Generate Cash and Tax Savings from Current and Past Investments

Size: px

Start display at page:

Download "Generate Cash and Tax Savings from Current and Past Investments"

Rafe Mills
6 years ago
Views:

2 Generate Cash and Tax Savings from Current and Past Investments Nathan Clark Senior Director, BDO USA, LLP Parker Pieri Director of Finance, The Dwyer Group

3 Next to being shot at and missed, nothing is really quite as satisfying as an income tax refund. F. J. Raymond, humorist (

4 GENERATE CASH, SAVE TAXES Do you like paying more taxes than required? Anyone have difficulty getting a loan? Cash is King!

5 SESSION OBJECTIVES What questions you should be asking (or someone should be asking you) Optimize tax deductions you are entitled to Learn how to increase your cash flow Improve return on investment for property

6 OVERVIEW Franchisees and franchisors can benefit from the recent developments and existing provisions in U.S. tax law. New construction Acquisition of existing stores, building, facilities Improvements to leased space Identifying deductible costs Remodeling and renovations Tenant allowances

7 A WORD ABOUT TAX SPEAK I do solemnly swear to limit tax speak to the following terms Depreciation spread deductions over the period to which they relate Bonus Depreciation special deduction incentives provided by Congress Nexus The degree of connectedness to a jurisdiction, typically a state

8 Income tax has made more liars out of the American people than golf. Will Rogers, humorist (

9 CAPITALIZE VS. DEDUCTION Investments in property that last more than one year must be capitalized Capital costs are deducted over time through depreciation as defined by the IRS Essentially, spreading the investment over the periods the property is used

10 CAPITALIZE VS. DEDUCTION Certain costs are eligible for immediate expense: Repairs and maintenance Materials and supplies Internally developed software Asset expense election

11 MY CPA DOES THIS ALREADY Consider the questions throughout. Deductions are being missed if you are not addressing these questions. Large and small organizations routinely miss these deductions

12 WHY IS THIS DIFFICULT? Complex tax system Uncertain tax system Lack of information Lack of bandwidth Accounting/financial process limitations Changes in ownership of assets Staff turnover

13 WHY IS THIS SO DIFFICULT? True example: IRC Section 168, depreciable life of property Property which has an actual life of between 4 and 10 years is deemed to be 5-year property which means it has a recovery period of 5 years, which means a taxpayer must depreciate it over 6 years.

14 EXAMPLE TAX LAW CHANGES $100 invested in leasehold improvements 2007: No Bonus, Deduct over 15 years 2009: 50% Bonus, Deduct over 15 years 2011: 100% Bonus 2012: 50% Bonus, Deduct over 39 years 2013: No Bonus, Deduct over 39 years

15 EXAMPLE TAX LAW CHANGES $100 $90 $80 $70 $60 $50 $40 $30 $20 $10 $ Year

16 RECENT DEVELOPMENTS Bonus depreciation 100% Bonus depreciation expired in % Bonus depreciation expiring in 2012 Certain Leasehold Improvements 15-year life expired in 2011 Reverted to 39 years for 2012 and forward

17 RECENT DEVELOPMENTS Personal property asset expense election $500,000 in 2011 $139,000 in 2012 New Repair law effective for 2012 and forward 250 pages 2 supplemental bulletins covering transition

18 QUESTIONS TO ASK Have I: Claimed the maximum Bonus depreciation? Capitalized costs that are eligible for immediate deduction? Claimed a 15-year life and Bonus depreciation on leasehold improvements?

19 The hardest thing in the world to understand is the Income Tax. Albert Einstein (

20 HOW ARE INVESTMENTS RECOVERED? Depreciate assets when ready for use Depreciated according to property type Real property 39 years Land improvements 15 years Equipment (personal property) 5 or 7 years Software 3 years

21 HOW ARE INVESTMENTS RECOVERED? Property type also dictates speed of deductions Real property evenly spread over life Personal Property More deductions in early years Eligible for Bonus depreciation

22 DEDUCTION STREAM: $100 ASSET $40 $35 $30 $25 $20 $15 $10 $5 $0 Equip. Land Imp. Real Prop Year

23 QUESTIONS TO ASK Have I: Capitalized costs unnecessarily? Capitalized all assets that are in use? Analyzed Construction in Process accounts to place eligible assets in service?

24 QUESTIONS TO ASK Have I: Performed a Cost Segregation analysis? Assigned the shortest life possible? Claimed all eligible Bonus depreciation?

25 WHAT IS COST SEGREGATION? Segregation of the costs of real and personal property and land improvements 39-Year Real Property 15-Year Land Improvements 5 and 7-Year - Equipment Segregation of costs allocable to each bucket of costs

26 WHAT IS COST SEGREGATION? Targets embedded construction costs ie: Electrical and plumbing supporting equipment Allocation of soft costs or indirect costs to each bucket of costs Identification of depreciation methods and lives, e.g., Bonus depreciation, 5 vs. 7 year, 15 vs. 39 year

27 REAL PROPERTY

28 LAND IMPROVEMENTS

29 LAND IMPROVEMENTS

30 PERSONAL PROPERTY

31 PERSONAL PROPERTY

32 PERSONAL PROPERTY

33 RESTAURANT

34 COST SEGREGATION BENEFIT Assume $100,000 Build-out Before 5-Year 20% After 39- Year 100% 15-Year 10% 39-Year 75%

35 DEDUCTIONS: BEFORE COST SEGREGATION $12,000 $10,000 Real Property - 39-Year $8,000 $6,000 $4,000 $2,000 $ Year

36 DEDUCTIONS: AFTER COST SEGREGATION $12,000 $10,000 5-Year 15-Year 39-Year $8,000 $6,000 $4,000 $2,000 $ Year

37 DEDUCTIONS: AFTER COST SEG + 50% BONUS $12,000 $10,000 5-Year 15-Year 39-Year $8,000 $6,000 $4,000 $2,000 $ Year

38 COMPARISON: TOTAL ANNUAL DEDUCTIONS $20,000 Cost Seg + 50% Bonus Cost Seg, No Bonus 39-Year $15,000 $10,000 $5,000 $ Year

39 WHEN TO PERFORM A COST SEG? For all real property: New construction At time of acquisition Major remodels or renovations For all existing real estate acquired after 1986

40 COST SEG PROCEDURES Engineering based analysis Examination of blue prints and drawings Review of cost documentation Site inspection Adherence to the IRS audit guide

41 QUESTIONS TO ASK Has a cost seg been performed on this year s real property construction, acquisition, or remodel? Has a cost seg analysis been performed on all existing real property holdings? What is my actual cash benefit to performing a cost seg study?

42 A tax loophole is "something that benefits the other guy. If it benefits you, it is tax reform. Russell B. Long, U.S. Senator (

43 QUALIFIED LEASEHOLD IMPROVEMENTS Includes improvements to interior portion of leased space Does not include: Common areas Enlargement of a building Elevator, Escalator Internal structural framework Other considerations

44 QUALIFIED LEASEHOLD IMPROVEMENTS Eligible for Bonus depreciation, all years Depreciated over 15 years Oct. 23, 2004 Dec. 31, 2004 Jan. 1, 2008 Dec. 31, 2011 Depreciated over 39 years: Sept. 11, 2001 Oct. 22, 2004 Jan. 1, 2012 Dec. 31, 2012

45 QUALIFIED RESTAURANT IMPROVEMENTS Leased or owned real property 50% of the building square footage is dedicated to preparing meals or seating Building must be at least 3 years old

46 QUALIFIED RESTAURANT IMPROVEMENTS Depreciated over 15 years Oct. 23, 2004 Dec. 31, 2011 All other tax years, depreciated over 39- years Eligible for 50% Bonus depreciation Oct. 23, 2004 Dec. 31, 2004 Jan. 1, 2008 Dec. 31, 2008

47 WHAT ABOUT PERSONAL PROPERTY What if my business does not own real property? Apply these concepts to all property Have I properly assigned depreciation methods and lives Have I claimed all of the Bonus depreciation I am entitled?

48 DEDUCTIBLE COSTS Capitalization threshold De minimis amount Repairs and maintenance Materials and supplies Items purchased and consumed during the year No record of the items are kept Not necessarily small dollars Smallwares: utensils, flatware, floor mats

49 DEDUCTIBLE REPAIR COSTS What is the item being repaired? Is it the building? Is it the roof or window? Is it the vehicle, engine or sparkplugs?

50 WHAT IS THE REPAIRED ITEM Must be functionally interdependent Vehicles Equipment Buildings Building structure HVAC system Electrical system Plumbing system Doors and Windows Others

51 WHERE REPAIRS CAN OCCUR Roof repairs Parking lot repairs On-going maintenance Routine maintenance HVAC repairs Equipment repairs Equipment maintenance De minimis expenses

52 WHERE REPAIRS CAN OCCUR Other building repairs (walls, floors, etc.) Removal costs Repainting Certain upgrades / refurbishments Building remodeling / renovation Window / door replacement Equipment relocation expenses

53 QUESTIONS TO ASK Can I deduct everything under $xxxx? What routine expenditures do I incur to maintain property, regardless of amount? My business suffered a disaster this year (fire, flood, hurricane, etc.). Are any repair costs deductible?

54 TENANT ALLOWANCES In certain situations, cash received as a tenant allowance and/or rent reductions can be excluded from taxable income. Allowance must be for retail space Lease term must be 15 years or less Allowance must be used for construction of real property improvements

55 QUESTIONS TO ASK Did I receive cash or rent reductions for a lease of retail space? What did I do with the allowance? Construct real property? Purchase equipment? Can I exclude the allowance from taxable income?

56 WHAT IF I MISSED DEDUCTIONS? IRS allows you to claim missed deductions Applies to the current and all prior years File a form with your current tax return No Amending required Applies to businesses and individuals Application is strictly optional, not mandatory

57 WHAT IF I MISSED DEDUCTIONS? BENEFIT: Application allows a catch-up deduction to claim in the current year all deductions missed in prior years. Generally a favorable deduction, can be significant Automatic Change, No Amending to previous returns Is not an IRS audit Red flag

58 People who complain about taxes can be divided into two classes: men and women. Unknown (

59 FRANCHISE TAX BILL Growth, Recovery, Empowerment and Entrepreneurship Act, or AGREE Act Tax relief and incentives for: Small franchise businesses, and Returning veterans purchasing franchise businesses No movement on the bill since November

60 FRANCHISE TAX BILL Provisions include: Tax credit for veterans equal to 25% of the fee associated with starting a franchise up to $100,000 3-Year extension of: 100% Bonus depreciation Asset expensing for small businesses Eliminated taxes on certain small business stock Extension of the Research & Development tax credit until 2013 Establishment of a research credit for domestic manufacturers to encourage job creation at home Relaxed visa requirements

61 STATE TAX ISSUES: NEXUS Situation: Franchisor does not file income tax returns or do business in XYZ state Franchisee in XYZ State pays franchise fee to franchisor The franchisor may have an income tax filing obligation to the state where the fee originated Some states are targeting recipients of franchise fees Most Aggressive: Massachusetts, New Jersey, Ohio This situation does not apply to franchisees

62 QUESTIONS TO ASK Have I ever received a franchise fee? In what state was the payee of the fee? Did I file an income tax return in that state?

63 RECAP Deducting capital spend is complex and varied. Taxpayers often miss deductions they are entitled to claim associated with capital spending. Significant opportunity exists to accelerate deductions or to deduct costs immediately. You can capture this year deductions missed in prior years.

64 QUESTIONS Nathan Clark Senior Tax Director BDO USA, LLP Direct: (704) Parker Pieri Director of Finance The Dwyer Group Inc. Direct: (254)

Let s Talk Taxes. Jim Forbes, CPA. February 12, 2013

Let s Talk Taxes. Jim Forbes, CPA. February 12, 2013 Let s Talk Taxes Jim Forbes, CPA February 12, 2013 The income tax had made more liars out of the American people than golf. Will Rogers AGENDA The hardest thing in the world to understand is the income