n overview of tangible property regulations n greatest impacts to your clients n avoid the traps of...

The Effect of the Temporary & Final Tangible

Property Regulations

Today’s Agenda

Overview of Tangible Property Regulations Greatest Impacts to your Clients Avoid the Traps of the Temporary Regs Action Steps to Prepare for 2013 Filing

Capitalize or Expense?

Acquire, Produce, Improve.

10 yrs. 300+ Pages Lots of Examples Not Many Bright

Lines

Overview

Best Executive Summary of Temp Regulations

Copies of the Final Regulations

AICPA Summary

Tangible Property Regulations General Framework

Materials and Supplies

Cost to Acquire Tangible Property

Cost to Improve Tangible Property

Dispositions

Benefit to your Client Partial Disposition Election 1.168(i)-8(d)(2)

Taxpayers may elect to treat a partial disposition of an asset as a disposition.

The election is made in the taxable year that the disposition occurs starting in 2014.

Benefit to your ClientAbility 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

Benefit to your ClientAbility to write off assets that are

no longer in use. Ghost Assets removed.

Roof Replacement HVAC Redo Plumbing Redo Electrical

Catch Up Provision 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 years 2012 and 2013.

• $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

• Asset Valuation $53k

• Cost Segregation on Renovation $126k

Year of OPT In Matterso 2013 Get Botho 2014 No Past

Disposition

PRE 2014 REQUIRES OPT IN

2012 l 2013 l 2014 l

Final Regs

Temporary RegsOpt in Period

Disposition back to 1987

2012 & 2013 2014

Same Methods


2012 l 2013 l 2014 l

3-6 3115s

Multiple 3115

Audit Protection

Scope Limitations


2012 & 2013 2014


2012 l 2013 l 2014 l

Multiple 3115

Audit Protection

Scope Limitations

Final Tangible RegulationsAutomatic



2012 & 2013 2014


2012 l 2013 l 2014 l

No Extended Scope Limitations.

No Multiple 3115s.

Limited to one 3115

every 5 years

Per Accounting Method

Scope Limitations



Final


2012 & 2013 2014


2012 l 2013 l 2014 l

Multiple 3115

Audit Protection

Scope Limitations



Final

Correct Past Capitalization -Expense Issues / Disposition

Both TPR and Cost Seg

Partial Disposition is an Annual ElectionIn the tax year item removed

“What happens if I do nothing?”

Current Economic Disposition not taken for catch up tax savings results.

IRS says…“Use it or lose it”.

Basis Reduced without the benefit of the deduction.

At time of sale: Unexpected recapture

#1 QuestionHow do I get “The Number”?

IRS says to use: Reasonable Method Cost Segregation is a Certain Method

Reasonable Methods1. Discounting the cost of the replacement

asset to its placed-in-service year cost using the Consumer Price Index.

2. Pro rata Allocation of the unadjusted depreciable basis of the GAA based on the replacement cost of the disposed of asset and the replacement cost of all of the assets in the GAA or Multiple Asset Account.

Reasonable Methods3. A Study allocating the cost of the asset to

its individual components.

Cost Segregation is a certain method.

Cost Segregation Method Scan Plans –

Estimating Software IRS accepted Cost

Databases Defined Engineering-

based Methodology The Study: Report

Form meets IRS Report Criteria

Defendable

Asset Valuation Study

Large Renovations

Complicated Remodels

Retired components and Partial Disposition

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

$50-$80k per $1 Million

Works on $200k building

What is Cost Segregation?

Personal Property vs. Real Property

Personal Property- Section 1245 Property- Non-structural building

components- Depreciated over 5, 7, or

15 years- Eligible for double

declining depreciation- Land Improvements

Real Property- Section 1250 Property- Structural building

components- Depreciated over 27.5 or

39 years- Straight line depreciation

- Land Improvements not subject to depreciation/amortization

Section 1245 Examples

Cost Segregation vs. Straight line

Time Value of Money

1 2 3 4 5 6 7 8 9 10111213141516171819202122232425262728293031323334353637383940 $-

$100,000 $200,000 $300,000 $400,000 $500,000 $600,000 $700,000 $800,000 $900,000

$1,000,000 $1,100,000 $1,200,000 $1,300,000 $1,400,000 $1,500,000 $1,600,000 $1,700,000 $1,800,000 $1,900,000 $2,000,000 Future Value of Invested Tax Savings

$100,000 @ 8%

Years of Ownership

Invested Savings

$200,000

$500,000

$1,050,000

Cost Segregation More Valuable

Partial Disposition allows the write down of retired elements.

No recapture on retired building pieces Permanent Tax Savings at Time of Sale Rates reduced from Ordinary Income

level (35-41%) to Capital Gains (20%)

Office Condo

Office Condo Summary Building Cost: $324,000

Tax Savings Benefit: $30,609

Study Fee Before Tax: $3,400

Study Fee After Tax: $2,176

ROI: 14:1

Manufacturing Company

Manufacturing CompanyActual Savings Overview

Building Cost $ 783,000

Date Acquired October 2007

Tax Year: 2007 2010 2011

Current Method

Accumulated Depreciation Reported 39 year straight line method $ 4,189 $ 64,417 $ 84,494

Alternative Method Cost Segregation Study Accumulated Depreciation 5 yr. $ 15,112 $ 121,741 $ 138,529 15 yr. $ 2,408 $ 27,855 $ 34,701 39 yr. $ 2,865 $ 44,062 $ 57,794 Total $ 20,385 $ 193,658 $ 231,024

Results for Tax Year: 2007 2010 2011 Increased Accumulated Depreciation Expense $ 16,196 $ 129,241 $ 146,530 Tax Rate (Estimated) 36.0% 36.0% 36.0%

Estimated Accumulated Tax Savings Benefit $ 5,831 $ 46,527 $ 52,751

Auto Dealership

Auto DealershipActual Savings Overview

Building Cost $ 2,036,777

Date Acquired August 2010

Tax Year: 2010 2011 2014

Current Method

Accumulated Depreciation Reported 39 year straight line method $ 19,614 $ 71,837 $ 228,506

Alternative Method Cost Segregation Study Accumulated Depreciation 5 yr. $ 101,839 $ 264,781 $ 479,865 15 yr. $ 38,699 $ 112,226 $ 291,564 39 yr. $ 6,865 $ 25,143 $ 79,977 Total $ 153,222 $ 417,946 $ 883,053

Results for Tax Year: 2010 2011 2014Increased Accumulated Depreciation Expense $ 133,608 $ 346,109 $ 654,547

Tax Rate (Estimated) 38.0% 38.0% 38.0%

Estimated Accumulated Tax Savings Benefit $ 50,771 $ 131,521 $ 248,728

Temporary & Final Tangible Property

Regulations

Tangible Property Regulations General Framework

Materials and Supplies

Cost to Acquire Tangible Property

Cost to Improve Tangible Property

Dispositions

Who is Affected?

Anyone with Tangible Property- New regulations provide

guidance on whether an expenditure on tangible property should be considered a capitalization or expense.

Summary Purpose

- Provide guidance and clarification on applications of Sec. 162(a) and 263(a) with regards to amounts paid to acquire, produce, or improve tangible property

- Code Section 162(a)- Cost are deductible as a repair expenses if incidental in nature and neither adds to the value of property nor appreciably prolong its useful life.

- Code Section 263(a) – Costs are capitalized if for permanent improvements or betterments that increase the value of property, restore its value or use, substantially prolong useful life, or adapt it to new or different use.

Summary Purpose

- Provide guidance and clarification on applications of Sec. 162(a) and 263(a) with regards to amounts paid to acquire, produce, or improve tangible property

• Supposed to summarize all case history relating to Cost Seg.

December 2003 – Notice 2004-06 Requesting comments on the issues

August 2006 – Proposed Regulations issued

March 2008 - Re Proposed regulations – Lots of bad feedback

December 2011

“New” temp regulations and proposed regs are released

Effective for tax years beginning Jan. 1st, 2012

Later deferred until tax years beginning 1/1/2014

IRS – Notice 2012-73

March 2012 - Rev. Proc. 2012-19 & 2012-20 (IRS guidance on Regs.)

September 2013 – Final Regulations Sept 9, 2013

OCT / NOV 2013 – Final Procedural Guidance

Overview

Relief for Small Businesses - small taxpayers (<$10M) can elect not to apply improvement rules to eligible building (<$1M). If total amount paid < $10,000 or 2 percent of unadjusted basis of the building.

Changes to definitions of Betterments and Restorations

Overview

Routine Maintenance Safe Harbor rule –extend safe harbor to buildings but require 10 years as the period which a taxpayer must reasonably expect to perform the relevant activities more than once.

Overview

Dispositions – the Proposed Regulations for Dispositions change the rules for partial dispositions of assets.

Requires making a qualifying disposition election for certain situations when assets are held in GAA.

Overview

Partial Disposition election is made on Federal return for the taxable year in which the portion of the asset is disposed by the taxpayer.

Cost Segregation Studies are more relevant for repair determination and for retirement purposes.

Caution – Timely Action Required.

Many sections of regs. must be applied retroactively to all prior years where it presents a material difference in tax liability. IRS has not provided clear guidance on how far back to go.

Must File Form 3115 “Change of Accounting Method” for several sections of the regulations. (most taxpayers 4-6 CAMs)

Timing is Important Rules generally apply to tax years beginning on/after

1/1/2014 (but also apply to cost incurred in prior years)

Taxpayers that incurred costs to repair or improve tangible property are required to conform prior years expenditures to the Final Repair Regs.

If you did a “repair study” in a prior year, you may have to revisit those.

Final & Temp Repair Regs. require Changes of Accounting Methods to be filed. Several sections require full 481(a) adjustments for prior years as mentioned above. (2012 & 2013)

Overview

Options for tax years beginning 2012 & 2013

Continue with existing accounting methods

Early adopt the 2011 Temp Repair Regs.

Early adopt the Final Repair Regs. All taxpayers must conform to the Final

Repair Regs for tax years beginning 1/1/2014 Can still apply to 2012 (180 day window)

Cut-Off Basis

Sections below do NOT require 481(a) adjustments. Applied to amounts for tax years on/after 1/1/2014 with option to apply to tax years beginning on/after 1/1/2012,

Materials and supplies (Reg. sec. 1.162-3);

De minimis rule ("capitalization threshold“) (Sec. 1.263(a)-1(f));

Costs for acquisition of real property (Sec. 1.263(a)-2(f)(2)(iii));

Employee comp and overhead costs for acquisition of real/personal property (Reg. sec. 1.263(a)-2(f)(2)(iv))

Inherently facilitative amounts for acquisition or production of

real/personal property (Reg. sec. 1.263(a)-2(f)(3)(ii));

Safe harbor for small taxpayers (Reg. sec. 1.263(a)- 3(h));

Cut Off Basis

Continued… Optional regulatory accounting method for amounts to repair,

maintain, or improve tangible property (Reg. sec. 1.263(a)-3(m));

Election to capitalize repair and maintenance costs (Reg. sec.

1.263(a)-3(n));

Section 263A direct material costs (Reg. sec. 1.263A-1(e)(2)(i)(A));

Section 263A indirect material costs (Reg. sec. 1.263A-1(e)(3)(ii)(E)).

For early adopters, there is transition relief to make certain

elections on 2012 & 2013 amended returns.

Overview

General Asset Account Election issue addressed – do not have to elect GAA treatment to forgo loss upon retirement of structural component

De minimis Rule Change - eliminated the ceiling! Amounts less than $5,000 per item (invoice) can be expensed for tax as long as they are expensed on financial statements. Taxpayers without Applicable Financial Statements can use De minimis rule with a limit of $500 per item (or invoice)

Routine Maintenance Safe Harbor rule –extend safe harbor to buildings but require 10 years as the period which a taxpayer must reasonably expect to perform the relevant activities more

OverviewIssue Prior

RegulationsTemp/Final Regulations

De minimis Rule n/a • Eliminates Ceiling• Properly Expensed to be

Deductible• No Statement Restrictions• <$5,000 per invoice or item• (with AFS)

De minimis RuleSafe Harbor Scope

n/a

• <$5,000 per invoice or item.• Economic useful life 12 months

or less• (with AFS)

• <$500 per invoice or item (without AFS)

OverviewIssue Prior Regulations Temp/Final Regulations

Acquisition / Production Cost

• Capitalize amounts paid to acquire / produce tangible property or defend or protect title

• Largely restate prior rules

• New list of inherently facilitative cost

• Safe Harbors for employee comp /overhead and real property investigatory cost

Overview

Issue Prior Regulations Temp/Final Regulations

UOP -General rule

N/A Functional Interdependence

UOP -Building

N/A Each building and its structural components

UOP–Plant Property

N/A Each Component that performs a discrete and major function or operation

Overview


Materials and Supplies • Not Defined• Incidental –deduct

when purchased• Non-Incidental-

deduct when used or consumed

• New Definitions• Same General

Methods• Elections available to

capitalize and depreciate or deduct under the De minimis rule

• Special rules for rotables and temporaries

$200 limit

Overview


UOP –Leased Property

N/A Lessor: Each building and its structural components

Lessee: Portion of each building subject to lease and structural components of leased portion

Improvement Standards

N/A BettermentAdaptationRestoration

Overview


Relief for Small Businesses

N/A Exempt from Improvement Rules if• Less than $10,000• Or 2% of unadjusted

basis of building• < $1M basis• Less than $10M

Disposition(rules not final)

Include sale, exchange, retirement, abandonment, destruction, scrap, involuntary conversion

Add retirement of Structural Components of a Building

Partial Disposition

Overview


Routine Maintenance for Safe Harbor

N/A • extend safe harbor to buildings

• 10 years as the period which a taxpayer must reasonably expect to perform the relevant activities.

Changes to Betterment and Restoration

Results in changes to is

Tax Accounting Method Change Rules Rev. Proc. 2012-19

Repairs / Unit of Property Improvements Routine Maintenance Safe

harbor Optional Regulatory Method Incidental Supplies Non-Incidental Supplies Rotable Spare Parts

De minimis Rule Dealer Facilitative Sales

Costs Non-dealer Facilitative Sales

Cost Real Property Investigatory

Costs Capitalize Costs to Acquire/

Produce Property

Tax Accounting Method Change Rules Rev. Proc. 2012-20

Depreciation / Amortization of Leasehold Improvements

Changes within single, multiple or general asset accounts

Disposition of buildings or structural components

Disposition of tangible depreciable assets (other than buildings)

Late general asset account elections

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;

Fuel, lubricants, water, & similar items expected to be consumed < or =12 months from beginning of use;

UOP with a useful life of < or = 12 months; CHANGE: UOP < $200 (from $100 in Temp Regs.); Property identified in published guidance in the

Federal Register or in the IRS Bulletin as materials and supplies.

Incidental materials and supplies• Deductible when purchased

Non-Incidental materials and supplies• Deductible when used or consumed

CHANGE: Election to capitalize and depreciate is now only available for rotable, temporary, or standby

emergency spare parts.

Taxpayers must Capitalize Cost associated with Real or Personal property paid to:• Produce or Acquire the property• Facilitate the Acquisition• Defend or Perfect the Property

De Minimis Safe Harbor Expenses

CHANGE: $5,000 expensing threshold per item or invoice for property if taxpayer

Has an Applicable Financial Statement (AFS) Has written expensing policy for amounts under a

certain dollar amount Treats the amounts as expenses on the AFS as well $500 expense threshold per item or invoice if

taxpayer does not have an Applicable Financial Statements

Must still have written expensing policies in place at the beginning of the tax year.

Elected, it is also applied to all eligible materials & supplies except, rotable, temporary, and standby emergency spare parts.

If tangible property is acquired with intent of being used to produce property, 263A may required capitalization.

De minimis Safe Harbor is elected annually for all amounts paid in that tax year that meets the safe harbor. No deductions if exceeded.

Includes materials and supplies that meet requirements for qualification. Cannot exclude qualifying expenses.

De Minimis Safe Harbor Expenses

Deductible – must reasonably expect (at time UOP is placed in service) to perform more than once during class life (alternative depreciation system (ADS))

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, manufacturers' recommendations, and taxpayer's

Taxpayers must Capitalize or Expense cost associated with improving tangible property based on the Unit of Property Concept.

Determine

Unit of Property

Apply Improvement

Standards

Consider whether Routine

Maintenance Safe Harbor Applies

CapitalizationExpenditure

Unit of Property - UOP

For Real and Personal Property (except buildings)• a Unit of Property is comprised of all components

that are functionally interdependent (i.e., the placing in service of one component is dependent on the placing in service of the other component).

• EXAMPLES Tires on a Truck HVAC System (pumps, compressors, piping, etc.)

Unit of Property - UOP Except for certain defined building systems, a building is considered

a single Unit of Property.

New regulations require taxpayer to consider effects on expenditures of “building systems” rather than the building as a whole.

Units of Property within a building must be defined in order to properly apply new temporary regulations and final regulations.

Taxpayers have depreciation schedules that need revision in regards to UOP.


The smaller the Unit Of Property, the more likely to Capitalize

Facts and Circumstances Driven

Must analyze each cost in relation to UOP $7,000 in a UOP valued at $40,000 - Improvement $7,000 in a UOP valued at $400,000 Repair


Building and its structural components are considered a single Unit of Property 1.263 (a)-3T(e)(2)(i)

Building Structure consist of “building and its structural components other than the structural components designated as

Building Systems… 1.263(a)-3T(e)(2)(ii)(a)

Building Systems1. HVAC

2. Fire Protection & Alarm

3. Elevators/Escalators

4. Electrical

5. Plumbing

6. Gas Distribution

7. Security Systems

8. Any other systems identified in published guidance

9. Rest of Building(walls, flooring, ceiling…)

Cost Segregation DepreciationThe 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

Unit of Property - UOP Lessor - entire building UOP

For multi-tenant buildings, UOP is always the entire building Lessee – UOP is portion of the building that is leased.

For multi-tenant buildings UOP is their space CHANGE: Amounts paid by lessee are NOT separate UOP from

leased property.

Combine all future improvements to leased portion into the UOP being leased

Ex 5. p148. In year 2, “T” pays for large extension of building they lease. In year 5, adds overhead door to the extension. UOP is now the entire building including the extension and overhead door.


Special rules for:

Plant Property Special Rule – UOP are components that perform a discrete and major function within the functionally interdependent equipment

Two pieces of equipment that are functionally interdependent cannot be separate UOP

Network Assets- UOP is based on facts and circumstances.

Capitalize…Amounts paid for new building or improvements 1.263(a)-3T• Betterments… that increase value of property,• Adaptations… bring property to new or different use• Restorations…return of original condition

Expense... Amounts paid for incidental repairs and maintenance of property 1.263 (a)-1• Refresh… ?

Capitalize Improvements

BettermentsAdaptations

Restorations

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)-3T(h) is to capitalize.

Capitalize

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.

Capitalize

Adapting to New or Different UseChange not consistent • with the taxpayer’s intended use • the Unit of Property at the time originally placed in

serviceoExample: Fabrication shop converted to retail

store.oExample: Warehouse converted to apartments

Capitalize Roofing HVAC Fire Protection Electrical System Plumbing System General Remodel..removing walls, painting, flooring,

ceiling tiles, carpet, floor tiles Windows Flooring

Restoration1.263(a)-3T(i)(5)

Capitalize CHANGE: Major Component – Parts that Perform a

discrete and critical function in operation of UOP CHANGE: 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.

Capitalize Replacement of minor component of UOP will

not constitute a major component or substantial structural part

Even though it affects the function of the UOP (example: roof tiles)

Capitalize CHANGE: For Buildings - Major Component or

Substantial Structural Part if

Replacement includes parts that comprise a major component or a significant portion of a major component of a building or building system. OR

Replacement includes parts that comprise a large portion of the physical structure of the building or building system.

Expense

• Capitalization is not needed.

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

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

Refresh

Example of a Refresh• An automobile dealer owns a car dealership. To remain competitive

in the marketplace and maintain customer traffic and sales, the owner does occasional refreshes to the dealerships

• Cosmetic: Example….patching holes in the walls, repainting interior , replacing damaged ceiling tiles, and repairing and cleaning vinyl flooring.

• Qualify: • Did not deal with any defects that existed at acquisition of building• Did not result in any addition to the store buildings. • Did not increase capacity, productivity, efficiency, strength, or quality of the

building’s structure • Did not change other building systems; • Did not have to be considered a betterment.

Section 168• Includes:

- Sale or Exchange- Retirement- Physical Abandonment- Destruction- Transfer to supplies or scrap- Involuntary conversion- Retirement of a structural component (or

improvement to) of a building.

New rule allows tax payers to not depreciate both the removed and replacement property.• Old Rule: Replace roof, depreciate old and new roof.• New Rule: Replace roof, deduct the Tax NBV of old roof……

Write down result (Sec . 1231 loss).

Recognition of loss is no longer mandatory.• Election is retroactive to date of improvement. • Must keep records of GAA groupings.

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 Larger Building Number

A business owner buys 20 year old building and replaces the Roof after 5 years of ownership.

New Regs: 5 years 39 years

Property Ownership2014

Elect to apply Temp or Final Regulations: Requires Change in Accounting form 3115…19 codes

A. Tax years 2012 / 2013 allow for multiple change in accounting changes for same property/entity.

B. Possible write down of previously retired building elements resulting from demolition/restoration/improvements.

C. Cost Segregation study may be done concurrently to achieve building depreciation redefinition for accelerated tax lives.

D. Cost Segregation Study can identify elements for catch up/ write down opportunities…defendable.

Before 2014

Property Ownership2014

A. Automatically requires use of Final Regulations.

B. Cost Segregation Study may be done concurrently to achieve building depreciation for accelerated tax lives.

C. Cost Segregation Study can identify elements for write down opportunities for future with defined units of property, or element of the unit of property.• May give guidance for expense within Unit of Property for future

After 1/1/2014

Automatic Changes in Accounting Methods (Form 3115)

• Elect by filing Form 3115 and attaching the required documentation listed in the Regs and Revenue Procedures

• Waiting for Procedural Guidance in Oct/Nov.

• IRS trying to simplify process.

• Tax payers who are on calendar year have until January 1, 2014 to comply with method change rules and not be subject to the scope limitations of section 4.02

• Will these be extended? Not Likely.

Automatic Changes in Accounting Methods (Form 3115)

Need to plan by making appropriate elections in 2012 and 2013

• You may not have the right to write-off structural components after 2013 if you don’t elect the provisions of the temp regulations that allow it. Oct/Nov clarification

• Could have negative affect on taxpayer.

• Eliminate Ghost Assets on client’s depreciation schedules

Accounting Transactions for Disposition

Disposition Study -Valuation

Disposition of 1231 property

- Reported as sale for $0

- Scrapped

-Loss equal to undepreciated

basis

481 (a) adjustment calculated and taken as

-Other expense

-Allowed in accordance with Temp Regs. (old regs did not allow a partial

disposition)

Calculate 481 (a)

adjustmentForm 3115

Cost Segregation Specialist

Note of Caution

IRS is beginning to look hard at incorrect depreciation (errors) and advises taxpayers to make the necessary corrections now during this opportunity.

Experts project each business entity will make between 3 and 4 changes in accounting methods (3115) by the end of 2013.

Recommendations Start the Process Now…..It is getting late for 2013! Qualify your clients to make them aware of “catch up”

for 2013 tax year. • Find all clients with depreciation on building assets. • Qualify clients with estimated Disposition and

Cost Segregation economic needs.• Get an engineering-based study for each client with a

qualified Cost Segregation Company that produce Engineering-based Study that meets the IRS 13 Criteria for a Quality Study.

• Apply the Change in Accounting Form 3115 with study results to the client’s return.

CSSI Experience Tax Savings. Delivered.

Performing Engineering-based studies for over 13 years, National

capability, 8,000 Studies completed across the U.S., always on-time.

Qualify the tax savings estimates in 48 hrs. for your client.

Full engineering-based studies completed in 4-8 weeks.

Perform Change in Accounting Form 3115 and 481(a) adjustments.

Use CSSI as your engineering-based service provider for your clients.100

Circular 230 Disclosure

To comply with IRS requirements, we inform you that any tax advice contained in this communication is not intended or written to be used, and cannot be used, for the purpose of avoiding penalties under the Internal Revenue Code.

n overview of tangible property regulations n greatest impacts to your clients n avoid the traps of...

Documents

pages n n lots of examples

n value

clients n

n relative

n partial disposition

past disposition slide

sale slide

filing slide