STRATEGIC DISCUSSIONS AWSCPA 33rd Annual Conference Tangible Property Regulations What Tax Professionals need to Know for Tax Year 2015
Journal of Accountancy Article Clearly, the new repair regulations pose considerable compliance risks both for CPAs and the businesses they advise. Journal of Accountancy Feb 2014 Implementing the New Tangible Property Regulations Christian Wood. J.D. 2015
STRATEGIC DISCUSSIONS Our goal is to share better ideas on the Implementation of the Tangible Property Regulations FAST. Steps to the Solution: 1. Analyze economic Impact of 2014 Repair Regulations Are your clients Compliant? Have you made them aware of their tax savings? 2. Predict impact of the regulations for their property portfolio 3. CSSI provides the calculations of the repair regulations for your implementing in the tax record. Provides for compliance. Provides economic benefits Cash Flow. Coordinated with you, the CPA 2015
CSSI Results - Get Compliant and Save Money Increased Cash Flow from Tax Savings Significant tax savings from both Cost segregation study (accelerated depreciation) Potential partial disposition (renovation/improvement) written off. Capital to Expense Reversals LED Retrofit - Tax & Energy Savings 179D Energy Efficiency Studies Compliance with the Repair Regulations (TPRs) Look back at existing Cap/Ex Decisions Detailed cost for each structural component and building systems component that allows a client to make future expense/capitalization decisions as per the TPRs. Tax Return Details Provide study to accounting professional for inclusion in financials with precise numbers. We will provide detailed explanation and defense to the IRS if needed at no extra cost. 2015
STRATEGIC DISCUSSIONS Latest Update with TPRs 2 New Rev Procs issued New 3115s and related instructions Eric Wallace TPRToolsandTemplates.com 2015
STRATEGIC DISCUSSIONS Preparing for the coming tax season relating to TPRs Fixing 2014 /Filing 2015 Most missed opportunities What Deductions are still Eric Wallace TPRToolsandTemplates.com available from past years? 2015
STRATEGIC DISCUSSIONS Preparing for the coming tax season relating to TPRs Can I still go back and fix it? Looking Forward to Filing 2015 De minimis Safe Harbor prep Eric Wallace TPRToolsandTemplates.com 2015
STRATEGIC DISCUSSIONS Preparing for the coming tax season relating to TPRs TPRs are based on a Cost Segregation Depreciation model Eric Wallace TPRToolsandTemplates.com 2015
Explaining Cost Segregation 2015
Explaining Cost Segregation Input calculation to the Regulations The process of analyzing and identifying commercial building components that are eligible for accelerated depreciation providing a significant tax benefit for the taxpayer. Personal Property is Segregated from Real Property $50k to $80k per $1 Million in Cost Works on $250k buildings 2015
Explaining Cost Segregation Straight-Line Hamburger Cost Segregation 2 All Beef Patties Special Sauce Lettuce Cheese Pickles Onions on a Sesame Seed Bun 2015
Explaining Cost Segregation Straight-Line Hamburger $3.99 Cost Segregation $3.99 2 All Beef Patties $1.99 Special Sauce $0.15 Lettuce $0.18 Cheese $0.45 Pickles $0.18 Onions on a $0.29 Sesame Seed Bun $0.75 2015
Explaining Cost Segregation Straight-Line Cost Segregation Looks at the building as a Whole Structural Building Components Depreciated over 39yrs (27.5yrs) Real Property Only Identifies Parts and Pieces of the building Non-Structural Building Components Depreciated over 5, 7 & 15 years Personal Property & Real Property 2015
Cost Segregation vs. Straight-Line Depreciation 2015
Dispositions Benefit to your Client Includes: Sale or Exchange Retirement Physical Abandonment Destruction Transfer to supplies or scrap Involuntary conversion Retirement of a structural component of (or improvement to) a building. Section 168 2015
Dispositions Benefit to your Client Ability to write off assets that are no longer in use with Partial Disposition Election Renovations Remodels Replacements Abandoned in Place Common Items Roofs, HVAC, Electrical 2015
Dispositions Know the Value of what went into the Dumpster. Relative to the value that your client paid for the building. Disposed of as a Partial Disposition. Write down to the basis of the property in current year. Looking for Improvements or Repairs on Depreciation Schedule. 2015
Cost Segregation vs. Straight-Line Depreciation Eighth Wonder of the World 2015
Financial Results of Cost Segregation and Partial Disposition Cost Segregation Partial Disposition Climate Control Self-Storage $3,150,750 Tax Savings Benefit: $ 164,682 ROI: 32:1 Auto Dealership Office Condo $324,000 Tax Savings Benefit: $ 30,609 ROI: 14:1 Office Warehouse $5,246,900 Tax Savings Benefit: $ 312,687 ROI: 33:1 2015
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Unit of Property 1.263(a)(3)(i) Functional Interdependence Standard The Unit of Property determination is generally based upon the functional interdependence standard. Components of property are functionally interdependent if the placing in service of one component by the taxpayer is dependent on the placing in service of the other component by the taxpayer. But there are 2015
Unit of Property 1.263(a)(3)(i) Functional Interdependence Standard Special Rules for Buildings- Each building is a Unit of Property Plant Property Network Assets Leased buildings and leased property Improvements to Property 2015
Listed Building Systems The Building U of P Determination Is Based Upon 1.48-1(e) Each building and its structural components (as defined in 1.48-1(e)(2)) is a single unit of property. A building structure consists of the building (as defined in 1.48-1(e)(1)), and its structural components other than the building systems. Each of the following structural components including the following components constitutes a building system that is separate from the building structure, and to which the improvement rules (RABI) must be applied. 2015
Listed Building Systems (1) Heating, ventilation, and air conditioning ( HVAC ) systems (2) Plumbing systems (3) Electrical systems (4) All escalators (5) All elevators (6) Fire-protection and alarm systems (7) Security systems for the protection of the building and its occupants (8) Gas distribution system (9) Or within the building systems or building structure, any item that performs a major and discrete function, i.e. doors, windows, toilets, cabinetry, lighting fixtures etc. 2015
STRATEGIC DISCUSSIONS Latest Developments What s new that I need to know about Good News Eric Wallace TPRToolsandTemplates.com 2015
Latest Updates - Great News De minimis SH raised to $2500 Rev Proc. 2015-86 Non-AFS Taxpayer limit raised Capitalization Policy Changes Best Practice Put it in writing Sample Capitalization Policy Eric Wallace TPRToolsandTemplates.com 2015
Latest Updates - Great News What to do to Implement DMSH Action Steps Need Capitalization Policy Alert Clients with Plan of Action Documentation of Action Best Practices Required to be in place before Jan 1, 2016 Eric Wallace TPRToolsandTemplates.com 2015
Latest Updates - Great News Change in 3115 Form Takes effect December 15, 2015 New Form, new instructions Clear that the IRS is expecting many more TPR method changes There are many new answers and information that must be supplied Eric Wallace TPRToolsandTemplates.com 2015
Latest Updates Great News Rev Proc 2015-56 DCN 221 & DCN 222 November 20, 2015 Safe Harbor Method for Restaurant and Retail Refresh-Remodeling Cost Requires Audited Returns, 20%, Restaurant or Retail, new GAA 25% of qualifying remodel-refresh cost are Capitalized and remaining are Deductible as Repairs and Maintenance can be Retroactive 2015
Focus What should Tax Professionals focus on to prepare for the coming tax season? Going Back in Time Adopt the TPRs if they have not. Opportunities to look for in the portfolio for client deductions Year 2015 & Future Years Eric Wallace TPRToolsandTemplates.com 2015
TPRs Applying the Improvement Standards The RABI Rules 2015
TPRs R - Restoration A Adaptation B Betterment I Major Improvement 2015
Cost to Improve Tangible Property Improvement Standards Capitalize Amounts paid for new building or improvements 1.263(a)-3. - that increase value of property - bring property to new or different use - return of original condition Expense... Amounts paid for incidental repairs and maintenance of property 1.263 (a)-1. Repair / Refresh - keeps in ordinary operating condition 2015
When to Capitalize or Expense? 1. The Expense Decision! Must Capitalize if An Improvement (RABI) or Major Expenditure 1. Improvement = Restoration, Adaptation, Betterment, Improvement (RABI) 2. Major Expenditure = More than 30%-35% of the REPLACEMENT cost of the building system, structural component or unit of property (40% of Roof Replaced = Capitalize) 2015 A capital expenditure is generally considered to be a more permanent increment in the longevity, utility, or worth of the property. Must Expense if = Repair If the expenditure does not materially increase capacity, productivity, efficiency, strength, quality or improve output of the building system, structural component, or Building(Unit of Property) it must be expensed. A repair keeps the building structure and building system in ordinary and efficient operating condition.
Cost to Improve Tangible Property Expense Capitalize Not a Improvement 1 of 3 furnaces Roof membrane only 30% of electrical wiring 10% of sq. ft. of flooring Improvement Entire Sprinkler System Complete roof All Wiring in Building 40% of sq. ft. of flooring 2015 35
Cost to Improve Tangible Property Compare future Invoices to: Building Systems Valuation Building Structural Components Valuation Components perform Major and Discrete Function within Systems and Structure Any Large Physical Portion of the Building Cost of Items One of above % 2015
Cost Segregation Expertise Compliance: Building Systems Definition Building Systems/ Structural Components EXP/CAP TEST - Client spends $50,000 on HVAC System. TPR ratio test is 30-35%. 50,000/179,747 = 28%. Test says to expense. Train staff to do this for these items at time of expenditure.
Tax Extender Advantage Tax Extenders and Cost Segregation Bonus Depreciation at 50% in 2016-2017. Section 179 extended permanently New Items with a Depreciable Life less than 20yrs qualify. New 5,7,15 year life items all qualify. Can look back at past years. New Construction or Remodels Eric Wallace TPRToolsandTemplates.com 2015
Going Back in Time Opportunities for Write Offs in your portfolio from past years. Gutted Building Removal Cost Buildings in service with Improvements/Repairs over years. Buildings in service with Tenant/Leasehold Space Improvements State what your Unit of Property is Eric Wallace TPRToolsandTemplates.com 2015
Going Back in Time Can I still go back and reverse Capitalized Items to Expense? Eric Wallace TPRToolsandTemplates.com 2015
Historical Capitalized Items 3. Capital Reversal to Expense Decision! The regulations, require you to go back to your depreciation schedule and your repair costs for all prior years and ask one key question: Under the new regulations, would these expenditures have to be capitalized or could they be expensed? Look back at items you may have capitalized since you owned the building and expense them in the current tax year. This creates economic opportunities. Cash Flow! Let CSSI calculate and implement this for you in partnership with Eric Wallace, CPA Foremost Expert on the TPRs in the US.
Adopting the TPRs Can I still go back and reverse Capitalized Items to Expense? How did the Taxpayer file in 2014? Did Taxpayer adopt the TPRs? Filed a 3115 Put a statement of adoption on the return under 2015-20 If TPRs adopted no changes can be made to past years before 2014 Eric Wallace TPRToolsandTemplates.com 2015
Adopting the TPRs Small Taxpayer can go back and scrub if: Did not file the 3115s with 481(a) Did not file the 0 481a Used Rev Proc 2015-20 Those with and without an adoption statement. Large Taxpayer can go back and scrub if: Did not file the 3115s to adopt TPRs Eric Wallace TPRToolsandTemplates.com 2015
Capital to Expense Reversal Examples $$ The CSSI Study Multiple Story Apartment Complex (Purchased in 1993) Cost $1.1 mill Improvements over years - $4 mill, $160k, $2.7mill, $70k, $26K, $900k Created -481(a) adjustments of $1,387,016.00 @ 40% Tax rate Resulted in Tax Savings of $554,000 Eric Wallace TPRToolsandTemplates.com 2015
Going Back in Time Example The CSSI Study Office Building Converted to Hotel 11 story (Purchased in 2000) Cost $1.6 mill Multiple Improvements over years- $10 mill, $1.2 mill, $41K, $30K Created -481(a) adjustments of $3,138,017 @ 34% Tax rate Resulted in Tax Savings of $1.1 million Eric Wallace TPRToolsandTemplates.com 2015
Year 2015 & Future Years Questions to ask your client Did you have any renovations or remodels of your building? - Dispositions Did you remove or throw anything away? - Remaining Basis can be written off. Removal Cost breakout on invoice? -No documents? Cost study can provide Tenant Improvements? Unit of Property issues? Eric Wallace TPRToolsandTemplates.com 2015
Year 2015 & Future Years Examples of Client Situations Did you have any renovations or remodels of your building? Dispositions Apartment Complex Office Building moved walls Addition to a building Strip Center Remodel Eric Wallace TPRToolsandTemplates.com 2015
Year 2015 & Future Years Examples of Client Situations Did you remove or throw anything away? Remaining Basis can be written off. Removal Cost breakout on invoice? Changed out a Roof Changed out HVAC units Upgraded Wiring, Plumbing Cost Segregation Study can provide clarity with our without supporting documentation. Eric Wallace TPRToolsandTemplates.com 2015
Year 2015 & Future Years Examples of Client Situations Tenant Improvements? Old Tenant leaves Space Remodeled New Client build out. Who pays to the build out? Eric Wallace TPRToolsandTemplates.com 2015
Year 2015 & Future Years Unit of Property Issues Multiple Building Sites Basis for buildings Invoice Decisions Expense or Capitalize? Building Systems Baseline Eric Wallace TPRToolsandTemplates.com 2015
5 Action Items for Year 2015 1. Written Capitalization Policy in place 2. File 3115s that did not get filed 3. Scrub Schedules for CAP/EX Reversals 4. Establish Units of Property Building Systems Multiple Buildings assigned Correct Basis 5. Review Portfolio for Cost Segregation Opportunities. CAP/EX opportunities Eric Wallace TPRToolsandTemplates.com 2015
Information Needed To Run Preliminary Analysis Depreciation Schedule is best What type of Building? What did they pay for the building? (without the land) When did they purchase it? Have there been any major renovations or remodels? Send this info to Rep that invited you to the call. 2015
Solution: It s the Process Partnering Qualification and Analysis Client Contact and Proposal Execution 2015
Solution:.. It s the Process Ease of Compliance CPA: 1-2 hrs per client Timely completion Additional Revenue For Tax Professional Client Satisfaction 100%: Grateful for effort to save taxes 2015
Resources Education Resources: CSSI www.cssistudy.com CCH Seminars https://www.cchgroup.com/training-andsupport/cch-seminars Eric Wallace www.tprtoolsandtemplates.com 2015
Use the CSSI Experience Performing Engineering-based Studies for over 14 years, National capability, 15,000 Studies completed across the U.S., always on-time. Qualify the tax savings estimates within 48 hrs. for your client. Full Engineering-based Studies completed in 4-8 weeks. Perform CAP/EX Reversals with Eric Wallace Use CSSI as your engineering-based service provider for your clients. 2015
CSSI Today Your Calculation Experts Cost Segregation Study Tangible Repair Regulations Consulting for Spending Analysis for Capital or Expense Decision Partial Disposition Study Building Systems Definition Study Capital Reversal To Expense Study LED The economic solution for sustainable energy savings Related write downs and partial dispositions Section 179D Energy Credit Analysis R&D Tax Credit Analysis VIPCO Forensic Business Spending Analysis 2015
Thank You Let us provide pre-analysis for your clients. David H. Trahan dht@dtrahan.com 832.971.2885 2015 Rick Harsch rharsch@nationalrealty.com 281.798.9580