GAIN CLARITY BANK TAXATION: TANGIBLE PROPERTY AND DEVELOPMENTS

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1 Jeffrey Ring, CPA, MST Tax Consulting & Compliance Group GAIN CLARITY BANK TAXATION: TANGIBLE PROPERTY AND DEVELOPMENTS berrydunn.com

2 TODAY S OBJECTIVE Help taxpayers who acquire, produce, or improve tangible property understand the implications to their business. What Yesterday and today We ll cover When How Rules take effect How you need to respond? Your questions 2

3 FIXED ASSET LIFECYCLE Acquisition Capitalization PIS Classification Disposition 3

4 GETTING UP TO SPEED Inconsistent application of rulings and case law Temporary and proposed regulations, December 2011 Final regulations and re-proposed regulations, September

5 BRIDGING THE GAP Automatic consent for method changes Scope limitations waived Audit protection for prior years 5

6 GENERAL FRAMEWORK Materials and Supplies Disposition Costs Acquisition or production costs Improvement costs 6

7 Issue Old New Materials & Supplies $100 or less $200 or less Materials & Supplies De Minimis Safe Harbor Election Small Taxpayer Safe Harbor Routine maintenance Safe Harbor Capitalization Election Elect to include under the de minimis rule Lesser of.1% of tax gross receipts or 2% of book depreciation Excluded buildings Must include when applying the de minimis rule $5,000 with an AFS or $500 without an AFS Lesser of 2% of unadjusted basis or $10,000 Includes buildings Elect to capitalize repairs Dispositions Partial disposition election 7

8 MATERIALS AND SUPPLIES A component used to maintain or improve tangible property Consumables (fuel, water, etc.) w/useful life <12 months Property with acquisition or production costs < $200 8

9 COSTS TO ACQUIRE OR PRODUCE TANGIBLE PROPERTY Capitalize amounts to: Acquire or produce a unit Defend or protect title Facilitate acquisition or production of real or personal property 9

10 COSTS TO ACQUIRE TANGIBLE PROPERTY Transaction costs Moving and reinstallation costs Work performed prior to placing in service 10

11 DEDUCTION OPTION: DE MINIMIS RULE Applies to property < $5,000 with applicable F/S Applies to property < $500 without applicable F/S 11

12 DE MINIMIS SAFE HARBOR WITH AFS Cost per Item Incidental Materials & Supplies Non-incidental Materials & Supplies Acquired Property From $200 to $500 Deduct Deduct From $500 to $5,000 Deduct Deduct Greater than $5,000 Capitalize Capitalize 12

13 COSTS TO IMPROVE TANGIBLE PROPERTY Identify unit of property Apply improvement standards Routine maintenance safe harbor 13

14 IMPROVEMENT STANDARDS Capitalizable Improvement Betterment Restoration Adaptation 14

15 ROUTINE MAINTENANCE SAFE HARBOR Amounts paid for recurring activities expected to be performed to keep the unit of property in its ordinary efficient operating condition are not considered improvements Routine maintenance is an activity that the taxpayer reasonably expects to perform more than once during the class life of the unit of property Does not apply to amounts capitalized as betterments, adaptation, and certain restorations 15

16 SAFE HARBOR FOR SMALL TAXPAYERS The final regulations provide a safe harbor election for building property held by taxpayers with gross receipts of $10,000,000 or less Eligible building property includes a building that is owned or leased, provided that the unadjusted basis of the building is $1,000,000 or less The taxpayer may elect not to apply the improvement rules if the total amount paid during the year for repairs, maintenance, improvements, and similar activities does not exceed the lesser of $10,000 or 2% of the unadjusted basis of the property 16

17 DISPOSITIONS New proposed regulations will affect ALL taxpayers who dispose of MACRS property Partial disposition election requires change in accounting method 17

18 TAKE ACTION TO GET THINGS MOVING CORRECTLY FOR YOUR BUSINESS 18

19 REGULATORY CAPITAL CURRENT RULE The amount of DTAs recognized as good assets for regulatory capital are: Net with DTLs: allowed to extent netted with DTLs Net DTAs are allowed if they can be carried back against previously paid taxes Remaining allowed if they can be absorbed against projected tax liability estimated for 12 months from reporting date. 19

20 REGULATORY CAPITAL CURRENT RULE DTAs exceeding the limits must be written off for regulatory capital purposes AOCI items are reversed: i.e. gains/losses from AFS debt or equity, actuarial gains/losses on pension and gains/losses on cash flow hedges Option to include or exclude from limitation calculation 20

21 REGULATORY CAPITAL CURRENT RULE EXAMPLE Example: ABC Bank has its head office and branches in ME. It has $1,000 DTA related to loan losses, $100 tax credit carryover, $100 DTL related to fixed assets. Year 1 tax liability of $500, year 2 tax liability of $200, projected 12 month liability of $200 Step 1: net DTAs and DTL ($1,000 + $100 - $100 = $1,000) Step 2: Carryback net DTA (PY tax = $700 excess DTA of $300) Step 3: Next 12 months (DTA of $300 - $200 liability = $100 WO 21

22 REGULATORY CAPITAL BASEL III SUMMARY Deferred taxes are categorized differently By jurisdiction DTAs from NOLS and Credits DTAs from temporary differences Deferred tax liabilities allocated to DTAs pro rata, must be on jurisdiction basis 22

23 REGULATORY CAPITAL BASEL III SUMMARY Threshold Deduction Good assets to extent individually less than 10% of common equity tier 1 capital (CET1) Collectively less than 15% of CET1 Applies to: DTAs, MSAs and Significant investment in unconsolidated Financial Institution s common stock 23

24 REGULATORY CAPITAL BASEL III SUMMARY NOLs and Credits are subtracted from CET1 (net of allocated DTLs) DTAs either realized net of DTLs or gross, before DTL allocation. Final rule is silent on whether DTAs/DTLs are assumed to reverse at report date. Most component of AOCI must be included. There is an opt-out (one time election) for non AA Banks. 24

25 EXPIRING TAX PROVISION Section 179 limitation: 2013 was $500,000; 2014 and beyond is $25,000 (total investment $200,000) Bonus depreciation: 50% for 2013; none for 2014 and beyond. Exclusion for CODI on primary residence 25

26 INTERESTED IN MORE? Contact Jeff Ring, a Principal in BerryDunn s Tax Consulting & Compliance Group, to learn more. Jeff specializes in: Tax compliance and planning ASC 740 (tax accrual & related) Transaction planning Multi-state and financial products taxation Mergers, acquisitions & divestitures Consolidated corporate tax returns Stock compensation Bank tax matters jring@berrydunn.com 26