Like-Kind Exchange and Fixed Asset Conference. Fixed Asset Tax Related Opportunities including Alternative Energy Incentives October 28, 2010

Transcription

1 Like-Kind Exchange and Fixed Asset Conference Fixed Asset Tax Related Opportunities including Alternative Energy Incentives

2 Agenda Fixed Asset Tax Depreciation Repairs and Maintenance Alternative and Renewable Energy Incentives This document was not intended or written to be used, and it cannot be used, for the purpose of avoiding U.S. federal, state or local tax penalties. This includes penalties that may apply if the transaction that is the subject of this document is found to lack economic substance or fails to satisfy any other similar rule of law. This document has been prepared pursuant to an engagement between PricewaterhouseCoopers LLP and its Client and is intended solely for the use and benefit of that Client and not for reliance by any other person. 2

3 Fixed Asset Tax Depreciation Acceleration Opportunities 3

4 Cost Segregation and Fixed Asset Depreciation Issue / Action Fixed asset classifications may not be optimal due to misclassification of tangible personal property as real property or case law changes, resulting in under-depreciation for tax purposes Companies should strive for proper classification of assets in the year placed in service on an originally filed tax return Revenue Procedure provides guidance to reclassify these assets and allow for catch-up depreciation considered a change in accounting method An in-depth review allows a company to document and support specific asset reclassifications from 39-year real property to 5- year and 7-year personal property and 15-year land improvements Benefits Catch-up deduction in Year 1 via a Section 481(a) Adjustment, utilizing Form 3115, Application for Change in Accounting Method No amended returns required Established cost segregation methods are recognized by the IRS, through its Cost Segregation Audit Techniques Guide Accurate reporting of book-tax differences for complete deferred tax basis reporting Maximize and capture often missed opportunities such as bonus depreciation in and , and the 15-year recovery period for leasehold improvements from

5 Why are Fixed Assets Misclassified? Companies frequently misclassify tangible personal property (IRC Section 1245) as real property (IRC Section 1250) resulting in less than optimal depreciation deductions. The following are some of the reasons fixed assets could be misclassified: Constructed assets are accounted for based on limited invoice detail (and tax personnel unable to identify personal property from construction invoices) Engineering/facilities personnel are not knowledgeable about regulatory definitions for personal property Purchased assets are pooled, leading to difficult asset tracking Fixed assets are often characterized and recorded in the company's fixed asset ledger with minimal input provided by the tax department Enterprise Resource Planning systems struggle to provide accurate reporting information resulting in the tax accounting for fixed assets being routinely handled off-line with inadequate system support. 5

6 Fixed Assets Legislative Update Fixed Asset Depreciation (Revenue Procedure ) Allows for automatic accounting method change of depreciable lives for assets for which depreciation claimed was less than the allowable amount. Catch-up in year of change the amount of missed depreciation from the date the asset was placed in service is deducted in the current year. Examples include an asset method change from non-residential real property (39- year) to MACRS asset class 28.0, Manufacture of Chemicals and Allied Products (5- year). Bonus Depreciation The Economic Stimulus Act of 2008, American Recovery and Reinvestment Act of 2009 and Small Business Jobs Act of 2010 temporarily re-enact the additional 50% first-year depreciation deduction for qualified property and leasehold improvements placed in service from January 1, 2008 to December 31, Qualified Leasehold Improvement Property The Emergency Economic Stabilization Act of 2008 and American Recovery and Reinvestment Act of 2009 extend the 15-year recovery period for Qualified leasehold improvement property placed in service from October 22, 2004 to January 1,

7 Bonus Depreciation Section 168(k) allows a taxpayer to take advantage of 50% bonus depreciation for qualified properties and leasehold improvements: Property must be acquired by the taxpayer after January 1, 2008 and before December 31, 2010 Property must be placed in service before January 1, 2011 (excluding LPPP) Taxpayer must be the original, or first, user of the property Must be Qualified Property as follows: MACRS property with a GDS recovery period of 20 years or less Water Utility property Computer Software other than Sec. 197 property Qualified leasehold improvement property ( QLHI ) Written Binding Contract Considerations. 7

8 Bonus Depreciation Planning Considerations Other provisions that may potentially reduce, offset or eliminate the benefit of bonus depreciation: 460 accelerated revenue recognition 199 reduces QPAI and taxable income - Trading permanent for timing difference 263A additional depreciation capitalized into inventory/property Expiring NOLs or other expiring tax attributes Taxpayer's foreign tax credit position. 8

9 Qualified Leasehold Improvement Property The American Jobs Creation Act of 2004 and subsequent Acts provide that qualified leasehold improvement property placed in service after October 22, 2004 and before January 1, 2010, is 15-year MACRS property (straightline) with a 15-year recovery period (Code Sec. 168(e)(3)(E)(iv)). For the leaseholds to qualify, the following must apply: Improvements are made under or pursuant to a lease either by the lessee (or sub lessee) or the lessor, of that portion of the building to be occupied exclusively by the lessee (or sub lessee); The improvements are placed into service more than 3 years after the date that the building was first placed into service; and The improvements are section 1250 property, but are not attributable to the enlargement of the building (expansion), to any elevator or escalator, to any structural component benefitting a common area, or to the internal structural framework of the building. 9

10 Repairs and Maintenance Analysis 10

11 Repairs and maintenance What taxpayers sometimes do Optimal tax method How to implement How to identify Capitalize routine repairs and maintenance expenditures Currently deduct repairs costs paid or incurred during the taxable year Automatic method change Review current policies regarding how repair and maintenance costs are treated for federal income tax purposes and identify current year repair deductions 11

12 Repairs and Maintenance Companies may generally deduct the ordinary and necessary expenses paid or incurred during the taxable year including incidental repairs (Reg. Sec ). Companies should deduct the costs of incidental repairs incurred in connection with the routine repair and maintenance of their assets to the extent such costs: Do not materially add to the value of the property Do not appreciably prolong the useful life of the property, but keep it in an ordinarily efficient operating condition Are not in the nature of replacements that arrest deterioration and appreciably prolong the life of the property Do not adapt the property to a new and different use These costs keep an asset in operating capacity versus put an asset into such capacity. Many companies follow their book method of capitalizing insignificant repair expenditures and depreciating such costs over the recovery period of the respective asset(s). 12

13 Tax Repairs: Re-Proposed Tangible Regulations Overview (Regulation 1.263(a)-1 through 1.263(a)-3): The IRS issued re-proposed regulations March 7, 2008 for amounts paid to acquire, produce or repair tangible property, addressing many issues including: - Materials and Supplies - De minimis rule - Unit of Property (UOP) - Material increase in value (betterment, etc.) - Repair allowance When finalized, the re-proposed regulations are expected to be effective prospectively 13

14 Tax Repairs: Re-Proposed Tangible Regulations, continued Plan of Rehabilitation eliminated More liberal view of repairs via proposed regulation examples: - Asbestos removal and replacement with similar insulation - Retail store re-branding and periodic layout construction ( 1250 property) - Roof replacement (as long as not a betterment ) - Turbine blade replacements within a steam turbine 14

15 Repairs Method Changes Rev Proc Updates and modifies RP Permits repairs method changes to be filed automatically Separates repairs method changes into two separate automatics: - Repairs - Retirements - Two Forms Separate 481(a) adjustments 15

16 Repairs vs. Capitalization : Tier I issue Designated as an Emerging Issue in May (Public September 2009) Significant increase in CAMs since Dec 2008 Substantial Sec. 481 (a) adjustments Unit of Property (UOP) key issue Finally something published - Industry Director Directive #1 (1/22/10) - Industry Director Directive #2 (1/22/10) What can we expect? 16

17 Planning Opportunities Repairs & Maintenance Examples of repair and maintenance expenditures to which the Taxpayer's proposed method change relates to include, but are not limited to: Property Type Building and Structural Components Leasehold Improvements Land Improvements Section 1245 Assets Examples Roof repairs Facilities and other repairs HVAC Repairs 2 nd generation costs Office or grocery remodel Parking lot and pavement repairs Retaining wall and fence repairs Drainage repairs Repairs to Section 1245 assets October

18 Repairs and Maintenance Next Steps To address accounting for repairs and maintenance costs for federal income tax purposes, taxpayers should: Review current policies regarding how repair and maintenance costs are treated for federal income tax purposes and identify current year repair deductions Consider filing an automatic application for a change in accounting method to change from capitalizing and amortizing to currently deducting incidental costs. 18

19 Alternative and Renewable Energy Incentives 19

20 Green Incentive Opportunities for Your Business Increasingly companies are going green to reduce costs, manage risks, and generate new revenue opportunities. Tax credits/deductions incentivize renewable investments and energy saving improvements: Renewable Energy Property Investment Tax Credits ( ITC ) Renewable Energy Production Tax Credits ( PTC ) Election to claim PTC in lieu of PTC Grants in lieu of energy credits Section 179D Energy Efficient Commercial Building Deduction A variety of other incentives exist as well: Alternative fuel credits Alternative vehicle credits Specialized credits carbon sequestration State and local incentives are very widespread 20

21 Renewable energy investment tax credits and energy production tax credits Wind (placed in service before 2013) Biomass (open- and closed-loop) (before 2014) Geothermal (before 2014) Hydropower (before 2014) Marine (waves and tides) (before 2014) Municipal solid waste and landfill gas (before 2014) Refined coal including steel industry fuel (before 2010) Solar (through 2016) Geothermal (either 10% without placed in service date, or 30% credit through 2013) Fuel cell (through 2016, capped at $1,500 per half-kilowatt of capacity) Microturbine (defined as less than 2,000 kilowatts) (through 2016, capped at $200 per kilowatt of capacity) Small wind (defined as 100 kilowatts or less) (30% credit through 2016, with no credit cap for tax years after 2008) Combined heat and power systems (10% credit through 2016) 21

22 Section 179D Energy-efficient commercial building deduction Under Section 179D, the costs of energy efficient commercial building property placed in service before 2014 are allowed as a current deduction for otherwise capital costs: Tax deduction of up to $1.80 per square foot is available, for buildings that achieve a 50% energy savings target Energy efficient commercial building property includes Building Envelope, Interior Lighting, or Heating and Cooling systems The basis of any energy efficient commercial building property must be reduced by the amount of the deduction Notice , provides where energy efficient commercial building property is owned by a federal, state or local government, the deduction may be allocated to the designer of the property, not the owner The Marginal Abatement Cost of Carbon Calculations of the marginal abatement cost of carbon (MACC) show that many building energy efficiency and lighting projects are double winners because they Reduce carbon emissions and energy usage, while also Saving costs Since many of these projects also qualify for Section 179D, evaluating them on an after-tax basis makes the return on investment attractive 22

23 Election to claim ITC in lieu of PTC The American Recovery and Reinvestment Act (ARRA) provides an election allowing qualified Section 45 production tax credit (PTC) facilities (other than solar, refined coal, or Indian coal) to elect the 30 percent Section 48 investment tax credit (ITC) in lieu of the Section 45 production credit. The election applies to the eligible basis of depreciable (or amortizable) qualified Section 45 property placed in service between January 1, 2009 and December 31, 2013 (December 31, 2012 for wind facilities) Qualifying property must be tangible personal property or other tangible property not including a building or its structural components if such property is integral to the facility Consideration: Day-one tax benefits vs. year-over-year section 45 credits 23

24 Grants in lieu of energy credits ARRA creates a new grant program option in lieu of the Section 45 energy production credit or the Section 48 energy investment credit. The grant amount is 30 percent of the depreciable or amortizable basis of the energy property in the case of wind, biomass, Section 45 geothermal, solar, landfill, gas, trash, hydro, marine, qualified fuel cell, or small wind property The grant amount is 10 percent for microturbine, combined heat and power, small irrigation, section 48 geothermal, and geothermal heat pump The basis of the underlying property must be reduced by 50 percent of the amount of the grant The grant program will be administered by the Treasury Secretary The grant program is uncapped any qualified application will be honored 24

25 Grant in lieu of energy credits General application requirements The grant in lieu of credit application is roughly 20 questions long including: Type of entity (corporation, partnership, etc.) Remember: Partnerships that include an exempt entity (government, 501(c)) are not eligible for a grant Type of energy property Cost basis of energy property Remember: These costs require attestation Basis determined under federal tax rules Jobs data full/part-time, construction and operational phases 25

26 Grant in lieu of energy credits Attestation requirements For properties that have a cost basis in excess of $500,000 applicants must submit an independent accountant s certification attesting to the accuracy of all costs claimed as part of the basis of the property. If the expected grant amount is less than $1 million, then an agreed-upon procedures (AUP) attest engagement is acceptable If the expected grant amount is $1 million or more, then a positive assurance attest engagement is required Both attestation engagements should be performed under the attestation standards issued by the American Institute of Certified Public Accountants Attestation is performed on management s assertion regarding the eligibility of the costs Various resources are available to assist engagement teams in this area. Costs are for tangible property (not including a building) which is an integral part of the facility Only the portion of the facility that is the specified energy property is taken into account in computing the cost basis. 26

27 Grant in lieu of energy credits Timeline and key dates for energy property eligibility Begin construction and placed in service To qualify, construction must begin on the eligible energy property installation in 2009 or 2010 Construction requires physical work of a significant nature, much like bonus depreciation Safe harbor: 5% of total project costs incurred As long as construction begins in , the energy property need not be placed in service until the given property s specified statutory date Applications must be received by October

28 Contact Information Stuart Finkel Partner New York, NY (646)

29 pwc.com This document is for general information purposes only and should not be used as a substitute for consultation with professional tax advisors. This document was not intended or written to be used, and it cannot be used, for purposes of avoiding U.S. federal, state or local tax penalties PricewaterhouseCoopers LLP (US). All rights reserved. PricewaterhouseCoopers refers to PricewaterhouseCoopers LLP, a Delaware limited liability partnership, or, as the context requires, the PricewaterhouseCoopers global network or other member firms of the network, each of which is a separate and independent legal entity.