#cbizmhmwebinar 1

CBIZ & MHM Executive Education Series™

The Combined Benefits of Cost Segregation and Tangible Property: Part 3- Compliance Considerations and Partial Asset Dispositions Linda Atkinson, Larry Rosenblum, & Eric Wallace November 29 and December 13, 2016

#cbizmhmwebinar 2

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 (Mayer Hoffman McCann P.C.) is an independent CPA firm that provides audit, review and attest services, and works closely with CBIZ, a business consulting, tax and financial services provider. CBIZ and MHM are members of Kreston International Limited, a global network of independent accounting firms.

#cbizmhmwebinar 3

Before We Get Started…

• To view this webinar in full screen mode, click on view options in the upper right hand corner.

• Click the Support tab for technical assistance.

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

#cbizmhmwebinar 4

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.

#cbizmhmwebinar 5

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.

CBIZ & MHM 6

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

#cbizmhmwebinar 7

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.

412.977.6644 • ericw@ericwallacecpa.com

Eric Wallace, CPA Eric Wallace LLC

#cbizmhmwebinar 8

Agenda

The new IRS Audit Technique Guide (ATG) – what the IRS instructs its auditors to do regarding your compliance with the Tangible Property Regulations (TPRs).

02

01

03

Partial Asset Dispositions (PADs) – how to compute, what the ATG says about them, the value of cost segregation in PAD issues

Questions

#cbizmhmwebinar 9

THE COMBINED BENEFITS OF COST SEGREGATION AND TANGIBLE PROPERTY: PART 3- COMPLIANCE

CONSIDERATIONS AND PARTIAL ASSET

#cbizmhmwebinar 10

Introduction

• All taxpayers must employ the TPRs in determining whether expenditures made after the asset is in service should or should not be capitalized

• The roles, process, and importance cost segregation plays in the TPR capitalization process, according to the IRS ATG

• Warnings regarding the issues of concern in the application of the TPRs that the ATG creates • In other words, where the ATG gets it “wrong” and

what taxpayers are going to have to look out for in IRS audits of the TPRs

#cbizmhmwebinar 11

Introduction

• Cost segregation studies enable a taxpayer to more easily determine how expenditures should or should not be capitalized by defining and valuating building components or systems

• Why the current costs (replacement cost) of building components or systems are used in that comparison and not original costs or basis

#cbizmhmwebinar 12

Introduction

• The proper and permitted calculation and manner of PAD amounts including examples on the stated three “reasonable” methods: • The PPI rollback method • Cost segregation study on what was disposed of • Factorial comparisons

• Why the use of cost segregation in the PAD process is the best, hands down

• How a taxpayer can obtain TPR deductions for tax year 2016 and beyond via Cost Segregation and TPR Studies

#cbizmhmwebinar 13

THE NEW IRS AUDIT TECHNIQUE GUIDE (ATG) – WHAT THE IRS INSTRUCTS ITS AUDITORS TO DO REGARDING YOUR COMPLIANCE WITH THE TANGIBLE PROPERTY REGULATIONS (TPRS).

#cbizmhmwebinar 14

Taxpayers and the Implementation of the TPRs What the TPRs Mean

• The TPRs present a opportunity/requirement to write off the net remaining tax basis of • Current year expenditures on duplicate building

assets, called partial asset dispositions (PADs) if properly calculated and proper form filed, &

• Previously capitalized expenditures that did not arise the level of being required to be capitalized under the RABI rules, if proper IRS Form 3115 filed (if taxpayer has not yet done so)

#cbizmhmwebinar 15

Taxpayers and the Implementation of the TPRs What the TPRs Mean

• If the taxpayer misses this opportunity or misinterprets the TPRs in the application of the TPRs, the taxpayer faces the real risk that large future depreciation deductions for these (prior year or current year) required repairs and maintenance items will be permanently disallowed by the IRS

• PADs are not required to be written off – they are optional in most cases

#cbizmhmwebinar 16

The TPR Compliance Process The IRS ATG on Capitalization

• As the TPRs are not an easy read nor ones that can be easily grasped by taxpayers or their tax preparers, the ATG seems to clearly be an effort by the IRS to: • educate the IRS agents on this tough subject, • provide information on implementation and

applicability, • to offer insight on procedures, and • mandate audit techniques available to insure

compliance.

#cbizmhmwebinar 17

IRS Examination of Tangible Property

• The purpose of the IRS ATG is stated in its opening salvo – for IRS examiners to use as a tool for identifying potential tax issues, assess risk, apply the law to the facts and circumstances for issue involving capitalization and dispositions of tangible property.

• It is interesting to note that the following key terms were used here (1) law, (2) facts and circumstances, (3) capitalization and (4) dispositions.

• The TPRs are the law that is the subject of this ATG. • Facts and circumstances of each situation is key.

#cbizmhmwebinar 18

Examination Procedures

• Comment: All but the last two chapters in the IRS ATG have specific steps or procedures that the IRS examiners should employ regarding the audit of the taxpayer’s compliance with the TPRs.

• Just listing the IRS audit procedures only takes up 32 pages in a Word document, after the elimination of the repeated or duplicate procedures!

#cbizmhmwebinar 19

General Instructions for IRS Agents

There are specific instructions, orders, procedures directed to its agents from which all taxpayers can learn from: a) As the TPR regulations were developed over 10 years in

various IRS releases, many taxpayers who changed their methods to match those earlier releases, are using methods that are inconsistent with the final TPRs.

b) Taxpayers were required to correct any prior methods that do not comply with the final TPRs on or after January 1, 2014.

c) The burden of proof rests with the taxpayer. d) Sufficient contemporaneous records are required.

#cbizmhmwebinar 20

Key Specific Audit Procedures

• The IRS advises its agents to address 1. Whether the taxpayer filed its TPR method

changes, and 2. The timing of those accounting method changes

to comply with the final TPRs. • The IRS does not communicate this issue to its

auditors as one of a taxpayer choice whether to implement, only one of a choice of when to implement.

#cbizmhmwebinar 21

Key Specific Audit Procedures

• In all cases (unless the taxpayer is a small taxpayer), this will require filing Form(s) 3115 to change their methods of accounting for costs addressed under the final regulations.

• Note compliance is not a choice - Filing Form 3115 method changes is a requirement. Taxpayers should have complied by “no later than their first tax year beginning on or after January 1, 2014.”

• Certain “qualifying small business taxpayers” could have implemented the TPRs, however, by instead complying with Rev. Proc. 2015-20 (i.e. those under the $10M thresholds)

#cbizmhmwebinar 22

Prior Year Capitalization to Repair Studies

• Comments: The IRS does not focus on current year capitalization to repair studies, or those studies that are related to employment of the final TPR rules, which is a good thing.

• The IRS instead focuses on studies that were done during tax years 2006 to 2012.

• If a taxpayer filed method changes related to capitalization to repair studies for those tax years and did not subsequently file modifications or updates to those studies in tax years 2013 or later, the IRS will undoubtedly challenge those prior studies.

#cbizmhmwebinar 23

Prior Year Capitalization to Repair Studies

• “While “capitalization to repair” studies employing the final TPRs is a very valuable and required work effort for most taxpayers (see exception above for qualified small taxpayers) there are a significant number of taxpayers that did such studies inappropriately.”

• “Those improper studies are ones done in prior tax years based on the proposed or temporary regulations. Any improper “capitalization to repair” studies that were done must be redone and corrected employing the final TPR rules.”

• Any method changes filed for tax years 2006 through 2012 must be redone.

#cbizmhmwebinar 24

KEY IRS EXAMINATION PROCEDURES AND IMPORTANT STATEMENTS

#cbizmhmwebinar 25

IRS ATG Important Statements

• “Employment of the TPRs often results in the deduction of the net remaining basis of prior year capitalized expenditures.”

• “The size of the property is not determinative for the UOP. • For example, a building can be very small, (e.g. a tool shed,

or very large, as in a fifty-story building). • “UOP used for applying the final regulations is not

necessarily the same as the “asset” used for depreciation purposes.

• The TPRs do not change the treatment of other Code Sections, such as 263A, 280B, 199

#cbizmhmwebinar 26

IRS ATG Important Statements

• “With the issuance of the final regulations, the demand for cost segregation studies is on the rise.”

• “Taxpayers … are hiring specialists with engineering expertise to determine units of property for purposes of applying the improvement rules.”

• “Cost segregation studies now serve additional purposes. For example, not only do these studies reclassify a building’s components into assets with shorter class lives, but they also identify building systems for purposes of applying the improvement rules.”

#cbizmhmwebinar 27

IRS ATG Important Statements

• Regarding the DMSH: “an otherwise deductible amount is still deductible, even if the amount exceeds the safe harbor ceilings….[if] they can prove clearly reflect income under §446.”

• A UOP is improved if after the property is placed in service for a betterment to the UOP; to restore the UOP; or to adapt the UOP to a new or different use. These three improvement rules are comprised of 10 specific “tests” for identifying improvements. Each test must be considered separate and apart.

#cbizmhmwebinar 28

IRS ATG Important Statements

• “DCN 184 requires a full §481(a) adjustment. That is, the §481(a) calculation may reach into prior taxable years.”

• “If a taxpayer files a 3115 to comply with the final regulations.. the change will generally result in a negative, or taxpayer-favorable, §481(a) adjustment.”

• “a taxpayer that timely and properly files a Form 3115 to change to a method of accounting under the final regulations …..receives audit protection for that item for taxable years prior to the year of change.”

#cbizmhmwebinar 29

IRS Examination and TPR Basics

• Make sure that: • The 3115s are properly filed and done under the

TPRs • Deductions of the net remaining basis of prior year

capitalized expenditures must match all basis issues • The units of property (UOP) are properly

established • Second, that the facts and circumstances are

considered to determine whether the work constitutes an improvement to that UOP.”

#cbizmhmwebinar 30

IRS Examination and TPR Basics

• Determine if the taxpayer determined its units of property in accordance with the final regulations.

• Has the taxpayer attached a [DMSH] election to its timely filed federal income tax return? If so, determine which entities elected the safe harbor

• Review the taxpayers written accounting procedures identifying de minimis amounts for book and financial purposes.

#cbizmhmwebinar 31

IRS Examination and TPR Basics

• Review the repair and maintenance accounts for the period under exam to determine that capital additions are not included.

• Review fixed asset studies conducted by or on behalf of the taxpayer.

• Consider whether the study conforms to the final regulations UOP and improvement rules.

• Ensure that project requests, purchase orders, invoices and related documents were reviewed as part of the study.

#cbizmhmwebinar 32

IRS Examination and TPR Basics

• Regarding removal costs: • Has there been a disposition for tax purposes of an

asset or a component? • Has the taxpayer properly elected to treat the removal

of a component as a partial disposition? • Did the taxpayer file a Form 3115 to change its

method of accounting for removal costs?

#cbizmhmwebinar 33

IRS ATG CONCERNING COMMENTS

Taxpayers should watch these issues

#cbizmhmwebinar 34

• “A taxpayer cannot choose to apply the safe harbor to some items and not to others.”

• “Appropriate considerations include the quantitative and qualitative evaluations of the replaced components in relation to the UOP. While there is no bright line test to make this determination, the regulations provide many examples to assist in the evaluation of specific fact patterns. The examples are not meant to provide bright-line percentages ”

IRS ATG Comments that are not Correct or Fully Explained

34

#cbizmhmwebinar 35

• “Assume a taxpayer owns an office building with three wings: A, B, and C. Assume that furnace 1 breaks down, and as result, wing 1 receives no heat. The taxpayer incurs costs to replace furnace 1. Under these facts, furnace 1 provides the discrete, critical and non-incidental function of heating for wing A, and is, therefore, a major component of the HVAC system.

IRS ATG Comments that are not Correct or Fully Explained

35

#cbizmhmwebinar 36

PARTIAL ASSET DISPOSITIONS

IRS ATG Comments on PADs

#cbizmhmwebinar 37

IRS ATG Important PAD Statements

• “For the first time, taxpayers may elect to dispose of part of a MACRS asset. Taxpayers will use their existing records and may also supplement their records with one of the reasonable methods described in the regulations to determine the amount of loss on a partial disposition. It is important to understand the records taxpayers should have available as well as changes to the recordkeeping requirements made by the disposition regulations.”

#cbizmhmwebinar 38

IRS ATG Important PAD Statements

• “The definition of a disposition for MACRS property now includes a partial disposition. In addition to certain mandatory partial dispositions, the regulations contain a voluntary partial disposition election.”

• Dispositions of an entire asset from an MAA or SAA are always recognized. The recognition of certain limited partial dispositions is mandatory but taxpayers generally have the option to elect to recognize the disposition of part of an asset. This is an annual election that must be done on a timely filed tax return.”

#cbizmhmwebinar 39

IRS ATG Important PAD Statements

• “Taxpayers face some unique challenges in determining the loss on the disposition of part of a building or of a building structural component.”

• “While taxpayers are required to maintain records on their buildings, taxpayers may not have records regarding the basis of structural components or other parts of a building.”

• Comment: this is where the value of a cost segregation “mini” study comes in handy to determine the basis of PADs

#cbizmhmwebinar 40

PARTIAL ASSET DISPOSITIONS

How to Calculate PADs

#cbizmhmwebinar 41

1.168(i)-8(f) – PAD Basis of Asset Disposed of

• “… If it is impracticable from the taxpayer’s records to determine the unadjusted depreciable basis … the taxpayer may use any reasonable method …”

• The examples of reasonable methods include the following … • Discounting the cost of the replacement asset to its placed-in-service

year cost using the Producer Price Index (PPI) for Finished Goods (but only if the replacement is not a betterment nor adaption)

• A pro rata or factorial allocation

• A cost segregation study allocating the cost of the asset to its individual components

#cbizmhmwebinar 42

MACRS Dispositions Examples

• MACRS Assets (Assets placed in service tax years 1987 to 2016) • Taxpayer has building D that it constructed in June of 1995 for

$500,000 and had depreciated that building down to $250,000 using the proper 39 year class life

• Taxpayer replaces all of its windows, doors, and roof in June of 2016 for building D for a cost of $250,000

• Taxpayer would like to do a partial asset disposition in 2016 to be able to take the current year 4797 deduction and to be able to reduce future depreciation recapture

• Tax reporting result • Taxpayer must employ a “reasonable method” to be able to

calculate the basis of the assets disposed of, report the amounts in Form 4797, and adjust the depreciable basis and AD to date for building D

#cbizmhmwebinar 43

Dispositions Reasonable Methods Example of PPI Rollback Method

• In order to employ the PPI rollback method, the taxpayer has to obtain the proper, or available producer price index published by the US Bureau of Statistics

• The taxpayer should then obtain the following data • The PPI from the date of the disposal = A • The PPI from the date the asset was placed in service =

B • The cost of the replaced asset(s) = C

• The taxpayer should then employ the following formula • C times B divided by A = asset value to dispose

#cbizmhmwebinar 44

PPI Rollback Method Table

Series Id: Previously WPUSOP3000 Go to: http://data.bls.gov/cgi-bin/srgateThen Enter: WPSFD4907 for updates

Group:Item:Base Date:Years:

Year Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec Annual1986 105.5 104.0 102.6 102.3 102.9 103.1 102.5 102.7 102.4 103.6 103.6 103.5 103.21995 126.6 126.9 127.1 127.6 128.1 128.2 128.2 128.1 127.9 128.7 128.7 129.1 127.91996 129.4 129.4 130.1 130.6 131.1 131.7 131.5 131.9 131.8 132.7 132.6 132.7 131.32011 184.4 186.6 189.1 191.4 192.5 191.4 192.2 191.7 192.6 191.8 191.7 191.1 190.52012 192.0 192.9 194.4 194.9 193.7 192.8 193.2 195.4 196.7 196.3 194.5 193.7 194.22013 194.9 196.4 196.7 196.0 196.9 197.3 197.3 197.9 197.3 196.9 196.1 196.5 196.62014 198.1 198.9 200.3 202.1 201.8 202.9 203.0 202.5 201.7 200.4 198.2 195.4

2015 192.2 192.6 193.6 193.1 196.0 197.7 197.4 196.3 193.4 192.4 191.6 190.12016 189.8(p) 188.9(p) 189.9(p) 190.5(p)

Yellow means subject to revision up to 4 months afterwards

2013 196.3 197.3 196.2 195.1 196.2 196.3 196.2 197.0 169.9 197.2 197.4 198.42014 199.7 199.9 200.0 201.2 2012.0 201.6 2016.0 2014.0 201.2 200.6 199.5 196.92015 193.3 193.3 193.4 192.7 195.5 196.5 196.0 195.2 193.0 192.5 192.8 191.52016 190.8 189.2 189.2 190.2 191.2 192.8 191.9

Note: the BLS changed the index for producer price index for finished goods from series WPSOP3000 to WPSFD49207. This change affected many prior yea In order to compare to years prior to 2013 above follow the instructions above on how to obtain that information.

Finished goods

198200

1960 to 2016

Producer Price Index-CommoditiesOriginal Data Value

WPSFD49207

Not Seasonally AdjustedFinal Demand

#cbizmhmwebinar 45

PPI Rollback Method Example

• The taxpayer should then obtain the following data • The PPI from the date of the disposal = A (192.8) • The PPI from the date the asset was placed in service =

B (128.2) • The cost of the replaced asset(s) = C ($250,000)

• The taxpayer should then employ the following formula • C times B divided by A = asset value to dispose • $250,000 times 128.2/192.8 = $166,234

• So taxpayer will dispose of the prior assets of $166,234 net of its depreciation (approximate 50% or $83,117) or loss of $83,117

#cbizmhmwebinar 46

MACRS Disposition Example – Cost Study

• Under this MACRS disposition method, the prior asset value is determined any an engineered cost study

• In this example, if the cost study people determine that the original building cost of replacing these building parts was $150,000, then the following would be the calculation of the asset disposal • $150,000 less accumulated depreciation to date of $75,000

(approximate for discussion purposes but the exact depreciation, employing the proper 39 year, min-month convention, would be used) would result in a $75,000 deduction on the 4797

• The asset would then need to be adjusted down $150,000 and the AD for the $75,000 amount

#cbizmhmwebinar 47

? QUESTIONS

#cbizmhmwebinar 48

If You Enjoyed This Webinar…

Upcoming Courses: • 12/6: Understanding Complex Debt and Equity Transactions

• 12/7 & 12/15: Put Your Best Face Forward - How to Manage and Learn From Your Not-for-Profit's Publicly Facing Data

• 12/20 & 1/11: AICPA Conference on Current SEC and PCAOB Developments Debrief

• 1/10 & 1/17: Key International Tax Considerations – 4th Quarter Update

Recent Publications: • Federal Court Issues Preliminary Injunction on Overtime Regulations

• Presentation Changes to the Cash Flow Statement

• 7 Ways to Strengthen Cybersecurity: Know Your State Notification Laws

• Evaluating the Impact of the 2016 Presidential Election

#cbizmhmwebinar 49

Connect with Us

linkedin.com/company/ mayer-hoffman-mccann-p.c.

@mhm_pc

youtube.com/ mayerhoffmanmccann

slideshare.net/mhmpc

linkedin.com/company/ cbiz-mhm-llc

@cbizmhm

youtube.com/ BizTipsVideos

slideshare.net/CBIZInc

MHM CBIZ

#cbizmhmwebinar 50

THANK YOU CBIZ & MHM cbizmhmwebinars@cbiz.com