The Effect of the Temporary & Final Tangible Property Regulations

1. The Effect of the Temporary & Final Tangible Property Regulations

2. 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

3. Capitalize or Expense? • Acquire, Produce, Improve. • 10 yrs. 300+ Pages • Lots of Examples • Not Many Bright Lines

4. Overview • Best Executive Summary of Temp Regulations • Copies of the Final Regulations • AICPA Summary

8. Tangible Property Regulations General Framework

9. 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.

10. 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

11. Benefit to your Client Ability to write off assets that are no longer in use. Ghost Assets removed. Roof Replacement HVAC Redo Plumbing Redo Electrical

12. 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.

13. $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

15. Asset Valuation $53k • Cost Segregation on Renovation $126k Year of OPT In Matters • 2013 Get Both • 2014 No Past Disposition

16. PRE 2014 REQUIRES OPT IN 2012 & 2013 2014 Temporary Regs Opt in Period Final Regs Same Methods Disposition back to 1987 2012 l 2013 l 2014 l

17. PRE 2014 REQUIRES OPT IN 2012 & 2013 2014 Scope Limitations Disposition back to 1987 2012 l 2013 l 2014 l 3-6 3115s Multiple 3115 Audit Protection

18. PRE 2014 REQUIRES OPT IN 2012 & 2013 2014 Temporary Regs Opt in Period Scope Limitations Disposition back to 1987 Final Tangible Regulations Automatic 2012 l 2013 l 2014 l Multiple 3115 Audit Protection

19. PRE 2014 REQUIRES OPT IN 2012 & 2013 2014 Temporary Regs Opt in Period Scope Limitations Final Disposition back to 1987 Final Tangible Regulations Automatic 2012 l 2013 l 2014 l No Extended Scope Limitations. No Multiple 3115s. Limited to one 3115 every 5 years Per Accounting Method

20. PRE 2014 REQUIRES OPT IN Both TPR and Cost Seg Temporary Regs Opt in Period Partial Disposition is an Annual Election In the tax year item removed Scope Limitations Final Correct Past Capitalization -Expense Issues / Disposition Final Tangible Regulations Automatic 2012 l 2013 l 2014 l Multiple 3115 Audit Protection

21. “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

22. #1 Question How do I get “The Number”? IRS says to use: Reasonable Method Cost Segregation is a Certain Method

23. Reasonable Methods 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.

24. Reasonable Methods 3. A Study allocating the cost of the asset to its individual components. Cost Segregation is a certain method.

25. Cost Segregation Method • Scan Plans – Estimating Software • IRS accepted Cost Databases • Defined Engineering-based Methodology • The Study: Report Form meets IRS Report Criteria • Defendable

26. Asset Valuation Study • Large Renovations • Complicated Remodels • Retired components and Partial Disposition

27. What is 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 $50-$80k per $1 Million Works on $200k building

28. 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

29. Section 1245 Examples

30. Cost Segregation vs. Straight line

31. Time Value of Money

32. 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%)

33. Office Condo

34. 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

35. Manufacturing Company

39. Temporary & Final Tangible Property Regulations

40. Tangible Property Regulations General Framework

41. 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.

42. 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.

43. 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

44. 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

45. 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.

46. 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.

47. 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.

48. 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)

49. 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)

50. 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)