The Implementation of the
Tangible Property Regulations
Cost Segregation Services, Inc.
Copyright © 2014
©2014
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Cost Segregation - TPR Implementation
When was the last time you did
something for the 1st time?
Research
Implementation
Contact
Trusted
Advisor
Analysis
Experienced
Recommend
Advisor
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TPR Implementation Cycle
CSSI
Resource
Guide
Implementation
Preliminary
Analysis
Recommend
Process
Friend
Trusted
Advisor
Cost
Segregation
Professional
Advisor
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Cost Segregation - TPR Implementation
Bio
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Cost Segregation - TPR Implementation
Capitalize or Expense?
Welcome to the Tangible Property Regs
General framework for
distinguishing
Capital Expenditures
from:
• Supplies
• Repairs
• Maintenance
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Capitalize or Expense?
Welcome to the Tangible Property Regs
• 10 yrs. 300+ Pages
• Acquire, Produce,
Improve Tangible
Property
• Not Many Bright
Lines
• Lots of Examples
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You Need to:
Make Your Clients Aware… Before it’s TOO LATE
• Advantage to write off Late Partial Dispositions.
• “Use It or Lose it” Deadlines in tax year 2014?
• Need a Capitalization Policy for tangible property
less than $500 per invoice by … January 1, 2014
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Today’s Agenda
Actions to Take
• Overview of the Regulations- Resource Documents.
• Greatest Impact to Tax Professionals.
• How to: Applying Partial Disposition.
• Cost Segregation and how it helps in applying TPR.
• Improvement Standards Basics for UOP.
• Safe Harbors for your clients.
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Cost Segregation - TPR Implementation
Research
How to Implement the TPRs
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Cost Segregation - TPR Implementation
Request These Resource Docs
AICPA 6 Page Bullet Summary
Questions and Answers
CCH - Executive Summaries
Index of Examples in Fed Register
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Cost Segregation - TPR Implementation
AICPA Resources: Summary Chart
Written Policy Template - Webcast
Quick Summary Chart of
Final TPR
Implementing the new
TPR – Journal of
Accountancy
• This is the most concise summary of the regulations in the industry. Six pages in
bullet form. You will want to print this and keep it as a document to refer to when
reading other articles.
• If you only look at one, this is the one to look at. “5 Stars” *****
• Great Overview of the TPR that discusses the difficulties of implementation.
• Circular 230 Implications for Tax Professionals - discusses compliance risks.
Written Policy Template
from AICPA
• OMG! You just found out that your client needs a Capitalization Policy in Place
starting January 1 to be eligible for the De minimis Rule Safe Harbor.
• This document is priceless if your client does not have this in place already. Look
under “Sample Written Book Capitalization Policy”.
5 stars*****
Final Repair Regulations
Dissected
• AICPA Webcast
• A two hour presentation that provides insight on the new rules
• Aired Oct. 23, 2013
• Webinar at “Final Repair Regulations Dissected” Link
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Journal of Accountancy
Implementing the New Tangible Property Regulations
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Journal of Accountancy
Implementing the New Tangible Property Regulations
• “These rules will affect every TP that uses
Tangible Property in its business…”
• “The rules are all-encompassing and
complex…”
• “TP may need to devise new collection
procedures to capture the necessary data to
implement these regulations.”
©2014
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Cost Segregation - TPR Implementation
Journal of Accountancy
Implementing the New Tangible Property Regulations
• “Circular 230 may present challenges to
practitioners in signing tax returns of clients
that have not implemented the final
regulations.”
• “Due to the challenges of the regulations,
waiting to address these issues until
completing the 2014 tax return is ill-advised.”
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Cost Segregation - TPR Implementation
Tangible Property Regulations
Resource Guidance on Deductions & Capitalization
Table of Contents
Small Taxpayer Safe
Harbor Examples
Materials and Supplies
Examples
Betterment Examples
De minimis Rule Safe
Harbor Examples
Adaptation Examples
Routine Maintenance
Safe Harbor Examples
Restoration Examples
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Cost Segregation - TPR Implementation
Tangible Property Regulations
Resource Guidance on Deductions & Capitalization
©2014
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Cost Segregation - TPR Implementation
Tangible Property Regulations
Resource Guidance on Deductions & Capitalization
©2014
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Cost Segregation - TPR Implementation
Tangible Property Regulations
General Framework
Dispositions
Cost to Improve
Tangible
Property
Materials and
Supplies
Cost to Acquire
Tangible
Property
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Dispositions
Benefit to your Client
• Includes:
– Sale or Exchange
– Retirement
– Physical Abandonment
– Destruction
– Transfer to supplies or scrap
– Involuntary conversion
– Retirement of a structural component
of (or improvement to) a building.
Section 168
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Dispositions
Benefit to your Client
Ability to write off assets that are
no longer in use with Partial Disposition Election
• Renovations
• Remodels
• Replacements
• Abandoned in Place
• Common Items – Roofs, HVAC, Electrical
©2014
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Dispositions
Catch Up Provision
• Know the Value of what went into the Dumpster.
• Relative to the value that your client paid for the
building.
• Disposed of as a Partial Disposition.
• Write down to the basis of the property in year 2014.
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Cost Segregation - TPR Implementation
Dispositions
Benefit to your Client
Partial Disposition Election 1.168(i)-8(d)(2)
• PAST YEARS: Requires Change in Accounting
Method Form 3115 and 481(a) adjustment to “catch
up” (196).
• CURRENT & FUTURE YEARS: The election is made in
the taxable year that the disposition occurs starting
in 2014 and for new properties purchased.
©2014
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Cost Segregation - TPR Implementation
Dispositions
Example: A business owner buys 20 year old building and
replaces the Roof after 5 years of ownership.
Old Regs:
5 years
39 years
Cost of Roof Hidden in
Building Asset Basis
Roof 2 added asset
©2014
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Cost Segregation - TPR Implementation
Dispositions
Example: A business owner buys 20 year old building and
replaces the Roof after 5 years of ownership.
New Regs: 5 years
39 years
Original Building Asset
New Roof Asset
©2014
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Cost Segregation - TPR Implementation
Dispositions
Example:
• $1.5 m Nursing Home with
major renovations
• $91k in assets removed =
Asset Valuation Study
• $31k in cash flow
• Basis Write Down
• Tax Savings at Sale
5 yr. property (35-41%) recaptured at Capital Gains Rate (20%)
©2014
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Cost Segregation - TPR Implementation
Dispositions
Role of Cost Segregation
©2014
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Cost Segregation - TPR Implementation
Dispositions
Role of Cost Segregation
Example:
• Asset Valuation - $53k
• Cost Segregation on
Renovation - $126k
Year of “Opt In” Matters
• 2013, 2014 Get Both
• 2015 No Past Disposition:
Lose $53K
©2014
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Cost Segregation - TPR Implementation
Dispositions
Tax Professionals Ask
#1 Question
How do I get “The Number”?
IRS says to use:
• Reasonable Method
• Cost Segregation is a Certain Method
©2014
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Dispositions
Reasonable Methods
 Discounting the cost of the replacement asset to its
placed-in-service year cost using the Consumer Price
Index.
Appropriate for small projects, new equipment.
 Pro rata Allocation.
Both Methods need a valuation of the Unit of Property affected.
©2014
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Cost Segregation - TPR Implementation
Dispositions
Reasonable Methods
 A Study allocating the cost of the asset to its
individual components. This provides the proper
valuation of the affected building assets.
“Cost Segregation is a certain method.”
©2014
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Cost Segregation - TPR Implementation
Dispositions
Cost Segregation Method
•
•
•
•
•
•
•
Labor to Remove Materials
Disposal Fees
Identify Items Removed
Quantify Items
Value Items
Determine the remaining basis
Write Down of Basis is a
permanent tax reduction at
the time of sale.
•
•
•
Personal Property Sec 1245 35-40%
Real Property Section 1250
25%
Capital Gains
20%
©2014
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Cost Segregation - TPR Implementation
Dispositions
Cost Segregation Method
• Building Plans – Cost Detail
Review
• IRS accepted Cost Allocation
Methods
• Defined Engineering-based
Methodology
• The Study: Report Form meets
IRS Report Criteria
• Defendable
©2014
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Cost Segregation - TPR Implementation
Dispositions
Asset Valuation Study
Works for all applications:
• Large Renovations
• Complicated Remodels
• Retired Components and
Partial Disposition
©2014
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Cost Segregation - TPR Implementation
Explaining Cost Segregation
The process of analyzing and identifying commercial
building components that are eligible for accelerated
depreciation providing a significant tax benefit for the
taxpayer.
Personal Property is Segregated from Real Property
$50k to $80k per $1 Million in Cost
Works on $250k buildings
©2014
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Cost Segregation - TPR Implementation
Explaining Cost Segregation
Straight-Line
• Hamburger
Cost Segregation
•
•
•
•
•
•
•
2 All Beef Patties
Special Sauce
Lettuce
Cheese
Pickles
Onions on a
Sesame Seed Bun
©2014
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Cost Segregation - TPR Implementation
Explaining Cost Segregation
Straight-Line
Cost Segregation
• Looks at the building as a Whole
• Identifies Parts and Pieces of
the building
• Structural Building Components
• Non-Structural Building
Components
• Depreciated over 39yrs (27.5yrs)
• Depreciated over 5, 7 & 15 years
• Real Property Only
• Personal Property & Real
Property
©2014
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Cost Segregation - TPR Implementation
Explaining Cost Segregation
Upgrade your Depreciation Strategy
Straight Line
Cost
Segregation
in HD
©2014
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Cost Segregation - TPR Implementation
Explaining Cost Segregation








5 & 7 Year Property
Decorative building elements, wallpaper
Specialty electrical, plumbing, mechanical
Carpet, flooring, crown moldings,
Built In cabinets, counter tops, millwork
Security, special lighting, window treatments
Communications, cable
Kitchen fixtures, refrigeration equipment
15 Year Property
Landscaping, paving, fencing, site utilities,
parking lot, signage, sidewalks, sprinklers,
walkways
©2014
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Cost Segregation - TPR Implementation
Explaining Cost Segregation
• An Engineering-Based
Study of the building for
tax purposes.
• Produce a Report that
the Tax Professional
submits with the return.
• Automatically accepted
by IRS.
©2014
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Cost Segregation - TPR Implementation
Explaining Cost Segregation
The Applications

Current Buildings Acquired after 1986

New Construction

New Acquisitions

Renovations / Leasehold Improvements
©2014
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Cost Segregation - TPR Implementation
Explaining Cost Segregation
Types of Commercial Buildings
•
•
•
•
•
•
•
•
•
•
•
Apartment complex, Condominium
Auto Dealership
Shopping Mall, Strip Center
Restaurant
Hotel/Motel
Medical/Dental/Veterinary Facilities/Surgical
Nursing Homes/Assisted Living
Office Buildings, Banks
Retail Chains/Franchises/Leasehold Space
Self Storage, Mini Warehouses
Supermarkets, Furniture Stores Etc…
©2014
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Cost Segregation - TPR Implementation
Information Needed
To Run Preliminary Analysis
• Depreciation Schedule is best
•
•
•
•
What type of Building?
What did they pay for the building? (without the land)
When did they purchase it?
Have there been any major renovations or
remodels?
©2014
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Cost Segregation - TPR Implementation
Cost Segregation
Process of Application
• Gather Documents for Engineers
• Completed in 4-6 weeks
• CPA will apply to return
• No need to Amend Past Tax Years
• Benefits start in next Quarter
©2014
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Cost Segregation - TPR Implementation
Cost Segregation vs.
Straight-Line Depreciation
©2014
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Cost Segregation - TPR Implementation
Cost Segregation vs.
Straight-Line Depreciation
Eighth Wonder of the World
©2014
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Cost Segregation - TPR Implementation
Cost Segregation vs.
Straight-Line Depreciation
Eighth Wonder of the World
©2014
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Cost Segregation - TPR Implementation
Cost Segregation vs.
Straight-Line Depreciation
©2014
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Cost Segregation - TPR Implementation
Financial Results of
Cost Segregation
Project #9501
Building Cost
$ 250,176
(with-out land)
Tax Savings Benefit:
$32,845
Study Fee Before Tax:
Study Fee After Tax:
$2,420
$1,549
ROI:
21:1
©2014
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Cost Segregation - TPR Implementation
Financial Results of
Cost Segregation
Building Cost
$324,000
(with-out land)
Tax Savings Benefit:
Study Fee Before Tax:
Study Fee After Tax:
ROI:
$52,856
$3,400
$2,176
24:1
©2014
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Cost Segregation - TPR Implementation
Financial Results of
Cost Segregation
Project # 9503
Building Cost
$5,246,908
(with-out land)
Tax Savings Benefit:
$312,687
Study Fee Before Tax:
Study Fee After Tax:
$14,900
$9,536
ROI:
33:1
©2014
Tax Savings. Delivered.
Cost Segregation - TPR Implementation
Tangible Property Regulations
Opportunity & Issues
Late Partial Disposition 2014
2014 Final only
Scope Limitations: Temp and Final
Allows for multiple 3115
Correct Past Capitalization –
Expense Issues / Disposition
2014,Future: Automatic
Partial Disposition is an Annual
Election
In the tax year item
removed…Allows for duplicate
assets in depreciation if no
disposition taken
Final Tangible Regulations
Automatic Enrollment
©2014
Tax Savings. Delivered.
Cost Segregation - TPR Implementation
Solution:
It’s the Process
• Find all clients with depreciation on building
assets.
• Qualify clients with estimated Disposition and
Cost Segregation economic needs.
• Get an Engineering-based Study that meets the
IRS’s guideline.
• Apply the Change in Accounting Method Form
3115 & 481(a) with study results to the client’s
return.
©2014
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Cost Segregation - TPR Implementation
Cost to Improve Tangible Property
Improvement Standards
Improvement Standards
• Deductible Repair
• Capitalized Improvement
BAR TEST
©2014
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Cost Segregation - TPR Implementation
Cost to Improve Tangible Property
Improvement Standards
BAR TEST
Betterments
Adaptations
Restorations
Capitalize
Improvements
©2014
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Cost Segregation - TPR Implementation
Cost to Improve Tangible Property
Improvement Standards
Capitalize…Amounts paid for new building or improvements
1.263(a)-3.
- that increase value of property
- bring property to new or different use
- return of original condition
Expense... Amounts paid for incidental repairs and maintenance
of property 1.263 (a)-1.
Refresh
- keeps in ordinary operating condition
©2014
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Cost Segregation - TPR Implementation
Cost to Improve Tangible Property
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).
For Buildings -
Each Building is a UOP
• Straight Line Each Building is a UOP
• Cost Segregation - Each Building’s 5,7,15 & 39 (27.5) yr. depreciable
lives property groups are UOPs
©2014
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Cost Segregation - TPR Implementation
Cost to Improve Tangible Property
Capitalize or Expense?
Can I expense this invoice?
Betterment- Adaptation- Renovation?
What do I compare it to?
The Building?
©2014
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Cost Segregation - TPR Implementation
Cost to Improve Tangible Property
Compare Invoice to
Building
Systems
Building
Structural
Components
©2014
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Cost Segregation - TPR Implementation
Cost to Improve Tangible Property
Building
Structural
Components*
Building
Systems
Building & Structural
Components,
HVAC
Fire Protection Sys.
Elevators/Escalators
Electrical, Plumbing
Gas Distribution
Security Sys.
Other
•
•
•
•
•
•
•
Roof
Windows
Exterior
Framing
Insulation
Doors
Foundation
* - Discreet and Critical Function
©2014
Tax Savings. Delivered.
Cost Segregation - TPR Implementation
Cost Segregation Expertise
HD Study
Building Elements/Units of Property
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
$
$
$
$
$
$
$
$
$
$
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
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
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
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
Site Work / Improvements
Water Well
$ 5,464,546.00
$
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
Structural Components
Roofing Systems
Foundations
HVAC
Electrical
Plumbing
Masonry
Doors & Windows
Insulation
Gas Distribution
Drywall
Painting
Fire Protection & Alarm
Gutters & Downspouts
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
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
Cost to Improve Tangible Property
Depreciation of UOP
Improvement Standards
Each Building is a Unit of
Property
Or
Each Building’s Property by Class Life
• 5 yr. Property
• 7 yr. Property
• 15 yr. Property
• 39 (27.5) yr. Property
BAR Test
©2014
Tax Savings. Delivered.
Cost Segregation - TPR Implementation
Request These Resource Docs
AICPA 6 Page Bullet Summary
Questions and Answers
CCH - Executive Summaries
Index of Examples in Fed Register
©2014
Tax Savings. Delivered.
Cost Segregation - TPR Implementation
Safe Harbor Issues
©2014
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Cost Segregation - TPR Implementation
Cost to Acquire Tangible Property
De minimis Safe Harbor
• With AFS - $5,000 per invoice (or per item as substantiated by invoice)
• Written policy in place at beginning of year.
• Policy to expense for amounts under a certain dollar amount or property
with an economic useful life of 12 months or less.
• Treats the amounts as expenses on the AFS as well.
• Without AFS: - $500 per invoice (or per item as substantiated by invoice)
• Policy in place at beginning of year (written policy not required) for
amounts under certain dollar amounts or property with an economic
useful life of 12 months or less.
**Action Item:
$5000 with AFS - Must have written expensing policies in place at the
beginning of the tax year.
©2014
Tax Savings. Delivered.
Cost Segregation - TPR Implementation
Materials and Supplies
• UOP with a useful life of < or = 12 months;
• Fuel, lubricants, water, & similar items expected to be consumed <
or =12 months from beginning of use;
• Costing $200 or less (up from $100 in temp regs).
Defined as tangible property used in taxpayer's business that is not
inventory and
A component acquired to maintain, repair, or improve a UOP that is
not acquired as part of any single UOP.
Reg Sec 1.162.-3
Requires a Form 3115
©2014
Tax Savings. Delivered.
Cost Segregation - TPR Implementation
Cost to Improve Tangible Property
Routine Maintenance Safe Harbor Expenses
• Deductible if you reasonably expect (at time UOP is placed in
service) to perform more than once during the 10 year period
from when the building system was placed in service.
• Safe Harbor does not apply to Betterments, Adaptations, or
some Restorations (see Reg. § 1.263(a)-3(i)(3))
• Requires submission of Form 3115 to adopt
©2014
Tax Savings. Delivered.
Cost Segregation - TPR Implementation
Cost to Improve Tangible Property
Small Taxpayer Safe Harbor for Buildings
• Can elect “not to apply” improvement rules to eligible
buildings if the annual amount spent is less than $10,000 or
2% of unadjusted basis on a building-by- building basis.
• May be written off as repairs.
• Example: $300k building = $6,000 limit
• If limit is exceeded, does not apply to any amounts
©2014
Tax Savings. Delivered.
Cost Segregation - TPR Implementation
Journal of Accountancy Article
“Clearly, the new repair regulations pose
considerable compliance risks both for CPAs and
the businesses they advise.”
Journal of Accountancy Feb 2014
Implementing the New Tangible Property Regulations
Christian Wood. J.D.
©2014
Tax Savings. Delivered.
Cost Segregation - TPR Implementation
Recommendations:
Take Action
• Acquisition Cost
• Prepare to make De minimis Safe Harbor election. (AICPA Form Provided)
• Check adequacy of written procedures for the De minimis Safe Harbor before
beginning of the year.
• Educate Clients to change policies, track expenses per UOP - (Dear Client
Letter).
• Repair and Maintenance Cost
• Apply Routine Maintenance Safe Harbor to cyclical maintenance on buildings
and other property (3115 req.).
• File book conformity election for capitalized improvements.
• Resources and Enhanced Capabilities
• Determine Implementation Work Load (3115’s, UOP revisions)
• Identify & Qualify Late Partial Disposition / Cost Seg candidates.
• Partner with a Cost Segregation Firm.
©2014
Tax Savings. Delivered.
Cost Segregation - TPR Implementation
Solution:
It’s the Process
• Find all clients with depreciation on building
assets.
• Qualify clients with estimated Disposition and
Cost Segregation economic needs.
• Get an Engineering-based Study that meets the
IRS’s guideline.
• Apply the Change in Accounting Method Form
3115 & 481(a) with study results to the client’s
return.
©2014
Tax Savings. Delivered.
Cost Segregation - TPR Implementation
CPA Implementation Process
Partnering
Qualification
&
Analysis
Client
Contact
&
Execution
Proposal
©2014
Tax Savings. Delivered.
Cost Segregation - TPR Implementation
Cost Segregation & Asset Valuations
Expected Results of the CSSI Process
Ease of Compliance
CPA: 1-2 hrs per client
Timely completion
Additional
Revenue
$1,000-$3,000 per
client
Client Satisfaction
100%: Grateful for
effort to save taxes
©2014
Tax Savings. Delivered.
Cost Segregation - TPR Implementation
Recommendations:
Take Action List
•
•
•
•
•
•
•
•
•
•
•
Late Partial Disposition study for 2014 tax year deadline.
Cost Segregation Preliminary Analysis.
Capitalization Policy in Place – AICPA Template.
De minimis Safe Harbor or Materials and Supply.
Routine Maintenance Safe Harbor Form 3115.
Units of Properties Defined on Dep. Schedule.
Track Expenses per Building and per Building Sys.
Book Conformity.
Dear Client Letter – Start selling difficulty.
Resources to file CAM Form 3115 & 481(a)
Partner with Cost Segregation Firm (CSSI)
©2014
Tax Savings. Delivered.
Cost Segregation - TPR Implementation
Use the CSSI Experience
Tax Savings. Delivered.

Performing Engineering-based Studies for over 13 years, National
capability, 9,500 Studies completed across the U.S., always on-time.

Qualify the tax savings estimates within 48 hrs. for your client.

Full Engineering-based Studies completed in 4-8 weeks.

Perform Change in Accounting Method Form 3115 and 481(a)
adjustments.

Use CSSI as your engineering-based service provider for your clients.
©2014
Tax Savings. Delivered.
Cost Segregation - TPR Implementation
Thank You
Looking forward to your call
Bill McCormick
Cost Segregation Services, Inc. (CSSI)
802-728-2044
wfm@costsegserve.com
David Deshotels
David@CostSegregationServices.com
www.CostSegregationServices.com
©2014
Tax Savings. Delivered.
Cost Segregation - TPR Implementation