Engineered Tax Services - Lunch Workshop

Presented by: Michael F. D’Onofrio

Engineering & Specialty Tax

Solutions

2017 Trump Tax Policy Update!

Cost Segregation & Disposition Credits

Energy Tax Incentives (179D & 45L)

Insurance Replacement Appraisals

Property Tax Appeals

New IRS Tangible Property Regs

Learning Objectives

Cost Segregation

Energy Tax Incentives

Abandonment/Disposition

Tangible Property Changes

Construction Tax Planning

ENGINEERED TAX SERVICES

National Strategy

Specializes in engineering studies for advanced tax strategies

Licensed

Professional

National

Engineering

Firm 20 offices

across U.S.A

$ Results

Tremendous

Revenue

generated for

Partners and

Billions of $

Taxes Saved

Success

ETS averages $100 Million monthly refunds and tax benefits property investors architects, engineering firms

Clients

Clients include NFL, Hilton, Marriott, IKEABoeing, Ford Snowbird Ski Resort, BMW, Outback, Top 100 CPAs and Designers

Education

Approved Training for CPA CPEEnergyStarAIAUSGBC NAIOPASHRAENSPE


Trump Tax Policy Update

So What’s on the Table … and possible Gone

- Carried Interest Expense?- Deducting State and Local Taxes?- Immediate Expensing over Depreciation?- Energy Tax Incentives? (179D, 45L, Renewables?)- 1031 Exchanges?- AMT?


Trump Tax Policy UpdateWho are the players involved to Watch? “BIG 6”

- Steve Mnuchin (Treasury Secretary)- Kevin Brady (R-TX, House Ways & Means Committee Chair )- Gary Cohen (WH National Economic Council)- Paul Ryan (R-WI, House Speaker) - Orin Hatch (R-UT, Chairman Senate Finance Committee)- Mitch McConnell (R-KY, Senate Majority Leader)

Trump Tax Policy Update

So What’s Next…?

Many Unanswered questions:

- Missing details on how exactly various provisions would work

- TBDs how Republicans will prevent wealthy from disguising

themselves as small businesses to tap the lower 25% rate.

- Plan currently calls for allowing both expensing and interest

deductions, tax experts across the political spectrum call bad idea

because the combination can allow people to create tax shelters.

What’s Next:

- The next major step for Republicans is Passing a Budget.

- They need it to tap the so-called “Reconciliation” maneuver to move

their tax plans through Senate over Democrats' objections.

- Without it, their tax plans -- at least as currently written -- are dead.

Said Brady: “Without a budget, there’s no tax reform.”

Republican leaders will start selling plan

to rank-and-file members immediately

Cost Seg & Abandonment

Current Best Hidden Opportunities For Property Owners & Investors!!

• Purchase, Construction & Sale…Proactive Tax & Energy Planning

• Energy Audits & Efficiency Studies• Detailed Engineering Cost Segregation• DEIRA Insurance Replacement Appraisals• Abandonment & Disposition (TPR PAD)• Energy Tax Incentives (179D / 45L)

179D is $1.80 per sf deduction for Commercial 45L is $2,000 tax credit per unit ResidentialStill Retroactive 2006-2016!


Engineering-Based

Cost Segregation

COST SEGREGATION

Cost Segregation Analysis methodically reviews all property and equipment to properly identify and reclassify Real Property (generally depreciated over period of either 27.5 years or 39 years) into Personal Property (generally depreciated over period of either 5 or 15 years).

How is this done? Yes, the IRS allows it …

• Drawings / Blueprints reviewed and site visits conducted to analyze the building as part of a detailed Engineering-based Cost Segregation Study.

• Can also go back Retroactively 5-10+ years!

• Don’t forget Improvements and Dispositions!

• Generally Requires the filing Form 3115 is easy

Next Generation

Cost Segregation Studies

COST SEGREGATION

Benefits are MORE than just Accelerated Depreciation…

• 2016-2017 Bonus Depreciation Extended at 50%

• Annual Abandonment and Disposition Credits on Assets removed during reno/improvements

• Annual Repair & Maintenance Updates

• Insurance Replacement Appraisal (DEIRA) Savings

• TPR Regs – R&M Expensing vs. Capitalization

• EPAct 179D & 45L – Federal, State and Utility Energy Tax Credits & Incentives

• Minimize Recapture and Gains on Sale!

TIMING ILLUSTRATION

WHICH PROPERTIES BENEFIT MOST?

18%

18%

18%

19%

21%

23%

24%

24%

25%

25%

25%

26%

27%

27%

27%

29%

31%

31%

32%

33%

33%

34%

34%

38%

0% 20% 40% 60% 80% 100%

M anufacturing & Processing

Airport Hangers

Distribution Centers

Industrial

Shopping Centers

Auto Service Centers

M arinas

Post Office

Office Buildings

Department Stores

Fitness Centers

Auto Dealerships

Day Care Centers

Hospitals

Warehouses

M edical/Surgical

Banks

Laboratory/Research

Nursing Homes/Assisted Living

Hotels

Leasehold Improvements

Residential Rentals

Restaurants

Resorts

Personal Property

Real Property

Property Type Percentage Reallocated


EPAct 179D & 45L

Federal & State

Energy Tax Incentives

179D / EPACT OVERVIEW

• Incentivize Energy Efficient Green Building

• New Construction or Renovations

• Placed in Services Dates of:

Jan 1, 2006 – Dec 31, 2016

• Up to $1.80 per sf Tax Deduction

• 2015 PATH Act Extension Through 2016

• Benefits Private Property Owner

OR

• Designers/Contractors of Public Buildings

• Upgrades, Renovations and Retrofits

• Commercial and Residential (4+ stories)

• Not only for LEED Certified Buildings

• Green / Energy-Efficient Buildings

• Architects, Engineers and Contractors (3-Yr Look-back)

• Types: Schools, Government, Office, Retail, Hospitality, Industrial, Manufacturing, Healthcare, Parking Garages

179D CANDIDATES

CALCULATION/REQUIREMENTS

Lighting HVAC Envelope Whole Building

Deduction/SF .60 .60 .60 $1.80

2006 Notice 16 2/3% 16 2/3% 16 2/3% 50%

2008 Notice 20% 20% 10% 50%

2012 Notice 25% 15% 10% 50%

3 Methods for Meeting

179D Certification Requirements

Improvements Require Reduction in

Energy Consumption Compared to

ASHRAE 90.1-2001 Standards

179D CERTIFYING PARTY

IRS Code States the Certifying Party must be:

• “Qualified Individual”

• Unrelated, Third-Part, Independent

• Professionally Licensed Individual in the

jurisdiction where the building is located.

• Must present to the taxpayer in writing the IRS

required documents and requisite qualifications.

• CPA must verify validity of BOTH the inspection

and signing parties.

Over $119,390 Energy Tax Deduction

Hampton Inn, Gainesville66,328 Square Feet

CASE STUDY - HOSPITALITY

GHG Cost Segregation Study Proposal

Client Overview:

A group of Doctors own an older medical clinic

with multiple 754 step-ups and significant renovations

and additions in previous years. The majority of the

property is depreciated on a straight line 39-year basis.

ETS Proposal:

There are benefits available to the client for

Energy Efficient systems, Abandonment of previously

removed systems, and accelerated depreciation

through Cost Segregation with 25% estimated

reclassification, reports also comply with Tangible

Property regs for capitalization and deduction.

Initial analysis estimates immediate deductions of over

$800,000 to be carried over on Form 3115 via 481 Adj.

GHG Cost Segregation Results

Class - life Depreciation Method Basis % of Reclassification

5 Year 200% db $1,744,892.03 31.56%

15 Year 150% db $175,195.39 3.17%

39 Year Straight-line $3,609,449.40 65.27%

179D Results $18,849.90

Total: $5,548,386.72 100%

Total 481 Adjustment $877,220.88 X 42.5 % $372,818.87 cash

Total Engineering Fee: -$19,477.29

Qualifies for (per Square Foot)*

Job Number Project Name

Fully Qualifying

Property (>50%)

Partially Qualifying Property

TotalTotal Square

FootageTotal Tax

BenefitEnvelope HVAC Lighting

ET-13070-12 Parkside Professional Village (1, 2, 3)

DNQ $0.60

DNQ(4)

- $0.60 26,479 $15,887.40

- - $0.30 $0.30 9,875 $2,962.50

% Improvement Contribution 30.72% 1.86% -

Lighting Power Density % Reduction - - 25.16%

Total: $18,849.90

179D Energy Case Study

Medical Clinic Client – 179D Results

Over $240,000 Energy Tax Deduction

Corporate Centre – Office Towers at Boca VillageEnvelope 106,957 square feet

Lighting 220,220 square feet

HVAC 106,957 square feet

CASE STUDY - OFFICE

Public Buildings – Architect Benefits

Year Tax Benefit Year Tax Benefit

2010 $341,547.00 2009 $165,706.80

2011 $375,731.60 2010 $150,414.60

2012 $346,983.10 2011 $95,118.00

2012 $415,270.80

TOTAL TAX BENEFIT $1,064,261.70 TOTAL TAX BENEFIT $826,510.20

CASE STUDY - DESIGNERS

ABANDONMENT & PAD

“Method of disposing of the value of an asset that has been removed for an immediate tax deduction”

Often times the existing system of an improvement /renovation (Lights, HVAC, Roof, etc) remains on the 39-year depreciation schedule for immediate deduction.

ETS increases the value of Cost Seg and 179D by incorporating Abandonment and Partial Dispositions into their study for an serious increased cash benefit and reduced ROI!

ABANDONMENT (162)

$80,000 Lighting System

10 Years Old

60,000 square foot building

• Depreciate $2,051 per yr (on 39 yr CL)

• $2,051 x 10(yr) = $20,510

• $80,000 - $20,510 = $59,490 (Abandonment)

• 60,000 x $.60 = $36,000 (179D)

Abandonment $59,490

179D $36,000

Total $95,490

($95,490 x 35% Tax Rate) $33,422 CASH Benefit

LEARNING OBJECTIVES

Overview of regulations

Materials & Supplies/Safe Harbors/De MinimisRules

Abandonment/Disposition of tangible property

Improvements: Units of Property

Betterments, Restorations, Adaptations

Capitalize or deduct – examples from the regulations

RECENT HISTORY OF REGS

• Temporary Regs Issued on 12/23/2011

• Effective 1/1/2012

• Revision Made 11/20/2012

• Changed to be Announced

• Effective Date of Regs Delayed to 1/1/2014

• Final & Proposed Regs Issued 9/13/2013

• Effective Date of 1/1/2014

• Further Guidance to be Finalized by Year-End

• The option for Early Adoption

The final treasury regulations expand, modify and clarify the scope and application governing I.R.C. §§162(a) and 263(a).

OVERVIEW: HIGHLIGHTS

The final Repair Regs include the following:

• IRC 168 Regs related to depreciation are proposed

• IRC 162 Regs relate to what can be expensed

• Materials and supplies (Reg. 1.162-3)

• Repairs and maintenance (Reg. 1.162-4)

• IRC 263 Regs relate to what can be capitalized

• Capital expenditures (Reg. 1.263(a)-1)

• Amounts paid for the acquisition or production of tangible property (Reg.

1.263(a)-2)

• Amounts paid for improvement of tangible property (Reg. 1.263(a)-3)

The Treasury did not finalize companion regulations governing general

asset accounts and the disposition of depreciable property under I.R.C. §

168. Instead, the Treasury issued proposed regs and indicated that the

proposed regs would be made final by the end of 2013.

OVERVIEW: HIGHLIGHTS

The final Repair Regs make the following

significant changes:

• A revised and simplified de minimis safe harbor

rule

• The extension of the safe harbor for routine

maintenance to buildings

• An annual election for buildings that cost $1

million or less to deduct up to $10,000 of

maintenance costs

• A new annual election to capitalize repair costs

that are capitalized on the taxpayer’s books

• The refinement of the criteria for defining

betterments and restorations

OVERVIEW: TIMELINE

While generally effective for tax years beginning onor after January 1, 2014, taxpayers have the optionof applying the final Repair Regs to tax yearsbeginning on or after January 1, 2012.

Taxpayers can comply with the Repair Regs by:

1. Continuing to use the existing method under the temporary regulations for 2012 and 2013 tax years,

2. Adopting the final regulations for 2012 and 2013, or

3. Adopting the final regulations for 2014.

All taxpayers must comply with the final Repair Regs for the tax years beginning on or after January 1, 2014.

At a minimum, all taxpayers need to put procedures in place to comply with the Repair Regs before the start of 2014. They should also consider filing amended returns for 2012 and 2013 to make certain elections provided in the final Repair Regs.

OVERVIEW: TIMELINE

MATERIALS & SUPPLIES

Defined as tangible property used & consumed in the taxpayer’s operations that is not inventory and:

• A unit of property with a cost of $200 or less (increased from $100)

• Is fuel, lubricants, water or other consumable with an expected life of 12 months or less.

• Fall within the IRS definition of materials & supplies

• Is purchased in order to maintain, repair or improve tangible property.

• Simplify the application of the de minimis safe harbor to materials and supplies.

The Treasury reasoned that the new $200 amount will “capture many common supplies such as calculators and coffee makers.”

Routine maintenance Safe Harbor

• The final regs also allow routine maintenance on fixed assets -- including routine building maintenance -- to be deducted for tax purposes.

• Routine maintenance costs are recurring activities you expect to perform to keep the property in its ordinarily efficient operating condition.

– Examples include inspection, cleaning, testing and replacing parts.

Routine Maintenance

Safe Harbor for Maintenance

Routine maintenance safe harbor

• To qualify as "routine," you must expect, at the time the property was placed in service, to perform the activity more than once during its economic useful life.

• For building improvements to qualify under the routine maintenance safe harbor, you must expect to perform the activity more than once in 10 years.

REPAIR & MAINTENANCECOSTS: ELECT TO CAPITALIZE

New Election to Capitalize Rule

The final Repair Regs allow taxpayers to elect to opt out of expensing repair and maintenance costs if the costs are treated as capital expenses on the taxpayers books and records.

This election is permanent.

It allows taxpayers to align their tax treatment with book treatment, eliminating book-to-tax differences.

De minimis Safe Harbor

De Minimis Safe Harbor for Acquisitions

• Many taxpayers prefer to use the same capitalization methods for book and tax purposes.

• The final regs permit (ANNUAL safe harbor election) certain taxpayers to deduct tangible property they acquire or produce, if the total cost per item (or invoice) is $5,000 or less.

• To qualify for this safe harbor, you must:

– Prepare an "applicable financial statement." That is, a certified audited financial statement or a financial statement filed with a state or local government.

– Possess a written accounting procedure at the beginning of the tax year for expensing property under a specified dollar amount.

– Expense the cost on your applicable financial statement, not just your tax return.

• The de minimis safe harbor also applies to property with an economic useful life of 12 months or less as long as the item does not cost more than $5,000 per item (or per invoice).

De minimis Safe Harbor (cont.)


• Many private taxpayers do not prepare "applicable financial statements.“

• Example: They might prepare financial statements in-house or have them compiled by a CPA.

• Taxpayers without applicable financial statements are subject to a $500 capitalization threshold.

• However - to qualify for the lesser amount, you still must have accounting procedures in place at the beginning of the tax year for expensing property below the threshold.

De minimis Safe Harbor


• In addition, if you elect to use this safe harbor on your tax return, you must use the de minimissafe harbor for all amounts paid in the taxable year for tangible property -- including materials and supplies -- that meet the requirements.

• You can only revoke an election to use the de minimis safe harbor by filing an application for change in accounting method.

• If you do not currently have a written policy for expensing property under a specified dollar amount, consider drafting one before year end,if you plan to elect the de minimis safe harbor in 2014.

Small Business Safe Harbor

Small Business Safe Harbor

• The final regs offer a break to small businesses with gross receipts of $10 million (or less) when it comes to building improvements.

• For buildings that initially cost $1 million or less, qualifying small taxpayers may elect to deduct the lesser of $10,000 or 2 percent of the adjusted basis of the property for repairs, maintenance, improvements and similar activities each year.

• You may elect annually to use the safe harbor for buildings on a building-by-building basis by including a statement on your federal tax return.

• Amounts to which you correctly apply this safe harbor are not treated as capitalizable building improvements under Section 263; instead, they are expensed under Section 162.

DE MINIMIS / SAFE HARBOR

RULE ANNUAL ELECTION

De Minimis / Safe Harbor rule is elected annually by attaching a statement to a timely filed tax return

The final Repair Regs provide that:– The de minimis rule is a safe harbor elected annually

by including a statement on the taxpayer’s timely filed original federal tax return for the year elected.

– If elected, the de minimis safe harbor must be applied to all amounts paid in the tax year for tangible property that meet the requirements of the de minimis safe harbor, including amounts paid for materials and supplies that meet the requirements.

Functional Interdependent: all components of property that are functionally interdependent comprise a single unit of property. Components are functionally interdependent if the placing in service of one component is dependent on the placing in service of the other component (Temp. Regs. Sec. 1.263(a)-3T(e)(3)(i)).

Deduct vs. Capitalize

Determination is “highly factual”

• Guidance revolves around what constitutes the Unitof Property that is being repaired or improved.

• Must analyze each cost in the context of the “Unit ofProperty”

• $10,000 cost. Unit of Property = $30,000 –Improvement

• $10,000 cost. Unit of Property = $300,000 ‐Repair• Same cost, but facts and circumstances require a diff

erent treatment!

Smaller the Unit of Property, more likely to capitalize

IMPROVEMENTS

The final Repair Regs continue to require capitalization of amounts paid to improve tangible property. Property is improved if it results in a:

Betterment Test Does it Increase the Value?

Restoration Test Does it Increase the Life?

Adaptation Test Does it Change the Use?

“keep the property in ordinary efficient

operating condition.”

© 2013 – Engineered Tax Services

IMPROVEMENTS:

UNIT OF PROPERTY DEFINED

Defining the Unit of Property (“UOP”):

• Components that are functionally interdependent. Defined as: Functional Interdependent: all components of property that are functionally interdependent comprise a single unit of property. Components are functionally interdependent if the placing in service of one component is dependent on the placing in service of the other component (Temp. Regs. Sec. 1.263(a)-3T(e)(3)(i)).

• New regulations include specifications to plant property, networks and buildings.

– Plant property individual UOP is now defined as components that perform a discrete and major function within a larger independent UOP.

When Do I Capitalize

an Improvement?

Determine if Expenditure is Improvement

Betterment Restoration Adaptation

Identify Unit of Property

Buildings Plant Property Network AssetsFunctional

Interdependence

If Exceptions Do Not Apply – Then Proceed

Potential Exceptions to Capitalization

Routine Maintenance Safe Harbor

De Minimis Safe HarborSmall Taxpayer Safe

Harbor

UNIT OF PROPERTY:

STRUCTURAL COMPONENTS

Building structure - this includes walls, windows, doors, concrete & roof

The nine building systems as defined by the IRS are:

1. HVAC2. Plumbing3. Electrical4. Escalators5. Elevators6. Fire suppression and alarm7. Security8. Gas distribution9. Any other systems identified in published guidance

New regulations define the UOP between lessor and lessee relationships:

For Lessor –UOP = Portion Leased ÷ 9 building systems

For Lessee –TIs are NOT a separate UOP from the larger unit. Rather UOP is identified as:Leased Space ÷ TIs ÷ 9 building systems

UNIT OF PROPERTY: EXAMPLE

Cost segregation studies can be used to make these determinations easier for the taxpayer.

Without cost segregation: • UOP = Building / 9 systems

With cost segregation: • UOP = Building x 2 / 9 systems (i.e., lighting in 1245 & lighting in 1250)

Example 18, pg. 144. Additional rules; change in subsequent year. In Year 1, T acquired and placed in service a building and parking lot for use in its retail operations. Under Treas. Reg. § 1.263(a)-2, T capitalized the cost of the building and the parking lot and began depreciating the building andthe parking lot as nonresidential real property under I.R.C. § 168(e). In Year 3, T completed a cost segregation study under which it properly determined that the parking lot qualified as 15-year property under section I.R.C. § 168(e). In Year 3, T changed its method of accounting for the parking lot to use a 15-year recovery period and the 150-percent declining balance method of depreciation. Under Treas. Reg. § 1.263(a)-2(e)(5)(ii), beginning in Year 3, T must treat the parking lot as a unit of property separate from the building.

IMPROVEMENTS:

BETTERMENTS

Clarity of the Rules Governing Betterments

The final Repair Regs reorganize and clarify the types ofactivities that constitute betterments to property.

Also, the final Repair Regs no longer phrase thebetterment test in terms of amounts that “result in” abetterment.

Rather, the final Repair Regs provide that a taxpayer mustcapitalize amounts that are reasonably expected tomaterially increase the productivity, efficiency, strength,quality, or output of a unit of property or that are for amaterial addition to a unit of property.

Eliminating the “results in” standard is aimed at reducingcontroversy for expenditures that span more than one taxyear or when the outcome of the expenditure is uncertainwhen the expenditure is incurred.

Betterment Examples

Retailer ‐ changes layout and appearance of stores, reconfigures display tables and racks to provide better exposure of merchandise, corresponding lighting,moving one wall to accommodate reconfiguration of tablesand racks, repainting, patching holes in walls, replacing damaged floor and ceiling tiles and power washing building exteriors.

• Not material increase in capacity, productivity, efficiency, strength or quality of the stores.

• Costs for section 1250 property do Not result in betterments!

• However, X must capitalize amounts for section 1245 property in accordance with §1.263(a)‐2T(d)(1)

Continued Example

Same facts as example 6.• In addition to refresh items, changes layout in

order to increase traffic and sales volume.• Moves changing rooms and specialty departm

ents to different areas; replace conventional doors with automatic doors; replace carpet with

ceramic tile to delineate departments and direct customer traffic.

• Includes upgrades to electrical system to add video monitors. Replaces lighting with more efficient, brighter lighting.

• Lighting change materially increase efficiency• Rebuild walls, ceilings, doors, flooring, and faca

des will materially increase the efficiency, productivity, and quality of X’s stores.

• X must capitalize ALL costs spent including items from ex 6

IMPROVEMENTS:

RESTORATION

Restorations = Capitalization with Potential Abandonment

An amount is paid to restore property if:

It is for the replacement of a component of the property and the taxpayer recognized gain or loss on the sale or exchange of the component or deducted a loss for the component;

The taxpayer returns the property to its ordinary efficient operating condition if the property has deteriorated to a state of disrepair and is no longer functional; it results in the rebuilding of the property to a like-new condition after the end of its class life; or It replaces a part or a combination of parts that comprise a major component or substantial structural part of the unit of property.

Restoration Example

• Roof in factory building is comprised of structuralelements, insulation, and waterproof membrane.

• Over time, waterproof membrane began to wear and leakage began

• X replaces roof membrane with similar but new membrane. (so it’s not a betterment)

• Although roof membrane may effect function ofbuilding structure, it is not, by itself, a majorcomponent or substantial structural part of building structure

• X is not required to treat the amount paid to replace the membrane as a restoration.

• Not a Restoration. Not a betterment. = Repair Expense

Restorations Example 2

NEW: Example # 16–

Office building with one HVAC System

• Comprised of 3 furnaces, 3 AC units, and duct work throughout the building

• Furnace breaks down, replaced with a new furnace

• The three furnaces together perform a criticalfunction in operation of HVAC system.

• However replacing a single furnace is not asignificant portion of this major component of the HVAC System.

• Not a restoration of the UOP (HVAC system)

IMPROVEMENTS :

ADAPTATIONS

Adaptations = Capitalization with Potential Abandonment

• An amount is paid to adapt property to a new or different use if the adaptation is not consistent with the taxpayer’s intended ordinary use of the property at the time the property was originally placed in service by the taxpayer.

• The number of examples demonstrates the difficulty of determining the fine line between a deductible expense and a capitalized item.

ABANDONMENT/DISPOSITION

Abandonment/disposition of property regulations are in PROPOSED form only! The prior temporary regulations identified the ability to abandon structural components of buildings at the time of removal.

Proposed regulations stipulate:

Partial disposition/abandonment on timely filed return only. This will prevent look-back on retirement of previous demolition projects. Taxpayers who have not taken disposition on assets in previous years may do so prior to tax year 2014 only.

Further guidance for determining the basis of a components for disposition:

1. A engineering-based report or study to identify basis.

2. Pro-rata allocation based on replacement costs.

3. A calculation discounting cost of replacement based on the consumer product index.

CASE STUDY

Medical Equipment Manufacturer

Mis-Capitalized Expenses 2009-2012 $4,735,158

Disposition from 2009-2012 $1,076,164

Energy Certification since 2007 $339,000

Total $6,150,322

IMPROVEMENTS:

REMOVAL COSTS

Removal costs can be deducted in all cases IF the taxpayer had a gain or loss on the removal of that asset or component.

For example:

In the case of a multi-use building and multiple tenants. One tenant moves out, and the new one requires demolition and new TIs. The contractor charges the building owner demolition charges for the removal of the existing TIs. These costs can be deducted IF the taxpayer files a partial disposition on a timely filed return.

REVIEW/RECAP

REVIEW/RECAP

STRUCTURAL COMPONENTS:

LESSEE PROPERTY

EXAMPLE FROM Regulations:

Example 4 pg. 150. Lessee property; personalproperty added to leased building. T is a retailer ofconsumer products. T leases a building from L,which T intends to use as a retail sales facility.Pursuant to the lease, L provides a constructionallowance to T, which T uses to acquire andconstruct partitions for fitting rooms, counters,and shelving. Assume that each partition, counter,and shelving unit is a unit of property underparagraph (e)(3) of this section. Assume that forFederal income tax purposes T is treated as theowner of the partitions, counters, and shelving. T’sexpenditures for the partitions, counters, andshelving are not improvements to the leasedproperty under paragraph (d) of this section, butrather constitute amounts paid to acquire orproduce separate units of personal property under§1.263(a)-2(d)(1).

ETS PROCESS

ETS PROCESS

What Does This Mean?

The IRS is expected to issue guidance this year (soon) explaining how and when to obtain automatic consents to comply with the final Repair Regs.

In the meantime, taxpayer with fixed assets should review the temporary and final Repair Regs and be prepared to act promptly when guidance is issued.

In the meantime, at a minimum, taxpayers should adopt written accounting procedures before the end of 2013 for expensing amounts paid for property under $5,000 (for taxpayers with applicable financial statements, $500 for others) to be able to take advantage of the de minimis safe harbor. This is an annual election beginning in 2014, but can also be made in 2012 and 2013 by filing amended tax returns if the taxpayer already had written accounting procedures in place for those years.

Compliance Deadlines

Effective Date

• The final regulations generally apply to taxable years beginning on or after January 1, 2014.

• However, certain provisions of the final regsonly apply to amounts paid or incurred in taxable years beginning on or after January 1, 2014.

• You may apply the new regulations to tax years beginning on or after January 1, 2012.

• Compliance may require you to change your current capitalization procedures and file IRS Form 3115.

Taxpayers Should Consider:

• How to put procedures in place to account for material and supply costs up to the $200 amount in 2014 given the increase from the $100 amount in the temporary Repair Regs.

• Whether to elect to capitalize and depreciate materials and supplies in 2014 given the inclusion of emergency spare parts and whether to revoke a prior election by filing a private letter ruling request.

• How to account for routine maintenance costs for buildings and structural components in 2014, which were added to the routine maintenance safe harbor in the final Repair Regs.

• Whether to elect to capitalize repair and maintenance costs rather than expensing them to eliminate book-tax differences. This is an election that can only be made on the 2014 return; it can’t be made in 2012 or 2013 by filing amended tax returns.

• Whether to elect to apply the safe harbor for small taxpayers with buildings with an unadjusted basis no greater than $1 million. This is an election that can be made for 2012 and 2013 by filing amended tax returns.

• Whether to elect to take losses for the costs of removing depreciable assets or components of depreciable assets in 2014 (which requires recognition of a loss) or for 2012 and 2013 (the MACRS temporary regulations—which were replaced by proposed regulations—also required recognition of a loss, but the regulations were optional for 2012 and 2013). A loss can be taken in 2012 or 2013 by filing amended tax returns or by filing a Form 3115 in the first or second year succeeding the applicable year.

• How to account for expenses previously capitalized as being part of an overall plan of improvement, which was a judicial standard eliminated by the temporary and final Repair Regs.


For Additional Information Contact:

Michael F. D’Onofrio | Managing Director

[email protected]

Office: 561-762-0044

www.engineeredtaxservices.com