How to Use Tax Strategies to Offset Dealership Construction Costs Six-figure offsets are possible if you plan carefully

Transcription

1 How to Use Tax Strategies to Offset Dealership Construction Costs Six-figure offsets are possible if you plan carefully With Stephen Bedell, CPA of Crowe Horwath LLP Moderated by Mike Bowers, of DealersEdge

2 Stephen Bedell, CPA of Crowe Horwath LLP Stephen Bedell is Crowe's Retail Dealer Tax Practice Leader. Mr. Bedell is a CPA who works exclusively with automobile dealerships on a broad range of business planning and tax consulting issues, as well as profitability analysis, business liquidation and sales support, cost segregation studies, state and local tax support and personal tax planning. He has presented at various dealership tax seminars nationwide, including those hosted by State Dealer Associations, Associations of CPA s, Leasing Associations and Car Rental Associations.

3 Tax Planning for Dealership Facility Expenditures June 23, 2011 Presented By: Stephen Bedell

4 Under U.S. Treasury rules issued in 2005, we must inform you that any advice in this communication to you was not intended or written to be used, and cannot be used, to avoid any government penalties that may be imposed on a taxpayer 2011 Crowe Horwath LLP 4

5 Introduction to Crowe and the Retail Dealer Practice Crowe Horwath LLP is a top ten public accounting and consulting firm with over 25 offices, coast to coast, serving clients in all 50 States. We have a dedicated Retail Dealer practice with more than 70 professionals who spend 100 percent of their time working with Retail Dealers. Crowe s Retail Dealer practice manages over 400 relationships representing 600 dealerships Crowe Horwath LLP 5

6 Presenters Stephen Bedell, CPA: Stephen Bedell is Crowe's Retail Dealers Tax Practice Leader. Mr. Bedell is a CPA who works exclusively with automobile dealerships on a broad range of business planning and tax consulting issues, as well as profitability analysis, business liquidation and sales support, cost segregation studies, state and local tax support and personal tax planning. He has presented at various dealership tax seminars, including those hosted by the State Dealer Associations, Association of CPA s, Leasing Associations and Car Rental Associations. Professional and Community Activities and Certifications American Institute of Certified Public Accountants Ohio Society of Certified Public Accountants Tax committee member for Auto Team America, a consortium of 13 CPA firms who specialize in dealerships nationwide Executive Committee Member, Board of Trustees and Vice President for the Columbus Children s Theatre Board of Directors Columbus Country Club Education Bachelor of Science, Accounting, University of Dayton 2011 Crowe Horwath LLP 6

7 Goals for today s discussion Analyze expenditures relating to dealership facilities Discuss tax planning techniques that may apply to the various expenditures Focus on the value provided by the tax planning Discuss the latest relevant tax law changes Note proposed or potential tax law changes on the horizon 2011 Crowe Horwath LLP 7

8 Summary of Discussion Points Tax Planning Opportunities Current status of cost segregation application to new construction, purchased facilities renovations, and existing facilities Status of bonus depreciation and Section 179 expensing Property with a construction period spanning pre and post September 9, 2010 Energy efficiency Are there tax benefits for commercial buildings? Treatment of expenditures as repairs expense vs. capitalized costs Qualified leasehold improvements and qualified retail improvements Manufacturer facility image upgrade payments Selection of entity for improvement expenditures Real property tax assessment appeals 2011 Crowe Horwath LLP 8

9 Summary of Discussion Points Phases of Facility Expenditures Initial phase New construction Purchased facilities Repairs and maintenance Improvements Renovations Image upgrades Real property taxes 2011 Crowe Horwath LLP 9

10 Cost Segregation Studies and Related Planning Well known tax planning strategy Focuses on identifying property units embedded in significant capital projects Assigns the shortest tax life possible to the cost of these units to accelerate tax deductions i.e. assign assets 5, 7, and 15 year depreciation lives rather than 39 Accelerated deductions defer taxes and allow for: Improved cash flow Net present value earnings on the deferral Typical automobile dealership studies can average around 30% - 40% cost allocation to shorter lives. IRS acceptable tax planning, but can be scrutinized for improper allocations, unfounded estimates or averages used, etc Crowe Horwath LLP 10

11 Cost Segregation Studies and Related Planning Common areas of application Newly constructed facilities Purchased facilities Large renovations Look-Back on buildings constructed, purchased or renovated in prior tax years 2011 Crowe Horwath LLP 11

12 Cost Segregation Studies and Related Planning Relevant current tax law Bonus depreciation rules Taxpayers can deduct 100% of their qualifying assets placed in service after September 8, 2010 and before January 1, % bonus continues after that until December 31, Qualifying assets are ones that: Meet the general requirements under the bonus depreciation rules established in prior years Are not subject to a binding contract entered into prior to January 1, 2008 Bonus depreciation at 100% provides additional and significant benefits to Cost Segregation Studies For Example, on $200,000 of qualifying 15 year assets With no bonus - $10,000 of initial year deduction With 50% bonus - $105,000 of deduction initial year With 100% bonus - $200,000 of deduction in the initial year! 2011 Crowe Horwath LLP 12

13 Cost Segregation Studies and Related Planning Relevant current tax law continued Recently the IRS clarified treatment for self-constructed assets started prior to September 9, 2010, but not completed or placed in service until after September 9, Rev. Proc allows 100% bonus depreciation for qualifying components of a project acquired or constructed after September 9, Applicable taxpayers that want to take advantage of this scenario need to attach a statement to their timely filed tax return to elect this. Election should indicate the assets covered by the election 2011 Crowe Horwath LLP 13

14 Cost Segregation Studies and Related Planning Relevant current tax law continued In some cases Section 179 expensing may come into play The recent tax law changes from the end of 2010 adjusted the Section 179 limits to: $500,000 expensing allowed with a phase-out starting at $2,000,000 for 2010 and 2011 $125,000 expensing allowed with a phase-out starting at $500,000 for 2012 It is important to remember that for S-Corporations and Partnerships, the Section 179 limitations are measured at both the entity and shareholder/partner level. It is also important to note that many states do not allow bonus depreciation and also limit Section 179 deductions for their tax reporting. Plan accordingly for this potential add-back for state tax purposes 2011 Crowe Horwath LLP 14

15 Cost Segregation Studies and Related Planning Additional areas of analysis Along with looking at facility costs for allocation in a cost segregation study, cost recovery specialists can also look into related areas of potential savings Embedded costs currently deductible Property tax minimization Sales tax minimization Federal credits and incentives analysis State and local credits and incentives analysis Property insurance minimization The right professional should be able to help you in analyzing all of these areas Provide tax savings Piece of mind 2011 Crowe Horwath LLP 15

16 Cost Segregation Studies and Related Planning Benefit recap for cost segregation studies Accelerated tax deductions leading to Reduced taxes resulting in Increased cash flow allowing for Time value benefit on cash retained 2011 Crowe Horwath LLP 16

17 Cost Segregation Studies and Related Planning Studies provided by an overall cost recovery specialist can provide: Additional analysis of potential savings areas both tax and other expenditures Assurance on various aspects of facility costs construction and going forward Minimization of audit risk The IRS Cost Segregation Audit Techniques Guide notes that a quality cost segregation study report: Identifies the preparer, their credentials and expertise Always describes the methodology used and details steps to determine classifications 2011 Crowe Horwath LLP 17

18 Energy Efficient Commercial Building Deduction The Energy Policy Act (EPACT) of 2005 Pub. L. No enacted Internal Revenue Code Section 179D: There shall be allowed as a deduction an amount equal to the cost of energy efficient commercial building property placed in service during the taxable year. The deduction is capped at $1.80/Sq Ft of building, less any deductions taken in prior years. For property placed in service in 2006 through * * Extended through 2013 by the Energy Improvement and Extension Act of 2008 May be applicable to new construction, renovations or improvements that have a focus on energy efficiency standards 2011 Crowe Horwath LLP 18

19 Energy Efficient Commercial Building Deduction Building must be located within the United States and must be within the scope of ASHRAE (i.e. commercial or high rise residential) Eligible property must be part of Internal Lighting System Heating, Cooling, Ventilation, Hot Water Systems Building Envelope System 2011 Crowe Horwath LLP 19

20 Energy Efficient Commercial Building Deduction Must be certified as part of a plan to reduce total annual energy and power costs by 50% or more in comparison to ASHRAE (as in effect on April 2, 2003) baseline building. Calculation of energy consumption must be prepared on qualifying software, and by qualifying individual. More information can be obtained at the Department of Energy website: Crowe Horwath LLP 20

21 Energy Efficient Commercial Building Deduction Partial deduction allowed for each of the three building subsystems: Interior Lighting Heating Cooling, Ventilation, Hot Water Heating Building Envelope Calculation of the deduction for any one systems currently is based on a reduction in the total annual energy and power costs for the building of either 16.67% as compared to a baseline ASHRAE building, or a 10% reduction relating to the envelope system and 20% reduction in the lighting and HVAC systems. The deduction for each subsystem is capped at $.60/Sq Ft of building vs. $1.80/Sq Ft for the total deduction Crowe Horwath LLP 21

22 Energy Efficient Commercial Building Deduction Interim Lighting Provision Currently only applicable for lighting property installed before the date of the issuance of Regs. Prescriptive rule vs. energy consumption Deduction is capped on a sliding scale from $.30 to $.60 / Sq Ft for Lighting Power Density reductions below ASHRAE of 25% to 40%. (See Tables or , not including additional interior lighting power allowances) For the system to be eligible the mandatory lighting controls of plus bi-level switching must also be included. No need for energy modeling under the interim rules Crowe Horwath LLP 22

23 Energy Efficient Commercial Building Deduction Example Regional Auto Retailer 2008 Lighting upgrades to 10 stores. Avg. 30,000 sq ft per store Total Capital Expenditure = $750,000 Total 179D deduction = $180,000 ($.60 x 30,000 sq ft x 10 stores) Net Present Value Benefit = $40, % capex 2011 Crowe Horwath LLP 23

24 Energy Efficient Commercial Building Deduction Required Documentation (to be provided by engineer) Documented Energy Reduction Plan Notice to Owner including the following pieces of documentation: Certification document including calculations of the energy and power consumption of both the proposed building and the baseline building using qualifying software and prepared by a qualified individual Inspection document confirming the energy property is actually installed in the proposed building. Explanation to the building owner regarding the energy efficiency features of the building and its projected annual energy costs Crowe Horwath LLP 24

25 Capitalization vs. Repairs Expense For Facility Expenditures Determining the proper treatment for facility expenditures as repairs expense or capitalized costs has historically been challenging for taxpayers The U.S. Department of the Treasury proposed regulations to clarify treatment of capitalization vs. repair expenditures These regulations are not final yet, so they cannot be relied upon for a tax position However, capitalized repair expenditures can currently be analyzed in detail under the current legal framework Analysis can help taxpayers determine if they have costs that should be treated as currently deductible repairs Crowe Horwath LLP 25

26 Capitalization vs. Repairs Expense For Facility Expenditures If a taxpayer s analysis finds that past and/or current capitalized expenditures meet the criteria to be expensed currently as repairs, they need to file for an accounting method change This change in accounting method will allow a taxpayer to get a 481(a) current year deduction for qualifying expenditures from prior years, as well as deducting current and future qualifying expenditures The IRS has delayed completion of the proposed Regs. several times and at last mention is looking to finalize them by the end of this summer Once the proposed regulations are finalized, taxpayers will not be allowed to request method changes under the current guidance Finalized Regs. may include a required cut-off method which would eliminate the ability to deduct qualifying expenditures from prior years Crowe Horwath LLP 26

27 Capitalization vs. Repairs Expense For Facility Expenditures Determining if a benefit exists Professional needs to apply numerous common law tests, doctrines, and standards to determine if expenditures are deductible repairs In simplified terms the taxpayer needs to determine if an expenditure: Materially adds value to the value of the property, or Appreciably prolongs the life of the property, or Adapts the property to a new or different use Meeting any of these criteria will result in the expenditure being a betterment of the property Betterments are not currently deductible and will need capitalized 2011 Crowe Horwath LLP 27

28 Capitalization vs. Repairs Expense For Facility Expenditures General approach to a capitalized repairs study Phase I Conduct a high-level review of the taxpayer s fixed assets and determine potential Phase II Conduct a capitalized repair study to determine in detail which expenditures past and current should be treated as currently deductible Also in this phase the professional can be looking for asset costs that can be moved to shorter lives Phase III Prepare an Application for Change in Accounting Method to allow for deduction of the qualifying expenditures. This can be an automatic change election in many situations A separate method change election would be needed for moving assets to shorter lives Phase IV Review expenditures in future tax years and apply tests to determine if deductible as repairs expense in that year. No election needed after the initial change 2011 Crowe Horwath LLP 28

29 Capitalization vs. Repairs Expense For Facility Expenditures Typical items that may qualify for deduction: Roof repairs or replacement HVAC replacement Lighting Electrical Plumbing Painting Lot repairs Components of manufacturer s image upgrade requirements 2011 Crowe Horwath LLP 29

30 Qualified Leasehold and Qualified Retail Improvements Qualified leasehold improvement property Certain improvements to the interior of a nonresidential building Improvements can be depreciated over a 15 year life (instead of 39 year) **QLI property is eligible for bonus depreciation** General criteria to qualify: Improvement must be Code Section 1250 property Made pursuant to a lease Portion of improved building is to be occupied only by the lessee The improvement is placed in service more that 3 years after the original building in service date Cannot be a related party lease 2011 Crowe Horwath LLP 30

31 Qualified Leasehold and Qualified Retail Improvements Qualified leasehold improvement property Continued QLI property does not include: Enlargement of the building Internal structural framework Any structural component that benefits the lessee s space Elevators or escalators QLI property can include: Heating, cooling and air handling equipment Internal non-load bearing walls Doors Ceilings Permanent light fixtures Electrical and plumbing systems 2011 Crowe Horwath LLP 31

32 Qualified Leasehold and Qualified Retail Improvements Qualified retail improvement property Certain improvements to the interior of a nonresidential building Improvements can be depreciated over a 15 year life (instead of 39 year) **QRI property is NOT eligible for bonus depreciation** General criteria to qualify: Improvements are in an area open to the public Area is used in retail trade business of selling tangible personal property The improvement is placed in service more that 3 years after the original building in service date Same rules as qualified leasehold improvements on what types of expenditure items are included and excluded 2011 Crowe Horwath LLP 32

33 Qualified Leasehold and Qualified Retail Improvements Summary of application for the improvement options If the improvements are made pursuant to a lease with an unrelated party and all of the criteria are met, then the taxpayer would most likely want the qualified leasehold improvement classification Allows 15 year depreciable life and bonus depreciation is applicable If the improvement is excluded from qualified leasehold improvements because there is a related party lease or other exclusion, it can still qualify as a retail improvement Allows 15 year depreciable life, but bonus depreciation is not applicable Some improvements can qualify as both qualified leasehold and qualified retail improvements The IRS ruled that these dual character improvements can take bonus depreciation 2011 Crowe Horwath LLP 33

34 Manufacturer Facility Upgrade Payments Contractual payments to induce the dealer to construct, renovate or improve a facility Contract terms and requirements, and payment amounts and timing, differ from manufacturer to manufacturer and sometimes dealer to dealer Payment Treatment IRS position Look at each plan individually to determine tax treatment 2011 Crowe Horwath LLP 34

35 Selection of Entity for Funding Construction and Improvements Who should own the improvements Legal contracts may dictate In cases where there are options, tax deductions and their deductibility should be considered Need to look at net income of the entity or individual that will be getting the tax deductions Need to consider passive loss rules and deduction limitations Need to consider basis rules and deduction limitations 2011 Crowe Horwath LLP 35

36 Real Property Tax Assessment Appeals What is a Real Property Tax Assessment Appeal? In general, it is an appeal by the taxpayer filed with the local taxing authority requesting a reduction in the taxable value used to determine the yearly real estate tax assessment The taxable value is typically determined considering the three approaches to value Income Sales comparison Cost In many cases the taxing authority can overlook important factors that reduce the value of the real property Building feature errors Present use adjustments Functional obsolescence based on excess utility costs and vacancy Market fluctuations in value External obsolescence based on the income and sales comparison approaches 2011 Crowe Horwath LLP 36

37 Real Property Tax Assessment Appeals It is up to the taxpayer or their hired consultant to evaluate and present the evidence for value adjustment in the form of an appeal Information important to completing an effective appeal request Access to proper sales comparisons Appraisal resources Understanding of valuing and reporting any errors determined in the assessment value Understanding of the appeals process and timing for filing and follow-up Differs from state to state and even tax regions within states Relationships with and knowledge of local tax authorities 2011 Crowe Horwath LLP 37

38 For more information, contact: Stephen Bedell, CPA For information on the issues critical to dealership accounting and operations, subscribe to our Dealership Flash e-newsletter at Crowe Horwath LLP is an independent member of Crowe Horwath International, a Swiss verein. Each member firm of Crowe Horwath International is a separate and independent legal entity. Crowe Horwath LLP and its affiliates are not responsible or liable for any acts or omissions of Crowe Horwath International or any other member of Crowe Horwath International and specifically disclaim any and all responsibility or liability for acts or omissions of Crowe Horwath International or any other Crowe Horwath International member. Accountancy services in Kansas and North Carolina are rendered by Crowe Chizek LLP, which is not a member of Crowe Horwath International. This material is for informational purposes only and should not be construed as financial or legal advice. Please seek guidance specific to your organization from qualified advisers in your jurisdiction Crowe Horwath LLP 2011 Crowe Horwath LLP 38