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CBIZ & MHM Executive Education Series™

Doubling Up: The Combined Benefits of Cost Segregation and Tangible Property Regulations Larry Rosenblum & Eric Wallace June 2 and 9, 2016

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About Us

• Together, CBIZ & MHM are a Top Ten accounting provider • Offices in most major markets • Tax, audit and attest* and advisory services • Over 2,900 professionals nationwide

A member of Kreston International A global network of independent accounting firms

*MHM is an independent CPA firm providing audit, review and attest services, and works closely with CBIZ, a business consulting, tax and financial services provider.

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Before We Get Started…

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• If you have a question during the presentation, please use the Q&A feature at the bottom of your screen.

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CPE Credit

This webinar is eligible for CPE credit. To receive credit, you will need to answer periodic participation markers throughout the webinar. External participants will receive their CPE certificate via email immediately following the webinar.

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Disclaimer

The information in this Executive Education Series course is a brief summary and may not include all

the details relevant to your situation.

Please contact your service provider to further discuss the impact on your business.

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Presenters

Larry Rosenblum is a Managing Director of CBIZ MHM, LLC and a

Shareholder of Mayer Hoffman McCann P.C. in the Boca Raton, FL office.

He has more than 20 years of public accounting experience. Previously,

Larry provided tax planning and consulting services for professional

service, real estate and manufacturing companies in the New York and

Los Angeles metro areas. Currently, Larry provides consulting and tax

services for the company’s real estate clients with a concentration in

commercial property cost segregation studies. He is a frequent lecturer

in cost segregation to the banking, legal and real estate communities

561.994.5050 • lrosenblum@cbiz.com Larry Rosenblum, CPA Managing Director

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Eric has extensive expertise in construction and real estate services,

tangible property regulations (263(a)), depreciation, NOL, and 263A

issues, and focuses on providing tax, accounting, auditing and consulting

services. He also provides specialized professional services, consulting,

writing, and training to CPA firms, CPA organizations, publishing

companies, and construction and real estate related entities for tax,

consulting, and accounting and auditing issues.

41.977.6644 • ericw@ericwallacecpa.com

Eric Wallace, CPA

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Agenda

What is the process and purpose of Cost Segregation (CS)

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Tangible Property Regulations (TPRs) – Summary and Revisit

CS and TPRs - How do these two now relate to each other and What CS and TPR work efforts can be done moving forward

TPRs and Form 3115 – How to do, in brief?

Questions 05

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DOUBLING UP: THE COMBINED BENEFITS OF COST SEGREGATION AND

TANGIBLE PROPERTY REGULATIONS

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What is Cost Segregation?

Cost Segregation is the process of separating the costs of tangible personal property, other tangible property, indirect costs and land improvements from building and improvement costs.

Building

Land Improvements

Equipment 1245 Property

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Properties That Qualify

Retail Offices Hotels Restaurants Apartments Hospital/Medical Facilities

Manufacturing/Warehouses Assisted Living Facilities Mixed Use Facilities Banks Grocery Stores Leasehold Improvements

Construction cost or purchase price over $1 million.

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Look Back Studies

A look-back study on properties purchased or constructed in a prior year can be performed to claim depreciation not previously deducted or to accelerate depreciation. The catch-up deduction may be claimed on the next tax return without amending previous returns. Form 3115 is filed with the tax return. The accounting change is automatic.

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Bonus Depreciation Means Greater Savings

Qualifying assets placed in service during specific periods may be eligible for bonus depreciation in the first year.

% Bonus Depreciation in the first year

Qualifying Assets Placed in Service

01/01/19-12/31/19 30% 01/01/18-12/31/18 40% 01/01/12-12/31/17 50% 09/09/10-12/31/11 100% 01/01/10-09/08/10 50% 01/01/08-12/31/09 50%

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The Cost Segregation Process

A coordination of effort with the client, the property manager and the cost estimator. Plans and blueprints are reviewed to highlight specific areas for

consideration. Construction documents and closing statements are reviewed

and reconciled to actual amounts spent. A physical walk through of the property helps document specific

items to be considered. Cost allocation of indirect costs such as labor, professional fees

and general conditions.

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Landmark Case in Cost Segregation:

In this 1997 case, the Tax Court concluded that certain assets in the hospital facilities could be considered personal property and depreciated over a 5-year period. Judge’s Memorandum (April 1, 1999) “…the use of cost segregation studies must be

specifically applied by the taxpayer.” IRS Memorandum (April 1, 1999) “An accurate cost segregation study may not be based on non-contemporaneous records, reconstructed data, or taxpayer’s estimates or assumptions that have no supporting records.

The Hospital Corporation of America Challenges the IRS

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TANGIBLE PROPERTY REGULATIONS

General Summary

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Tangible Property Regulations:

Applicable to all taxpayers who have tangible assets

• A taxpayer (TP) must employ the TPRs effective for tax year 2014

• For expenditures after an asset is placed in service

• DMSH is an “out” to the required TPR process

• First a TP must determine its U of P

• Second a TP employs the 16 RABI rules against that U of P

• If expenditure passes any of the rules = must capitalize; fails = TP must deduct

• Must employ the TPR rules “back in time”, unless exception exists

(i.e. such as under the $10M thresholds for revenue or assets)

• Must file a Form 3115 to employ “back in time” to obtain negative 481(a) adjustments

• If TP does not do? Subject to “use it or lose it” rules on the previously capitalized assets

it did not deduct, that it should have deducted via the TPRs

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But make sure that the TPRs are Applicable Before you Attempt to Apply

• Only applicable for expenditures after an asset is placed in service

• If the asset is not yet in service, the TPRs are not applicable

• Purchased a new building or a piece of equipment? Must capitalize all costs

(except removal costs)

• Purchased a new building and then immediately fixed it up? TPRs do not apply,

must capitalize all costs (except removal costs)

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The 16 RABI Rules

1. Capitalize all the direct costs of an improvement and all the indirect costs that directly benefit or are incurred

2. Indirect costs arising that do not directly benefit and are not incurred are not required to be capitalized

3. If a TP disposes of a depreciable asset, including a PAD, and has taken into account the adjusted basis of the asset in realizing gain or loss, removal costs are not required to be capitalized

4. No disposition or PAD, then removal costs = capitalize if expenditures are capitalized or R & M if not

5. Do you have a work plan or “an effort”? Then pull all related expenditure together

6. Government regulations, by self, do not require capitalization

1. Work effort or expenditure ameliorates a preexisting material condition or defect

2. Material addition to the U of P 3. Material increase (in productivity or output) 4. Did not replace part with better due to technological

advancement 5. Expenditure not necessitated by normal wear and

tear or damage to the unit of property that occurred during the TP’s use of the U of P

1. Returns the U of P to its ordinarily efficient operating condition after it had deteriorated to a state of disrepair and no longer used for its intended purpose

2. Rebuild the U of P to a like-new condition after the end of its ADS class life

3. Comprise a major component or substantial structural part of the building structure or any of its building systems of the U of P that is either (a) large physical portion or (b) performs a major and discrete function

4. Deducted a loss or basis for the prior

Not consistent with the intended ordinary use of the unit of property at the time originally placed in service

Improvement or Costing Rules Betterment Rules

Adaption Rule

Restoration Rules

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Partial Asset Dispositions (PADs)

• Now possible for MACRS assets (1986 to date) • No PADs available for ACRS assets (1981 to 1985) • PADs were always available for pre-ACRA (prior to 1981) • Two types of MACRS PADs: not separately stated and separately

stated (i.e. paid for subsequently) • Not separately stated PADs for years prior to 2014 had to be

filed for by tax year 2014 • Separately stated PADs for prior years are still available • PADs for 2014 and afterwards must be deducted in the current

tax year via the TPR election for that tax year

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Removal Costs Deductibility

• Now made clear that removal costs of prior assets disposed of does not need to be capitalized

• If removal costs are related to PADs, those removal costs must also be removed at the same time (if not, such removal costs will be required to be capitalized into the new asset(s)

• If prior assets had no value (no basis, no accumulated depreciation) removal costs can be deducted, even years later (if taxpayer files a DCN (designated change number) 21

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1245 Property and the TPRs

• The TPRs require application of their criteria/rules separately to each “unit of property” (U of P)

• If a U of P is acquired separately from other “work efforts”, it must be capitalized as its own U of P unless the DMSH rules apply

• Example: landlord pays $100,000 for new tenant improvements (LHIs) in a large building it has owned for several years in one of its 20 equal spaces and does not do a PAD on the prior LHIs. As part of those new LHIs the landlord installs $20,000 of electrical for the new tenant’s machinery. The $20,000 of new electrical is a 1245 asset and cannot be part of the landlord’s RABI consideration for the new LHIs.

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COST SEGREGATION AND TANGIBLE PROPERTY REGULATIONS

How do these two now relate to each other? What Work TPR or Cost Segregation Work or

Consulting can we do now and in future years?

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• If an expenditure does not need to be capitalized after application of the RABI rules to certain expenditures, obtaining a cost study on those expenditures would be meaningless

• Example: ABC Grocers has leased a large building of 100,000 sq. ft. for many years. ABC spends $4M in 2016 to remodel or update that store.

The Employment of the TPRs may Trump the potential need for a Cost Study

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• Here are the points of this example: • ABC must separate out any 1245 property that was part of

the $4M expenditure. Cost segregation is valuable for that determination and determines that amount to be $1M.

• ABC can deduct any removal costs of the work effort if the balance of the expenditures (O/T 1245 property) are not required to be capitalized.

• If the balance ($3M) does not arise to the TPR level of being required to be capitalized, i.e. it met any of the RABI rules, a cost study on that $3M would have no value.

The Employment of the TPRs may Trump the potential need for a Cost Study - Example

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• Cost Segregation has more, not less value, after the TPRs, now with the “must” requirement to get capitalization correct and in the right amounts

• The use of Cost Segregation includes: • Newly acquired buildings: to break out 1245 property • Newly acquired buildings: to determine the value of the

building components and systems to assist in the application of the TPRs RABI rules for past, current, future expenditures

• Expenditures: to determine if the taxpayer should apply the IRS refresh/remodel safe harbor (RRSH) and/or to the 25% of the RRSH that is required to be capitalized

Cost Segregation Application after the TPRs

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• TPR work did not end after tax year 2014 filing. The following consulting work types are valuable:

TPR and/or Cost Segregation Consulting Work

• Unit of Property Studies (to be able to determine proper U of P for TPR application for prior, current, or future tax years

• Tenant/Landlord Consulting (new or past projects and/or lease wording advice)

• TPR Compliance (for taxpayers who have not yet complied with the TPRs)

• Removal Cost Study (calculations of removal costs)

• Abandonment Study (calculations of assets removed/disposed of)

• GAA Planning to Avoid Section 280B Treatment

• RRSH Assistance • Current year Cap Ex verses R &

M Determinations and Documentation

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TANGIBLE PROPERTY REGULATIONS

Form 3115 – How to do?

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• The TPRs were not just a 2014 event, so if the taxpayer has not yet filed the required/needed Form 3115s (we estimate that a majority of taxpayers did not file the TPRs by tax year 2014)

• If the taxpayer (TP) is over the $10M thresholds – no problem in filing the required TPR Form 3115s in tax year 2015 or after (just cannot file DCN 196 on PADs nor 197 on GAAs) – but must do before IRS notification of audit.

• The TPR filings remain automatic (no fees charged to file) • Must submit “copy” to IRS in Covington, KY and “original” with tax

year with pdf copy in efilings • Cannot obtain TPR deductions w/o the Form 3115 filing

TPRs – How to File for Tax Year 2015 or After

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• If the TP is under the $10M thresholds: • If TP stated on its 2014 return (or amends 2014 return

to state) that it is not implementing the TPRs without filing the 3115s – no problem in filing

• If TP did not state that it is not filing the TPRs and wishes to now file the TPR method changes, as long as it did not implement the TPRs in 2014 (and can prove that if audited) it can file the 3115s and take advantage of the negative 481(a) adjustments

TPRs – How to File for Tax Year 2015 or After

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• Obtain 12-31-14 tax depreciation schedule (if filing for 2015, or 12-31-15 if filing for 2016 tax year)

• Determine appropriate U of Ps • Scrub depreciation schedule and apply RABI rules • Calculate 481(a) and develop schedules for each

method change to be filed (DCN 7 on class life corrections; 21 on removal costs; 184 on R & M write-offs; 205 on separately stated PAD deductions)

• Properly complete 3115s and answer all applicable ?’s • Submit “copy” of 3115 to IRS in Covington, KY and file

“original” 3115s with tax year with pdf copy in efilings

TPRs – How to File for Tax Year 2015 or After - Steps

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? QUESTIONS

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If You Enjoyed This Webcast…

Upcoming Courses: • 6/28 & 7/6: Key International Tax Considerations – Mid-Year Update

• 7/7 & 7/20: Second Quarter Accounting and Financial Reporting Issues Update

• 7/26 & 8/2: Eye on Washington – Quarterly Business Tax Update

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• Proposal to Simplify Goodwill Impairment

• 3 Information Security Risks Facing Healthcare Organizations

• Implementing the New Overtime Regulations: 5 Steps to Predicting and Controlling Costs

• Three Points of Interest for the Construction Industry in the Revenue Recognition Standard

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