roofs, HVAC units, demolished tenant spaces, and Remodeling of - clients own space, - auto dealerships, - hotels, - restaurants Late Partial Disposition Election REAL LIFE SITUATION In 2013, Fast Food Restaurant Owner performed the Franchisor s required re-imaging of their location. Owner s share of the re-imaging costs was $390K. Original tax answer take $250K Sec. 179 deduction, and write off the remainder over 15 years as Qualified Restaurant Property. Owner s 2013 tax savings is over $100K 9

10 Late Partial Disposition Election Our Solution as part of the re-imaging, the original roof was removed. We had cost segged the original restaurant, and knew the replaced roof s remaining tax basis was $45,000. By electing the partial disposition rule, the taxpayer can now write off the $45K, along with the $8K it cost to remove the roof. These ideas, along with some other MS Consultant ideas, increased the Restaurant owner s 2013 tax savings an additional $42K!! New Form 3115 Reduced Filing Requirement for Small Taxpayers Rev. Proc A small taxpayer is a taxpayer with average annual gross receipts of $10 million or less during the preceding three tax years. The reduced filing requirements only exempt filers from completing certain lines of Form 3115 and do not affect the detailed computation of any required Code Sec. 481(a) adjustment. 10

11 New Form 3115 Reduced Filing Requirement for Small Taxpayers (A) The identification section of page 1 (above Part I); (B) The signature section at the bottom of page 1; (C) Part I, line 1(a); (D) Part II, all lines except lines 11, 13, 14, 15, and 17; (E) Part II, line 13, if the change is to depreciating property; (F) Part IV, lines 25 and 26; and (G) Schedule E, if applicable. Pulling it all together Do I need to capitalize an expenditure? APPLY YOUR SAFE HARBORS Routine Maintenance De Minimis Small Taxpayer Building IF THE SAFE HARBORS DO NOT APPLY, THEN DETERMINE YOUR UNIT OF PROPERTY Buildings Plant Property Network Assets Equipment DETERMINE IF THE EXPENDITURE IS AN IMPROVEMENT TO THE UNIT OF PROPERTY Betterment Restoration Adaptation 11

12 Safe Harbor Filing Requirements ROUTINE MAINTENANCE SAFE HARBOR ongoing activity to keep the Unit Of Property in ordinary and efficient operating condition that the taxpayer expects to perform more than once during If Equipment, the ADS taxable life of the UOP. If Building, over a ten year period Does not have to conform with financial statements Has to be your wear and tear not the previous owners + Safe Harbor Filing Requirements ROUTINE MAINTENANCE SAFE HARBOR Can be applied in 2013 It is an accounting method change that requires Sec. 481 adjustment For more guidance - Rev. Proc , Method Change number 184, Reg and 1.263(a)-3 OPPORTUNITIES Manufacturers, Vehicle Fleets, Resurfacing Parking Lots + 12

13 Safe Harbor Filing Requirements SMALL TAXPAYER BUILDING SAFE HARBOR A Qualifying Small Taxpayer can elect to deduct improvements to an Eligible Building property if the total expenditures are less than a certain limit: Small Taxpayer gross receipts of $10M or less Eligible Building unadjusted basis of $1M or less Expenditure limit all work performed to the building cannot exceed the lesser of $10,000, or 2% of the building s unadjusted basis + Safe Harbor Filing Requirements SMALL TAXPAYER BUILDING SAFE HARBOR Under this test, all amounts (including those written off as repairs due to other Safe Harbors) are included to determine the amount or repairs incurred If the safe harbor amount is exceeded, then this particular safe harbor is not applicable to the amounts spent during the year for that specific property 13

14 Safe Harbor Filing Requirements SMALL TAXPAYER BUILDING SAFE HARBOR Can be applied in 2013 No required accounting method election For more guidance - Reg (a)-3(h) Reg (a)-3(r ) OPPORTUNITIES Self rental taxpayers like a medical practice, real estate owners with less expensive buildings + Safe Harbor Filing Requirements DE MINIMIS RULE taxpayers may expense Purchased items if they have Audited or government required financials written policy regarding capitalization must be in place at the beginning of the year and New Floor Test = $5,000 or less per individual item, and must be the same policy that is used for financial statement purposes. Remember This Safe Harbor is Elected Annually, & Must Be made on a timely filed original Federal Tax Return 14

15 Safe Harbor Filing Requirements DE MINIMIS RULE taxpayers may expense Purchased Items if they have Do not have Audited or government required financials written policy regarding capitalization must be in place at the beginning of the year and New Floor Test = $500 or less per individual item, and must be the same policy used for the taxpayer s books Remember This Safe Harbor is Elected Annually, & Must Be Made on a timely filed original Federal Tax Return. Safe Harbor Filing Requirements DE MINIMIS RULE Can be applied in 2013, if your accounting method was in place by the beginning of the year If following the Temporary Regs, it is a change in accounting method method number 169 If following the Final Regs, it is an election, not a method change 15

16 Safe Harbor Filing Requirements DE MINIMIS RULE De Minimis Capitalization Policy For tax years beginning, and forward, (Name of Business) elects to treat as an expense for both book and income tax purposes property with a cost of $ or less, including items that have a useful life of 12 months or less. It is (Name of Business s) intention that this election complies with the IRS Section 1.263(a)-1(f) de minimis safe harbor election. (Officer Signature) (date) Need a Cost Seg before your Filing Deadline? We can help! Even with the deadline crunch approaching! 16

17 What Buildings are Eligible? New buildings under construction Existing buildings undergoing renovation Purchases of existing properties Buildings purchased or constructed since 1987 Inherited buildings, including Sec. 754 Step Ups Usually the building s cost has to cost more than $600,000 (unless specialized like a fast food restaurant or medical), or build outs that exceed $300,00 ALL WE NEED TO GIVE YOU A PROPOSAL IS TAX DEPRECIATION RECORDS ADDRESS FOR THE BUILDING If the building was constructed, the construction cost records (if available). Our proposals and tax discussions are free 17

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