n
n
n
n
Overview of Tangible Property Regulations
Greatest Impacts to your Clients
Avoid the Traps of the Temporary Regs
Action Steps to Prepare for 2013 Filing
n
Acquire, Produce,
Improve.
n
10 yrs. 300+ Pages
Lots of Examples
Not Many Bright
Lines
n
n
n
n
n
Best Executive
Summary of Temp
Regulations
Copies of the Final
Regulations
AICPA Summary
Dispositions
Cost to Improve
Tangible
Property
Materials and
Supplies
Cost to Acquire
Tangible
Property
n
Partial Disposition Election 1.168(i)-8(d)(2)
n
Taxpayers may elect to treat a partial
disposition of an asset as a disposition.
n
The election is made in the taxable year that
the disposition occurs starting in 2014.
Ability to write off assets that are
no longer in use with Partial Disposition Election
n Renovations
n Remodels
n Replacements,
n Abandoned in Place
n Common Items – Roofs, HVAC, Electrical
Ability to write off assets that are
no longer in use. Ghost Assets removed.
n
n
n
n
Roof Replacement
HVAC
Redo Plumbing
Redo Electrical
n
Value of what went into the Dumpster.
n
Relative to the value that your
client paid for the building.
n
Disposed of as a Partial Disposition.
n
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 Matters
o 2013 Get Both
o 2014 No Past
Disposition
2012 l& 2013
2014
2012
2013 l 2014
l
Temporary Regs
Opt in Period
Final Regs
Same Methods
Disposition back to 1987
2012 l& 2013
2014
2012
2013 l 2014
l
3-6 3115s
Scope Limitations
Multiple 3115
Audit Protection
Disposition back to 1987
2012 l& 2013
2014
2012
2013 l 2014
l
Temporary Regs
Opt in Period
Scope Limitations
Multiple 3115
Audit Protection
Disposition back to 1987
Final Tangible Regulations
Automatic
2012 l& 2013
2014
2012
2013 l 2014
l
No Extended Scope
Temporary Regs
Limitations.
Opt in Period
No Multiple 3115s.
Scope Limitations
Limited to one 3115
every
5
years
Final
Per Accounting Method
Disposition back to 1987
Final Tangible Regulations
Automatic
Both TPR and Cost Seg
2012 l 2013 l 2014 l
Temporary Regs
Opt in Period
Partial Disposition is an Annual Election
In the tax year item removed
Scope Limitations
Multiple 3115
Audit Protection
Correct Past Capitalization Expense Issues / Disposition
Final
Final Tangible Regulations
Automatic
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
How do I get “The Number”?
IRS says to use:
n
n
Reasonable Method
Cost Segregation is a Certain Method
1.
2.
Discounting the cost of the replacement
asset to its placed-in-service year cost using
the Consumer Price Index.
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.
3.
A Study allocating the cost of the asset to
its individual components.
Cost Segregation is a certain method.
n
n
n
n
n
Scan Plans –
Estimating Software
IRS accepted Cost
Databases
Defined Engineeringbased Methodology
The Study: Report
Form meets IRS
Report Criteria
Defendable
n
Large Renovations
n
Complicated
Remodels
n
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
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
vs.
Future Value of Invested Tax Savings
I
n
v
e
s
t
e
d
S
a
v
i
n
g
s
$2,000,000
$1,900,000
$1,800,000
$1,700,000
$1,600,000
$1,500,000
$1,400,000
$1,300,000
$1,200,000
$1,100,000
$1,000,000
$900,000
$800,000
$700,000
$600,000
$500,000
$400,000
$300,000
$200,000
$100,000
$-
$100,000 @ 8%
$1,050,000
$500,000
$200,000
1
3
5
7
9
11
13
15
17 19 21 23 25
Years of Ownership
27
29
31
33
35
37
39
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:
Tax Savings Benefit:
$324,000
$30,609
Study Fee Before Tax:
$3,400
Study Fee After Tax:
$2,176
ROI:
14:1
Manufacturing Company
Manufacturing Company
Actual 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 yr.
39 yr.
Total
$
$
$
$
15,112
2,408
2,865
20,385
$ 121,741
$ 27,855
$ 44,062
$ 193,658
$ 138,529
$ 34,701
$ 57,794
$ 231,024
Results for Tax Year:
Increased Accumulated Depreciation Expense
Tax Rate (Estimated)
2007
$
16,196
36.0%
2010
$ 129,241
36.0%
2011
$ 146,530
36.0%
Estimated Accumulated Tax Savings Benefit
$
$ 46,527
$ 52,751
5,831
Auto Dealership
Auto Dealership
Actual 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
$
$
$
$
$
101,839
38,699
6,865
153,222
$
$
$
$
$
2010
133,608
71,837 $
228,506
Alternative Method
Cost Segregation Study Accumulated Depreciation
5 yr.
15 yr.
39 yr.
Total
Results for Tax Year:
Increased Accumulated Depreciation Expense
Tax Rate (Estimated)
Estimated Accumulated Tax Savings Benefit
$
38.0%
$
50,771
264,781
112,226
25,143
417,946
$
$
$
$
479,865
291,564
79,977
883,053
2011
346,109 $
2014
654,547
38.0%
$
131,521 $
38.0%
248,728
Dispositions
Cost to Improve
Tangible
Property
Materials and
Supplies
Cost to Acquire
Tangible
Property
Anyone with Tangible Property
- New regulations provide
guidance on whether an
expenditure on tangible property
should be considered a
capitalization or expense.
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.
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
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
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.
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.
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.
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)
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)
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)
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));
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.
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
Issue
Prior
Temp/Final Regulations
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 Rule
Safe 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)
Issue
Prior Regulations
Acquisition / Production • Capitalize amounts
Cost
paid to acquire /
produce tangible
property or defend
or protect title
Temp/Final Regulations
• Largely restate prior
rules
• New list of inherently
facilitative cost
• Safe Harbors for
employee comp
/overhead and real
property
investigatory cost
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
Issue
Materials and Supplies
Prior Regulations
Temp/Final Regulations
• Not Defined
• New Definitions
• Incidental –deduct
• Same General
when purchased
Methods
• Elections available to
• Non-Incidentalcapitalize and depreciate
deduct when used or
or deduct under the
consumed
De minimis rule
•
Special rules for rotables
and temporaries
$200 limit
Issue
UOP –
Leased Property
Prior Regulations
N/A
Temp/Final Regulations
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
Betterment
Adaptation
Restoration
Issue
Prior Regulations
Temp/Final Regulations
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
Issue
Routine Maintenance
for Safe Harbor
Changes to Betterment
and Restoration
Prior Regulations
N/A
Temp/Final Regulations
• extend safe harbor
to buildings
• 10 years as the
period which a
taxpayer must
reasonably expect to
perform the relevant
activities.
Results in changes to
is
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
Rev. Proc. 2012-20
Depreciation / Amortization
of Leasehold Improvements
Disposition of buildings or
structural components
Changes within single,
multiple or general asset
accounts
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
Capitalization
Expenditure
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.)
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)
1.
2.
3.
4.
5.
6.
7.
8.
9.
HVAC
Fire Protection & Alarm
Elevators/Escalators
Electrical
Plumbing
Gas Distribution
Security Systems
Any other systems identified in published
guidance
Rest of Building(walls, flooring, ceiling…)
Cost Segregation Depreciation
The Building Elements/Units of Property
Site Work / Improvements
Water Well
Site Drainage
Parking Lot
Exterior Signage Structure
Parking Lot Striping / Barriers
Sidewalks
Landscaping
Security Lighting Poles
Aggregate Base Paved Area
Exterior Fencing / Decking
Retaining Walls
Fabricated Steel - Bollards
Patio Concrete
Exterior Wood Trellis Systems
Gazebo
Building Structure
Structural Components
Roofing Systems
Foundations
HVAC
Electrical
Plumbing
Masonry
Doors & Windows
Insulation
Gas Distribution
Drywall
Painting
Fire Protection & Alarm
Gutters & Downspouts
$ 5,464,546.00
$
19,318.45
$
48,990.57
$
138,639.38
$
17,790.84
$
23,325.00
$
711.12
$
68,635.17
$
6,374.77
$
192,436.06
$
31,986.93
$
16,024.07
$
2,926.12
$
10,848.65
$
2,783.73
$
4,605.26
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
8.00
559,508.38
66,975.93
234,535.89
179,747.78
242,472.40
68,844.81
40,657.35
17,063.50
43,168.87
4,989.84
13,092.14
23,796.64
15,192.82
12,335.58
Building Components
$
6.00
Cabinets / Millwork
Moldings
Wood Paneling
Flooring - Vinyl Tile
Flooring - Carpet
Window Treatments
Air Curtain
Building Signage
Specialty Electrical - Kitchen Equip.
Communication / Data
Specialty Plumbing - Cooler Equip. / Kitchen Sinks
Security / Exterior Lighting
FRP Wall Panels
Rear Entry Canopy
Interior Overhead Doors - Security
Slatwall / Pegboard Paneling
Surveillance System
Interior Wood Trellis Systems
Liner Panels
Paging System
Windmill
Exhaust Hood
Fire Extinguishers
Cooler
Movable Storage Units
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
20,085.41
8,286.30
2,062.22
519.68
9,084.00
187.90
1,709.08
122.56
15,216.78
32,356.35
10,181.63
9,827.88
1,003.24
20,084.92
21,931.82
9,657.00
4,375.25
6,046.21
109,271.70
1,688.23
17,244.53
11,258.61
1,833.25
10,635.63
30,431.69
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… ?
Betterments
Adaptations
Capitalize
Improvements
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.
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.
Adapting to New or Different Use
Change not consistent
• with the taxpayer’s intended use
• the Unit of Property at the time originally placed in
service
o Example: Fabrication shop converted to retail
store.
o Example: Warehouse converted to apartments
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)
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.
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)
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.
Refresh
• 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.
•
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
Cost of Roof Hidden in
Larger Building Number
39 years
A business owner buys 20 year old building and
replaces the Roof after 5 years of ownership.
New Regs:
5 years
39 years
Before 2014
Elect to apply Temp or Final Regulations:
Requires Change in Accounting form 3115…19 codes
A.
B.
C.
D.
Tax years 2012 / 2013 allow for multiple change in accounting
changes for same property/entity.
Possible write down of previously retired building elements
resulting from demolition/restoration/improvements.
Cost Segregation study may be done concurrently to achieve
building depreciation redefinition for accelerated tax lives.
Cost Segregation Study can identify elements for catch up/
write down opportunities…defendable.
After 1/1/2014
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
•
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.
•
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
Calculate
481 (a)
adjustment
481 (a) adjustment calculated and
taken as
-Other expense
-Allowed in accordance with Temp
Regs. (old regs did not allow a partial
disposition)
Cost
Segregation
Specialist
Form 3115
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.


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.

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.