Advanced Tax Issues & More
Todd Fentress, Clark Schaefer Hackett
Ed Rebman, Maner Costerisan
Tim Smith, Bernard Robinson & Company
Topics to Discuss
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Tangible Property Regulations
RD Handbook Changes
Excess basis and avoiding loss of credits
Eligible Basis
Applicable Fraction
Casualty Loss
Non-profit set-aside
Tangible Property Regulations
• Changes accounting
• The new IRS
for materials &
regulations apply to all
supplies
taxpayers with any
• Changes the way
tangible property
taxpayers evaluate
including:
their expenditures for
– Materials & Supplies
capitalization/expense
– Buildings
• Effective for tax years
– Machinery &
beginning on or after
Equipment
January 1, 2014
De Minimis Safe Harbor
• What is an AFS?
– Audited Financial
Statements
– Financial statements
provided to federal or state
governmental agency
• Expenditures of $500 or
less per item or invoice for
taxpayers without
applicable financial
statements (AFS) & $5,000
or less with AFS
Decision
Tree
• Generally, taxpayer must
have a written
capitalization policy in
place specifying the dollar
threshold amount.
• In addition, an election
must be included within
each year’s income tax
return
To Capitalize or Not to Capitalize??
• Generally, amounts paid to improve a unit of
property (U of P) must be capitalized
• Exceptions:
– De minimis Safe Harbor (previously discussed)
– Routine Maintenance Safe Harbor
– Safe Harbor for Small Taxpayers
• Unit of Property – Building and Building Systems
• Improvements (Restoration, Adaptation, Betterment, Improvement Costs)
Unit of Property (U of P) Defined
• Each separate building is
by definition a U of P
• Must look at each building
system as a separate U of P
as well:
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HVAC
Plumbing systems
Electrical systems
Escalators
Elevators
Fire protection
Security systems
Gas distribution systems
• For non-building property, a U
of P is determined by whether
or not the property/
component can function
independently
– If so, then it is defined as a U of P
– If not, then it is a component of a
larger U of P
• The smaller the U of P, the
more likely capitalization will
be required
“Use It or Lose It” Rules
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Must “scrub” depreciation schedules in 2014 looking for the following:
– Repair and maintenance items that never should have been capitalized
under the new R.A.B.I. criteria
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Optional “scrub” of depreciation schedule in 2014 looking for the following:
– Impermissible methods (class life or bonus)
– Prior year PAD’s (partial asset dispositions)
– Items that qualify as “Routine Maintenance”
– Writing off removal costs
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Then calculate the 481(a) adjustment
– Equals the difference between what should have been taken and what
was actually taken as a deduction
Annual Elections
Expense Elections
• De Minimis Safe Harbor
Election **
• Safe Harbor for Small
Taxpayers **
• Partial Asset Disposition
Capitalization Elections
• Election to capitalize and
depreciate certain
materials & supplies
• Election to capitalize
repair and maintenance
costs **
• Election to capitalize
employee compensation
or overhead as part of
acquisition costs of
property
Accounting Method Changes
(Required)
• #184
– Application of R.A.B.I
– Routine Maintenance Safe
Harbor
– Identify U of P’s
– Expensing R&M items
previously capitalized
• #186/187
– Adopt new materials and
supplies accounting
method for non-incidental
(#186) and ability to
expense incidental
amounts (#187)
• #192
– Facilitative and inherently
facilitative costs must be
capitalized for asset
purchases
Proposed RD Handbook Changes
• Chapter 4: Financial Management
Current Audit Determination Threshold
Units
24+
16 - 23
Under 15
Reporting Requirement
Audit, Agreed Upon Procedures & Owner's
Self Certification
Agreed Upon Procedures & Owner's Self
Certification
Owner's Self Certification
Proposed RD Handbook Changes
• Chapter 4: Financial Management
Proposed Audit Determination Threshold
If > $500,000 in combined federal assistance
Audit w/ Opinion on Major Program & Owner's
Self Certification
If < $500,000 in combined federal assistance MINC filing & Owner’s Self Certification
If an audit is required by another organization You must submit a copy to RD (YB not required)
Proposed RD Handbook Changes
• Chapter 4: Financial Management
Current "Compliance" Testing Requirements
Internal Control Testing to meet GAGAS (Yellow Book)
Agreed Upon Procedures (not really compliance testing)
Operating and Administrative Expenses
Identities of Interest Transactions
Replacement Reserve Withdrawals &
Funding
Proposed RD Handbook Changes
• Chapter 4: Financial Management
Proposed Compliance Testing Requirements
Compliance Testing to Issue an Audit Opinion on Compliance with Program
Requirements related to:
Mortgage Status
Replacement Reserve
Return on Investment (ROI) or Return to Owner (RTO)s
Equity Skimming
Tenant Security Deposits
Cash Receipts & Cash Disbursements
Management Functions
Unauthorized Change of Ownership / Acquisition of Liabilities
Unauthorized Loans of Project Funds
Proposed RD Handbook Changes
• Chapter 4: Financial Management
Proposed Compliance Testing Requirements
Internal Control Testing to meet GAGAS (Yellow Book)
Tenant File Testing at the judgment of auditor to satisfy Yellow
Book & GAAS standards
Compliance Testing to Issue an Audit Opinion on Compliance with Program
Requirements related to:
Tenant File Testing is NOT covered under the Compliance
Supplement
Overview of Audit Guide
• 12/19/13 – Draft Form Released
• 3/28/14 – Closed for Draft Comments
• 9/18/14 – Final Version Released
Excess Basis
Actual
Eligible Basis
Applicable Fraction
Qualified Basis
Tax Credit Percentage
Annual Tax Credits
Form 8609
IRS Audit
$10,000,000
$9,500,000
100%
100%
$10,000,000
$9,000,000
9%
$900,000
$9,500,000
9%
$810,000
$855,000
Eligible Basis or Not?
• Relocation costs – expensed under
IRC §162
• Accounting costs
• Developer fee
• Land costs verses site improvements
• Bond issuance costs
Applicable Fraction
• Applicable fraction is total floor space
(TFS) of Low Income units over TFS of
residential units.
• Floor space includes the entire unit
including closets and balconies.
• Applicable fraction in first year is the
applicable fraction as of the end of
each month over 12.
Casualty Loss
• Understanding whether recapture
of previous credits or loss of current
year credits applies
• Also applies to Bond deals
Nonprofit Set Aside
• IRC §42(h)(5)(B)
– A qualified nonprofit organization is to
own an interest in the project (directly or
through a partnership) and materially
participate (within the meaning of IRC
§469(h)) in the development and
operation of the project throughout the
compliance period.
Taking Credits without Signed 8609s?
• When should you receive 8609s?
• What to do if they are delayed?
• Are you sure I can claim credits
without my 8609s?
Who Gets What When the
Partnership is Liquidated?
Partnership Capital Accounts
Partnership Agreement
Back End Calculations
Partnership Capital Accounts
All Partners in a Partnership Have a Capital Account
Safe Harbor Capital Account Maintenance Rules under IRC 704(b)
• All Capital Accounts Start at Zero
• Increased by Capital Contributions
• Increased by Income & Gain Allocations
• Decreased by Loss & Deduction Allocations
• Decreased by Distributions
• Upon Liquidation, all Capital Accounts Return to Zero
Partnership Agreement
Partnership Profit, Loss & Cash allocations controlled by
Partnership Agreement
• Section 3.2 (m) – Allocations of Income or Gain from Sales
• Section 4.2 – Net Cash from Sales and Refinancings
• Section 10 – Dissolution and Termination of the Partnership
4% Deal Liquidation Calculation
9% Deal Liquidation Calculation
What If the Ultimate Allocations of
Cash Aren’t What You Expected?
Purpose of 704 Safe Harbor
• Flexibility relating to allocation provisions
Avoid Triggering Threshold Tax Issues
• Substantial Economic Effect
• Boardwalk Issues (is the investor a limited partner at all?)
What to do for Old Deals:
For Existing Deals Approaching Year 15:
Stay out of the Liquidation Section of the Partnership Agreement
• Refinance instead of Selling
• Negotiate the purchase of the LP interest
Manage the Tax Capital accounts – Generate more tax
losses/agree to special allocations of income
What To Do for New Deals:
Negotiate Special Gross Income Allocation Provisions
Negotiate Right to Purchase LP Interests
Modify Liquidation Events
Forced Sale Rights
Pricing
Any Questions?
• Todd Fentress, CPA
– Shareholder, Clark Schaefer Hackett
– tfentress@cshco.com
• Tim Smith, CPA
– Partner, Bernard Robinson & Company
– tsmith@brccpa.com
• Edward Rebman, CPA
– Principal, Maner Costerisan
– erebman@manercpa.com