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Tax Savings. Delivered. Cost Segregation - TPR Implementation

The Application of the Tangible Property Regulations

Implementation

to

Compliance Cost Segregation Services, Inc.

Copyright © 2015


January 20-21th, 2015 Webinars

Getting Started- Getting Going

Cost Segregation Services, Inc. Copyright © 2015


The operative assumption today is that someone, somewhere, has a Better Idea…

And the operative compulsion is to find that idea, learn it, and put it into

action…FAST. Jack Welch - Former CEO of GE

Our goal is to share better ideas on the Implementation of the Tangible Property Regulations…FAST.

©2015


Bio David Deshotels (dez-o-tels)

• Executive Vice President of Cost Segregation Services, Inc. With CSSI since 2006.

• Mechanical Engineering Degree. LSU

• 20+ years of Sales and Sales Process

• World’s Hardest Public Affairs Job

©2015


Bio David Deshotels (dez-o-tels)


“None of us is as smart

as all of us.”

1st Steps Begin a Dialogue

Simplify a Complex Process

Time is running out

Phase I Education - Diagnosis

©2015


Request These Resource Docs

CCH - Executive Summaries AICPA 6 Page Bullet Summary

Index of Examples in Fed Register Questions and Answers

A) AICPA Resources: Summary Chart – Overview-Written Policy Template

• This is the most concise summary of the regulations in the industry. Six pages in bullet form. You will want to print this and keep it as a document to refer to when reading other articles.

• If you only look at one, this is the one to look at. “5 Stars” *****

Quick Summary Chart of Final TPR

• Great Overview of the TPR that discusses the difficulties of implementation.

• Circular 230 Implications for Tax Professionals - discusses compliance risks.

Implementing the new TPR – Journal

of Accountancy

• OMG! You just found out that your client needs a Capitalization Policy in Place starting January 1 to be eligible for the De minimis Rule Safe Harbor.

• This document is priceless if your client does not have this in place already. Press the button to download the “Sample Written Book Capitalization Policy”. 5 stars*****

Written Policy Template from

AICPA

Change to Reading View & Click to access

articles

https://www.calt.iastate.edu/sites/default/files/files-page/AICPA Sample De Minimis Safe Harbor Written Capitalization Policy.pdf

http://www.aicpa.org/InterestAreas/Tax/Resources/Compliance/DownloadableDocuments/Quick Summary Chart of Final Tangible Property Regulations.pdf


http://www.journalofaccountancy.com/Issues/2014/Feb/20137725.htm


B)

• This is a great article to start your research that compares the Temporary and Final Regulations in plain English in 11 pages.

• “4.5 Stars” *****

IRS Releases Comprehensive Repair/ Capitalization Final

Regulations Sept, 2013 CCH Tax Briefing

• What’s New, What’s the Same, and What is Means. This article is 44 pages with a great insight of the issues and comments on the impact of the regulations. This article dives into the details with codes cited. Highly recommended.

• “5 Stars”*****

Updated: Comprehensive Analysis of Final Repair /

Capitalization and Proposed MACRS Disposition

Regulations May, 2014 CCH Tax Briefing

• This article is an 8 page summary of the regulations with the final regs highlighted and 3115 advice discussed.

• “5 stars”*****

Dec, 2014 –Final Repair / Capitalization / MACRS

Regulations Update

Articles and Summaries



http://tax.cchgroup.com/downloads/files/pdfs/legislation/repair-capitalization-regulations.pdf

http://www.cchgroup.com/media/wk/taa/pdfs/news-and-insights/federal-tax-legislation/repair-regs_special-report_may-02-2014_final.pdf

http://www.cchgroup.com/media/wk/taa/pdfs/news-and-insights/federal-tax-legislation/finalrepair-capitalization-macrs-regulations-update2014.pdf

©2015


Research How to Implement the TPRs

©2015


Journal of Accountancy Implementing the New Tangible Property Regulations

©2015



• “These rules will affect every TP that uses Tangible Property in its business…”

• “The rules are all-encompassing and complex…”

• “TP may need to devise new collection procedures to capture the necessary data to implement these regulations.”

©2015



• “Circular 230 may present challenges to practitioners in signing tax returns of clients that have not implemented the final regulations.”

• “Due to the challenges of the regulations, waiting to address these issues until completing the 2014 tax return is ill-advised.”

Tangible Property Regulations Resource Guidance on Deductions & Capitalization

©2015


©2015


Today’s Agenda Questions

• This is complicated. Why?

• How Do I Explain this to my Clients.

• First Things that I need to do.

• Lottery Ticket Winners?

• Late Partial Disposition – Use It of Lose It

• Unintended Consequences of a Building being a UOP. • Applying the Improvement Standards. • Questions to Ask Every building owner. • How Can a Cost Segregation Specialist make your life easier

and your client happier.

©2015


Today’s Agenda Need to Know

• Overview of the Regulations- Resource Documents.

• Greatest Impact to Tax Professionals.

• How to: Applying Partial Disposition Election.

• Improvement Standards Basics for UOP.

• Safe Harbors for your clients.

• Cost Segregation and how it helps in applying TPR.


Capitalize or Expense? Welcome to the Tangible Property Regs

General framework for distinguishing

Capital Expenditures from:

• Supplies

• Repairs

• Maintenance


Capitalize or Expense? Welcome to the Tangible Property Regs

“We have to capitalize everything…unless there is an exemption.”

Safe Harbors are the exemptions.

©2015


Capitalize or Expense? Unique Adoption Method This is Why

In the Past • Starting Date • Mandate to follow new Regulations. TPR • Starting Date Jan 1,14 • Mandate to follow new Regulations. • Require permission to adopt new Regs. • “A TP must secure IRS consent to

voluntarily change an accounting method.” Code Sec.446(e) Reg§1.446-1(e)(2)(i)

©2014


Capitalize or Expense? Unique Adoption Method

New Rev Proc Issued Friday 1-16-15 2015-13 & 2015-14 A taxpayer must secure the IRS’s consent before changing its accounting method. To obtain consent, taxpayers file 3115. Even when the IRS’s consent is not required, a taxpayer must file Form 3115.

©2015



New Rev Proc Issued Friday 1-16-15 Rev Proc 2015-13 • Procedures for applying for Automatic

Changes in accounting method. • Changes that have an assigned number. • Automatically Granted. Rev Proc 2015-14 • List of Automatic Changes.

©2015



TPR Multiple Methods of Adoption • Just do it going forward (6 annual elections)

• Partial Asset Disposition • Small Tax Payer Safe Harbor • De minimis Safe Harbor

• Request Permission going forward (3115’s) • Repairs and Maint., Materials and Supplies, • Unit of Property, Improvement Standards, Acquisition of

Property, Removal Costs

• Adjustments Looking Back (3115’s w/ 481(a)) • Late Partial Asset Disposition Election, Repairs and

Maint., Removal Cost, Whole Disposition

©2015



TPR Multiple Methods of Adoption • Those Requiring a 3115 • Form 3115 last updated in 2009

• Attachments • 27 method codes • 82 Specific citations • 481(a) adjustments per building

• Concurrent 3115s - Which can be combined • #184, #186, #192

• Create Templates for 3115s

• New 3115s???? Rev Proc 2015-13 & 2015-14

©2015


3115 Concurrent Methods 184,186,192 on same 3115

Method Codes to accomplish:

• Repairs and Maintenance (R & M), #184, with a citation to regulation Section 1.162-4 (R)

• Material and Supplies (M & S), #186 and/or #187, with a citation to 1.162-3 (R)

• Unit of Property, #184, with a citation to 1.263(a)-3(e) (R)

• Betterment, Adaption, Restoration, (the BAR Test rules), #184 with a citation to the particular part of 1.263(a)-3(g), -3(j), -3(l), -3(k), as applicable (R).

• Routine Maintenance Safe Harbor, #184, with a citation to 1.263(a)-3(i) (R if you want to take)

• Acquisition of property, #192, with a citation to (1.263(a)-2) (R)

Tangible Property Regulations Resource Guidance on Deductions & Capitalization

©2015


ADMIN: CPA ECONOMIC & ACCOUNTING

CSSI Analysis Qualification Query

Provide Tax Depreciation Schedules - No Cost Estimate

Building Assets No Building Assets

TPR IMPLEMENTATION NEEDS – CPA FIRMS

CPA: EXPERT AND TRAINING (CPE)

Building Assets

No Building Assets/1040’s

COST SEGREGATION STUDY – SOURCE DOCUMENT BUILDING SYSTEMS AND PARTIAL DISPOSITION

Determine Application Functions: CPA and CSSI

Engage Client - Engagement Letters, Cost Segregation

All Clients: Capitalization Policy (every year) Adopting: 3115s

Partial Asset Disposition Material & Supplies

Expense/Cap Decision basis

Materials & Supplies Expense/Cap Decision basis

©2015


You Need to: Make Your Clients Aware… Before it’s TOO LATE

• Advantage to write off Late Partial Dispositions.

• “Use It or Lose it” Deadlines in tax year 2014

• Need a Capitalization Policy for tangible property less than $500 per item or invoice by …

January 1, 2014

©2015


Tangible Property Regulations General Framework

Materials and Supplies

Cost to Acquire Tangible Property

Cost to Improve Tangible Property

Dispositions

©2014


Dispositions Benefit to your Client

Section 168 • 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.

©2015



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

©2015


Dispositions Catch Up Provision

• 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 year 2014.

• Looking for Improvements or Repairs on Depreciation Schedule.

©2015


Dispositions

Example: A business owner buys 20 year old building and replaces the Roof after 5 years of ownership. Old Regs: 5 years 39 years

Cost of Roof Hidden in

Building Asset Basis

Roof 2 added asset

©2015


Dispositions

Example: A business owner buys 20 year old building and replaces the Roof after 5 years of ownership. New Regs: 5 years 39 years

Original Building Asset

New Roof Asset

©2015



Partial Disposition Election 1.168(i)-8(d)(2)

• In 2014 tax year for prior years: Requires Change in Accounting Method Form 3115 and 481(a) adjustment to “catch up” (196).

• Effective Jan 1. 2014 and future years: The election is made in the taxable year that the disposition occurs.

©2015


Dispositions

Example:

• $1.5 m Nursing Home with major renovations

• $91k in assets removed =

Asset Valuation Study

• $31k in cash flow

• Basis Write Down

• Tax Savings at Sale

5 yr. property (35-41%) recaptured at Capital Gains Rate (20%)

©2015


Dispositions Role of Cost Segregation

©2014


Dispositions Role of Cost Segregation

Example:

• Asset Valuation - $53k

• Cost Segregation on Renovation - $126k

Year of “Opt In” Matters

• 2014 Get Both

• 2015 No Past Disposition: Lose $53K

©2014


Dispositions Tax Professionals Ask

#1 Question

How do I get “The Number”?

IRS says to use:

• Reasonable Method

• Cost Segregation is a Certain Method

©2014


Dispositions Reasonable Methods

Discounting the cost of the replacement asset to its placed-in-service year cost using the Producer Price Index (PPI) (changed from CPI)

Restoration Only

Pro rata Allocation.

Both Methods need a valuation of the Unit of Property affected.

©2015


Dispositions Reasonable Methods

A Study allocating the cost of the asset to its individual components. This provides the proper valuation of the affected building assets.

“Cost Segregation is a certain method.”

©2015


Dispositions Cost Segregation Method

• Labor to Remove Materials

• Disposal Fees

• Identify Items Removed

• Quantify Items

• Value Items

• Determine the remaining basis

• Write Down of Basis is a permanent tax reduction at the time of sale. • Personal Property Sec 1245 35-40%

• Real Property Section 1250 25%

• Capital Gains 20%

©2015


Dispositions Cost Segregation Method

• Building Plans – Cost Detail Review

• IRS accepted Cost Allocation Methods

• Defined Engineering-based Methodology

• The Study: Report Form meets IRS Report Criteria

• Defendable

©2015


Dispositions Asset Valuation Study

Works for all applications:

• Large Renovations

• Complicated Remodels

• Retired Components and Partial Disposition

©2015


Solution: It’s the Process

• Find all clients with depreciation on building assets.

• Qualify clients with estimated Disposition and Cost Segregation economic needs.

• Get an Engineering-based Study that meets the IRS’s guideline.

• Apply the Change in Accounting Method Form 3115 & 481(a) with study results to the client’s return.

©2015



Partnering Qualification and Analysis

Client Contact and

Proposal Execution

©2015



Ease of Compliance

CPA: 1-2 hrs per client

Timely completion

Client Satisfaction

100%: Grateful for effort to save taxes

Additional Revenue

$1,000-$3,000 per client

©2015






Dispositions

©2015


Cost to Improve Tangible Property Improvement Standards

Improvement Standards

• Deductible Repair

• Capitalized Improvement

BAR TEST

©2015



Capitalize Improvements

Betterments Adaptations

Restorations

BAR TEST

©2015



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.

- keeps in ordinary operating condition Refresh

©2015


Capitalize

A Betterment is an expenditure that -

• Corrects a Material Defect existing prior to the taxpayer’s acquisition of the UOP or one that arose during the production of the UOP at acquisition or production;

• Is a Material Addition ( physical enlargement, expansion or extension) to the UOP;

• Is a Material Increase in capacity, strength, productivity, efficiency, quality, or output of the UOP.

Betterment-1.263 (a)-3(h)


©2015


Capitalize

Lessee Improvements:

• A lessee improvement constitutes a separate Unit of Property from the leased property being improved, and must be capitalized.

• The new property interest is separate and identifiable from the lessor’s interest in the underlying property.


©2015


Capitalize

• Must compare the condition of the property after the expenditure to the condition prior to the circumstances that necessitated the expenditure.

• Final regs specify the comparison rule only applies to wear, tear and damage that occurs during the use of the property.

• Compare to condition after last expense or original service date.


©2015


Capitalize

• No bright line tests for material increase and additions.

• Material Increase Reg Example 21

• 50% reduction in energy and power cost from new insulation.

• Not a Material Increase Reg Example 20 • Indicates 10% efficiency and 20% additional capacity from changing 2

of 10 roof mounted HVAC units


©2015


Capitalize

Adapting to New or Different Use

Change not consistent:

• With the taxpayer’s intended use

• With the Unit of Property at the time originally placed in service. (based on facts and circumstances)

o Example: Drug Store to Walk in Medical Clinic.

o Example: Hospital changes to Outpatient Surgery


©2015


Capitalize


• Returns the UOP to its ordinarily efficient operating condition if the property has deteriorated to a state of disrepair and no longer functional.

• Results in rebuilding the property to like-new condition after the end of its class life.

• Is for the replacement of a part or combination of parts that comprise a major component or a substantial structural part of a UOP that perform a discreet and critical function.

©2015


Capitalize


Major Component – Parts that perform a discrete and critical function in operation of UOP.

Substantial Structural Part - A large portion of the physical structure of the UOP.

Must consider all facts and circumstances - both quantitative & qualitative.

Not just the cost, but the size, type, function etc.

©2015


Capitalize


“Not An Improvement” Examples in Regs

• Roof Membrane Only (Reg Ex.15)

– Part vs. Whole Major Structural Component

• 100/300 Windows (25 % surface area)(Reg Ex.25)

– Part vs. Whole Major Structural Component

• 3/10 Roof HVAC Units (Reg Ex.18) – 3 roof units vs. HVAC Building System

• 8/20 Sinks (Reg Ex.23)

– 8 sinks vs. Plumbing Building System

©2015


Capitalize


“Improvement” Examples in Regs

• Entire Roof System (Reg Ex.14) – Major Portion of Building Structural Component

• 200/300 Windows (Reg Ex.26) – Major Portion of Building Structural Component

• One Chiller in HVAC System (Reg Ex.17) – Major Component of HVAC Building System

• All Sinks (Reg Ex.22) – Major Portion of Plumbing Building System

©2015


Capitalize


“Not a Restoration”

1 of 3 furnaces

30% of electrical wiring

10% of sq. ft. of flooring

“Restoration”

Entire Sprinkler System

All Wiring in Building

40% of sq. ft. of flooring

©2015


Capitalize


• Major Components

– 40% or less “May Not” be a Restoration. (Ex.18,21,23,25)

– 66% or more “May” be a Restoration.

• Substantial Structural Parts

– 25% Replacement “May Not” be a Restoration.(Ex. 30)

– 30% Replacement “May” be a Restoration. (Ex. 27) since it is a large portion of a structural part.

©2015


Expense


Refresh

Capitalization is not needed.

• Does not materially increase capacity, productivity, efficiency, strength, quality or output of the building’s structure.

• A refresh keeps the building structure and building systems in ordinary efficient operating condition that is necessary to continue to attract customers.

©2015


Cost to Improve Tangible Property Capitalize or Expense of an Invoice

Can I expense this invoice?

Betterment- Adaptation- Restoration?

What do I compare it to?

The Building?

©2015



Building Structural

Components

Building Systems

Compare Invoice to

©2015


Cost to Improve Tangible Property Building Systems

1. Building and Structural Components 2. HVAC 3. Fire Protection & Alarm 4. Elevators/Escalators 5. Electrical 6. Plumbing 7. Gas Distribution 8. Security Systems 9. Any other systems identified in

published guidance

©2015



Building Structural

Components*

• Roof • Windows • Exterior • Framing • Insulation • Doors • Foundation

Building & Structural Components,

HVAC Fire Protection Sys. Elevators/Escalators Electrical, Plumbing

Gas Distribution Security Sys.

Other

Building Systems

* - Discrete and Critical Function

©2015


HVAC

Compressor

Blower

Instruments

Ducts/Vents


©2015



Compare future Invoices to: • Building Systems valuation • Structural Components valuation • Major Components valuation

Cost of Items

HVAC %

Cost Segregation Expertise HD Study

Building Elements/Units of Property

Building Components $ 6.00

Cabinets / Millwork $ 20,085.41

Moldings $ 8,286.30

Wood Paneling $ 2,062.22

Flooring - Vinyl Tile $ 519.68

Flooring - Carpet $ 9,084.00

Window Treatments $ 187.90

Air Curtain $ 1,709.08

Building Signage $ 122.56

Specialty Electrical - Kitchen Equip. $ 15,216.78

Communication / Data $ 32,356.35

Specialty Plumbing - Cooler Equip. / Kitchen Sinks $ 10,181.63

Security / Exterior Lighting $ 9,827.88

FRP Wall Panels $ 1,003.24

Rear Entry Canopy $ 20,084.92

Interior Overhead Doors - Security $ 21,931.82

Slatwall / Pegboard Paneling $ 9,657.00

Surveillance System $ 4,375.25

Interior Wood Trellis Systems $ 6,046.21

Liner Panels $ 109,271.70

Paging System $ 1,688.23

Windmill $ 17,244.53

Exhaust Hood $ 11,258.61

Fire Extinguishers $ 1,833.25

Cooler $ 10,635.63

Movable Storage Units $ 30,431.69

Site Work / Improvements $ 5,464,546.00

Water Well $ 19,318.45

Site Drainage $ 48,990.57

Parking Lot $ 138,639.38

Exterior Signage Structure $ 17,790.84

Parking Lot Striping / Barriers $ 23,325.00

Sidewalks $ 711.12

Landscaping $ 68,635.17

Security Lighting Poles $ 6,374.77

Aggregate Base Paved Area $ 192,436.06

Exterior Fencing / Decking $ 31,986.93

Retaining Walls $ 16,024.07

Fabricated Steel - Bollards $ 2,926.12

Patio Concrete $ 10,848.65

Exterior Wood Trellis Systems $ 2,783.73

Gazebo $ 4,605.26

Building Structure $ 8.00

Structural Components $ 559,508.38

Roofing Systems $ 66,975.93

Foundations $ 234,535.89

HVAC $ 179,747.78

Electrical $ 242,472.40

Plumbing $ 68,844.81

Masonry $ 40,657.35

Doors & Windows $ 17,063.50

Insulation $ 43,168.87

Gas Distribution $ 4,989.84

Drywall $ 13,092.14

Painting $ 23,796.64

Fire Protection & Alarm $ 15,192.82

Gutters & Downspouts $ 12,335.58

©2015



Depreciation of UOP

Each Building is a Unit of Property

Or

Each Building’s Property by Class Life • 5 yr. Property • 7 yr. Property • 15 yr. Property • 39 (27.5) yr. Property

Improvement Standards

BAR Test

©2015



Depreciation of UOP

Each Building is a Unit of Property

Or

Each Building’s Property by Class Life • 5 yr. Property • 7 yr. Property • 15 yr. Property • 39 (27.5) yr. Property

Multiple Building Sites need basis assigned to: Each Building Land Improvements • Parking / Ext. Lighting • Landscaping

©2015


Each Building is a UOP


©2015


Challenges to the Tax Professional Clients with a Building

Building Description • Name of Building • Address • How many stories • Type Construction • Business Purpose or Building Use • Occupied / Leased • Approximate Square Footage • How many Suites or Lease Hold Spaces • Pictures or Building • Describe Parking Areas Separately • Improvements Listed Separately

©2015






Dispositions

©2015


Safe Harbor Issues

©2015



• UOP with a useful life Method Change #

• Incidental < or = 12 months -write off at time of purchase 187 • Non-Incidental > 12 months -w/o when used or consumed 186

• Fuel, lubricants, water, & similar items • Costing $200 or less (up from $100 in temp regs). Defined as tangible property used in taxpayer's business that is not inventory and A component acquired to maintain, repair, or improve a UOP that is not acquired as part of any single UOP. Reg Sec 1.162.-3(a)

©2015


Safe Harbors

• Allows expensing of amounts paid to acquire or produce a unit of real or personal property, including qualified materials and supplies.

• Calculated on an Invoice or Item level.

• Elected annually by including a statement with the taxpayer’s tax return for the year elected.

• Having an Applicable Financial Statement (AFS) makes a big difference on the limits that can be expensed.

©2015


Cost to Acquire Tangible Property De minimis Safe Harbor

• With AFS - $5,000 per invoice (or per item as substantiated by invoice)

• Written policy in place at beginning of year.

• Policy to expense for amounts under a certain dollar amount or property with an economic useful life of 12 months or less.

• Treats the amounts as expenses on the AFS as well.

• Without AFS: - $500 per invoice (or per item as substantiated by invoice)

• Policy in place at beginning of year (written policy not required) for amounts under certain dollar amounts or property with an economic useful life of 12 months or less.

**Action Item: $5000 with AFS - Must have written expensing policies in place at the beginning of the tax year.

©2014


AICPA Capitalization Policy

©2014


Cost to Improve Tangible Property Routine Maintenance Safe Harbor Expenses

• Deductible if you reasonably expect (at time UOP is placed in service) to perform more than once during the 10 year period from when the building system was placed in service.

• Safe Harbor does not apply to Betterments, Adaptations, or some Restorations (see Reg. § 1.263(a)-3(i)(3)).

• Consider-recurring nature of activity, industry practice, manufacturer’s recommendations, and TP’s business needs.

• Requires submission of Form 3115 to adopt.

©2014


Cost to Improve Tangible Property Small Taxpayer Safe Harbor for Buildings

• Can elect “not to apply” improvement rules to eligible buildings if the annual amount spent is less than $10,000 or 2% of unadjusted basis on a building-by- building basis.

• May be written off as repairs.

• Example: $300k building = $6,000 limit

• If limit is exceeded, does not apply to any amounts

©2015



Building Description • Name of Building • Address • How many stories • Type Construction • Business Purpose or Building Use • Occupied / Leased • Approximate Square Footage • How many Suites or Lease Hold Spaces • Pictures or Building • Describe Parking Areas Separately • Improvements Listed Separately

©2015



Identify all clients that have a building Ask these questions:

• Can you provide a Written Description of the Buildings and Parking Areas?

• Description used to identify UOP on 3115.

• Renovations, Remodels, Replacement? Late Partial Disposition Election Candidate • Write Down Remaining Basis of what was thrown away and is still on the books • Requires a 3115

• Routine Maintenance performed more than once every 10 years? • Requires a 3115

• Is the building cost basis above or below $1 million? • Small Taxpayer Safe Harbor for those below ($10k or < 2%) • Track expenses

©2015



• Reconfigure the depreciation schedule? - • Multiple Buildings on site requires multiple UOP Breakout of cost basis

• Reconfigure Depreciation Schedule

• Assign a cost basis for each building - UOP

• Assign a cost basis for Parking Lot/Land Improvements

• Track expenses on a per building basis – educate clients to comply

• Apply Improvement Standards to invoices? • Repair or an Improvement? BAR Test Betterment, Adaptation,

Restoration

• Compare cost of invoice to Building Systems, Major Component, Substantial Structural Part

• Know the starting basis of each of these building systems, major components.

• Cost segregation favorable to client?

©2015


3115 Concurrent Methods Late Partial Disposition / Cost Seg

Method codes to accomplish:

• Cost Segregation Impermissible to Permissible, #07

• Partial Asset Disposition Election, #196

• Whole Asset Disposition

– Building UOP #205

– Equipment UOP #206

• Removal Cost, #21

– Send to National Office in Washington, DC

– All others sent to Ogden, Utah

©2015



• Find all clients with depreciation on building assets.

• Qualify clients with estimated Disposition and Cost Segregation economic needs.

• Get an Engineering-based Study that meets the IRS’s guideline.

• Apply the Change in Accounting Method Form 3115 with method codes & 481(a) adjustment with study results to the client’s return.

©2015


3115 Concurrent Methods 184,186,192 on same 3115

Method Codes to accomplish:

• Repairs and Maintenance (R & M), #184, with a citation to regulation Section 1.162-4 (R)

• Material and Supplies (M & S), #186 and/or #187, with a citation to 1.162-3 (R)

• Unit of Property, #184, with a citation to 1.263(a)-3(e) (R)

• Betterment, Adaption, Restoration, (the BAR Test rules), #184 with a citation to the particular part of 1.263(a)-3(g), -3(j), -3(l), -3(k), as applicable (R).

• Routine Maintenance Safe Harbor, #184, with a citation to 1.263(a)-3(i) (R if you want to take)

• Acquisition of property, #192, with a citation to (1.263(a)-2) (R)

©2015


3115 Small Taxpayer Short Form

©2015


Implementation Compliance Steps

Administrative:

• Dear Client Letter – Start compliance discussions

• Resources to file CAM Form 3115 & 481(a)

• Capitalization Policy in Place – AICPA Template.

• Routine Maintenance Safe Harbor Form 3115.

• De minimis Safe Harbor and Materials and Supply.

©2015


Implementation Compliance Steps

Administrative:

Economic and Accounting:

• Cost Segregation Preliminary Analysis.

• Late Partial Disposition study for 2014 tax year deadline.

• Units of Properties Defined on Dep. Schedule.

• Track Expenses per Building

• Define Building Systems for each building

• Partner with Cost Segregation Firm (CSSI)

©2015


Recommendations: Take Action List

CPA Firm business issues:

• How are you going to get paid?

• Separate engagement letter?

• What are you going to charge?

• Know what you have to do for each client.

• Rank clients (Real Estate, Manuf., Rentals, 1040s)

• Who is going to do the work? Process/Cultural Adopt.

• Education, Process, Resources, Production, QC.

• Delivery Schedule. Extensions?

• Done before tax season?

©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


CSSI can Help

• Late Partial Dispositions – “Use It or Lose It” • Parts of Capitalized Improvements are now Deductible

Repairs • Units of Property – Assign Basis to Buildings • Improvement Standard Decision Clarity with Cost

Segregation Study • Switch clients to a Cost Segregation Depreciation Model

when Appropriate

Challenges for the CPA Solutions provided by CSSI

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Partnering Qualification and Analysis

Client Contact and

Proposal Execution

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Ease of Compliance

CPA: 1-2 hrs per client

Timely completion

Client Satisfaction

100%: Grateful for effort to save taxes

Additional Revenue

$1,000-$3,000 per client

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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

Explaining Cost Segregation

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Straight-Line

• Hamburger

Cost Segregation • 2 All Beef Patties

• Special Sauce

• Lettuce

• Cheese

• Pickles

• Onions on a

• Sesame Seed Bun

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Straight-Line

• Looks at the building as a Whole

• Structural Building Components

• Depreciated over 39yrs (27.5yrs)

• Real Property Only

Cost Segregation

• Identifies Parts and Pieces of the building

• Non-Structural Building Components

• Depreciated over 5, 7 & 15 years

• Personal Property & Real Property

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5 & 7 Year Property

Decorative building elements, wallpaper Specialty electrical, plumbing, mechanical Carpet, flooring, crown moldings, Built In cabinets, counter tops, millwork Security, special lighting, window treatments Communications, cable Kitchen fixtures, refrigeration equipment

15 Year Property Landscaping, paving, fencing, site utilities,

parking lot, signage, sidewalks, sprinklers, walkways

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Current Buildings Acquired after 1986

New Construction

New Acquisitions

Renovations / Leasehold Improvements

The Applications

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• An Engineering-Based Study of the building for tax purposes.

• Produce a Report that the Tax Professional submits with the return.

• Automatically accepted by IRS.

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Explaining Cost Segregation Types of Commercial Buildings

• Apartment Complex, Condominium

• Auto Dealership

• Shopping Mall, Strip Center

• Restaurant

• Hotel/Motel

• Medical/Dental/Veterinary Facilities/Surgical

• Nursing Homes/Assisted Living

• Office Buildings, Banks

• Retail Chains/Franchises/Leasehold Space

• Self Storage, Mini Warehouses

• Supermarkets, Furniture Stores Etc…

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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?

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Cost Segregation vs. Straight-Line Depreciation

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Cost Segregation vs. Straight-Line Depreciation

Eighth Wonder of the World

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Financial Results of Cost Segregation

Building Cost $ 250,176 (with-out land)

Tax Savings Benefit: $32,845

Study Fee Before Tax: $2,420

Study Fee After Tax: $1,549

ROI: 21:1

Project #9501

©2014



Building Cost $324,000 (with-out land)




ROI: 24:1

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Building Cost $5,246,908 (with-out land)




ROI: 33:1

Project # 9503

©2015


Thank You

Thanks for attending the Webinar,

For insights into your specific questions,

please Contact:

Eric Christenson 205-837-2026

[email protected]

And Request:

• TPR Resource Implementation Guide • Phases of Implementation Checklist • Method Codes List RP 2014-16

www.CostSegServe.com

Presented by David Deshotels Jan 20 and 21st, 2015 [email protected]

http://www.costsegserve.com/