Complying with and benefiting from the 2014 Tangible Property Regulations
As we begin a new year, I wanted to make you aware of some of the recent changes that may impact your clients that own tangible property set forth in the 2015 Section 179 regulations as well as the benefits and compliance set forth in the 2014 Tangible Property Regulations.
Section 179 provisions have recently been permanently extended. The following items that are entitled to Section 179 are:
- Equipment (machines, etc) purchased for business use
- Tangible personal property used in business
- Business Vehicles with a gross vehicle weight in excess of 6,000 lbs (Section 179 Vehicle Deductions)
- Computer "Off-the-Shelf" Software
- Office Furniture and Office Equipment
- Property attached to your building that is not a structural component of the building (i.e.: a printing press, large manufacturing tools and equipment)
- Partial Business Use (equipment that is purchased for business use and personal use: generally, your deduction will be based on the percentage of time you use the equipment for business purposes).
The tangible personal property does not have to be new but only new to the user/taxpayer (ie used equipment and real estate can qualify).
A summary of the 2015 Section 179 (taken from the website Section 179.org) is as follows:
- 2015 Deduction Limit = $500,000
This deduction is good on new and used equipment, as well as off-the-shelf software. This limit is only good for 2015, and the equipment must be financed/purchased and put into service by the end of the day, 12/31/2015.
- 2015 Spending Cap on equipment purchases = $2,000,000
This is the maximum amount that can be spent on equipment before the Section 179 Deduction available to your company begins to be reduced on a dollar for dollar basis. This spending cap makes Section 179 a true "small business tax incentive".
- Bonus Depreciation: 50% for 2015
Bonus Depreciation is generally taken after the Section 179 Spending Cap is reached. Note: Bonus Depreciation is available for new equipment only.
Whereas in the past, bonus depreciation was evaluated annually, Congress has now extended bonus depreciation through tax year 2019. Bonus depreciation applies only to acquisitions of new buildings/equipment and allows taxpayer to depreciate up to 50% of any asset that has a 20 year life or less. Bonus depreciation is reduced each year through 2019 as follows:
- 2016 & 2017 50%
- 2018 40%
- 2019 30%
If you have clients who have acquired any types of personal property in the last few years, these changes may yield great benefits. Additional details on 2015 Section 17 can be found on section179.org. If you have clients that may qualify, please contact us and we can help.
The second major area that you need to aware of if you have clients that own real estate are the changes as a result of the 2014 Tangible Property Regulations. CSSI has done a thorough job researching these regulations and bringing consulting experts on board such as Eric Wallace to assist tax preparers in understanding and interpreting the new “Repair Regs”.
Recorded webinars with Eric Wallace and CSSI are available to you upon request and without charge to answer some of the most confusing and difficult questions around the TPRs.
Furthermore as cost segregation specialists, we can assist you in a number of areas to ensure that your clients (taxpayers) are in compliance with and fully benefit from the 2014 Tangible Property Regulations (TPRs) going forward in tax year 2015 and beyond. Some of these areas include:
- Traditional Cost Segregation Studies,
- Systems Valuation Studies
- Partial disposition analyses
- Reclassification of Expenditures.
A traditional engineering based Cost Segregation Study is an analysis generally performed by an independent third party that reclassifies or segregates real estate components and improvements between real and personal property in order to accelerate the depreciation periods from 39 or 27.5 years to 15, 7, or 5 years. By breaking down the various component parts/systems of building improvements, and reclassifying them into shorter lives, near term depreciation is increased, federal income taxes are deferred and in some cases reduced and the after tax return on the owners investment is increased. By applying cost segregation, an owner’s income tax liability can be reduced by 6 to 10% within the first 5 years of ownership. A preliminary cost segregation analysis can be done at no cost to estimate the cash benefits that a tax payer may receive.
There are some additional benefits to the tax preparer and the owner of having a detailed breakdown of the improvements from a cost segregation study. The new repair regulations change the unit of property to be considered from a property level to a building level meaning that each building must be treated separately on a depreciation schedule. For example, no longer would a multifamily apartment project be considered a unit of property but with the new regulations, each building within the project must be accounted for separately.
In addition, The IRS website regarding complying with the new repair regs states:
“For buildings – The unit of property is generally the entire building including its structural components. However, under the final regulations and for these purposes only, the improvement analysis applies to the building structure and each of the key building systems. The key building systems are the plumbing system, electrical system, HVAC system, elevator system, escalator system, fire protection and alarm system, gas distribution system, and the security system. Lessees of portions of buildings apply the analysis to the portion of the building structure and portion of each building system subject to the lease. Lessors of an entire building apply the improvement rules to the entire building structure and each of the key building systems.”
Therefore to meet the new TPRs, all depreciation schedules should show the property on a building by building basis, regardless whether the client chooses to apply cost segregation or not.
However it is beneficial to both the tax payer and the tax professional to have a building systems breakdown. Why?
One of the primary objectives of the new repair regulations is to develop consistent guidelines to determine whether an expenditure is an expense or must be capitalized. The first criteria to be applied is whether the expenditure is a betterment, adaptation or restoration sometimes referred to as the BAR test. If the expenditure meets the BAR test then it must be capitalized.
If the expenditure is not a betterment, adaptation or restoration, then the next criteria to be considered is the comparison of the expenditure to the total value of the system. Thus to be able to determine whether an expenditure can be expensed, the taxpayer/tax preparer needs to know the value of the key building system. Based on the examples provided by the IRS if the expenditure exceeds 30% to 40% of the value of the system, then the expenditure must be capitalized.
So a traditional cost segregation study not only can save/defer taxes for the taxpayer but it also provides the necessary detail to determine whether an expenditure can be expensed or capitalized going forward.
What happens if the client has had a cost segregation study done but the report does not provide the detail necessary to determine the value of the building system? In this case, a systems valuation study can be done at a reduced cost to provide the information necessary to make the capital versus expense decision.
Another area that the cost segregation specialist can assist is determining the value of a component that has been replaced or removed, referred to as a partial disposition election. , Beginning in 2015, taxpayers must deduct the value of the remaining depreciation on an item removed in the year that it occurs. In cases where a cost segregation study has not been previously performed, a cost segregation specialist can determine the value of the component part in order to quantify the amount of the “write off”.
And finally, the new repair regulations allow a taxpayer to go back in previous years and reclassify an expenditure from a capital item to an expense if justified by the new regulations. We can evaluate an expenditure and determine whether it meets the BAR test. If it does not, then the expenditure can then be compared to the value of the system to determine whether it can be reclassified as an expense.
Make sure your clients have a Capitalization Policy in place (in writing is best) as of January 1, 2016.
In summary, your cost segregation specialist can be a cost effective, value added consultant to the tax professional. Take advantage of the consultant’s knowledge and experience as well as their engineering expertise. At no cost to the taxpayer or the tax professional, a cost segregation specialist can review a taxpayer’s depreciation schedule and can provide recommendations of how to save the taxpayer the maximum amount of money and ensure full compliance with the 2014 Tangible Property Regulations.
David H. Trahan, MBA is a senior consultant/account representative with Cost Segregation Services Inc.(CSSI), one of the premier cost segregation firms in the US. CSSI has been saving client’s money over the last 14 years and has completed over 14,000 cost segregation studies. David has been providing commercial real estate clients real estate consulting services for 42 years as a real estate broker, property tax consultant and a licensed appraiser and has offices in Texas and North Carolina.
David is available for consultation at email@example.com or via phone at 832.971.2885.