Learn the latest tax strategies as well as happenings at ICS Tax, LLC

Alex Bagne, President of ICS Tax, LLC as well as the President of the American Society of Cost Segregation Professionals (ASCSP), had the honor of representing the ASCSP at the 2018 Real Estate and Construction Conference hosted by the American Institute of Certified Public Accountants (AICPA). The goal of having ASCSP attend the event was to generate greater awareness of the Society to top accounting professionals as well as encourage CPA firms with cost segregation practices to join. The ASCSP is the preeminent professional Society for all members of the cost segregation industry.

Pictured from left to right are ASCSP members Bruce Johnson from Capstan Tax Strategies, Chris Hitselberger from SourceHOV, Alex Bagne from ICS Tax, as well as future ASCSP member John Denovich from the Jennings Denovich Group.

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ICS Tax, LLC (ICS) is a consulting firm providing innovative tax planning strategies. ICS collaborates with taxpayers and their tax professionals to identify credits and incentives that reduce tax liabilities and increase profitability. ICS provides nationwide service through its offices throughout the country.

 

This week, the House released proposed legislation titled “Retirement, Savings, and Other Tax Relief Act of 2018”, which seeks to extend several expired tax incentives including the §179D Energy Efficient Commercial Building Deduction (§179D Deduction) and the §45L Energy Efficient Home Credit (§45L Credit).

CURRENT LAW

The §179D Deduction is a Federal tax incentive promoting energy efficient buildings for both new and existing structures. Further, architects, engineers, contractors, environmental consultants or energy services providers may also be eligible for the incentive on public projects. This incentive is often referred to as the EPAct Deduction after the Energy Policy Act of 2005 that created it, or as the §179D Deduction, which relates to its tax code section. Commercial building owners can take a Federal tax deduction of up to $1.80 per square foot of the building’s floor area if they install certain property (e.g., efficient lights or HVAC systems, added wall or roof insulation, etc.) that reduces energy and power costs. The §179D Deduction applied to both new construction and renovations completed between 2006 through 2017.

The §45L Credit allows eligible developers to claim a $2,000 tax credit for each newly constructed or substantially reconstructed qualifying residence. It applies to single family homes, apartments, condominiums, assisted living homes, student housing, and other types of residences. The residences must not be more than three stories above grade in height. Like the §179D Deduction, this incentive expired in 2017.

PROPOSED LAW

The proposed legislation extends the §179D Deduction and the §45L Credit beyond 2017 and allows taxpayers to take it for projects completed in 2018.

HOW WE CAN HELP

Out of all the buildings and homes that qualify for these incentives, very few taxpayers are taking the steps necessary to claim them. ICS can provide a free analysis to determine if these incentives are feasible, and if so, provide the necessary third-party certifications and other assistance to benefit from it. For a free consultation, please contact an ICS Tax representative.

 

Author: Alexander Bagne, JD, CPA, MBA, CCSP. Contributing Authors: Mike Piper, LEED AP; Kevin Johnson, LEED AP, CCSP; Jon Walgrave, LEED AP

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ICS Tax, LLC (ICS) is a consulting firm providing innovative tax planning strategies. ICS collaborates with taxpayers and their tax professionals to identify credits and incentives that reduce tax liabilities and increase profitability. ICS provides nationwide service through its offices throughout the country.

 

By Alexander Bagne, JD, CPA, MBA, CCSP – President

By Kevin Johnson, CCSP, LEED AP – Midwest Practice Leader

The September 2018 edition of the Journal of Taxation discusses the practice of cost segregation with a focus on IRS Chief Counsel Advice (CCA) 201805001. This CCA memorandum reasons that the preparers of overly aggressive cost segregation studies may be subject to penalties.

The tax benefits for investing in a building are generally poor, as buildings are depreciated slowly over 27.5 years for residential and 39 years for commercial. A cost segregation study carves out components from buildings that qualify for more rapid depreciation, such as land improvements and personal property. The result of such a study yields accelerated tax deductions and greatly improved cash flow.

The recent CCA memorandum contends that overly aggressive cost segregation studies should result in penalties applied to the preparer of the study. Specifically, the CCA argues that overly aggressive cost segregation studies aid and abet taxpayers in the improper preparation of their tax returns. Should these penalties be upheld, the overly aggressive use of cost segregation will now have consequences for both the taxpayer and the preparer of the cost segregation study.

The Journal of Taxation article and the CCA memorandum highlight the need to hire thoroughly competent cost segregation professionals. The American Society of Cost Segregation Professionals (ASCSP) was established as a non-profit corporation in response to the growing need for education, credentials, technical standards and a Code of Ethics within the cost segregation industry. The highest level of certification offered by the ASCSP, a Certified Cost Segregation Professional (CCSP), requires 7,500 of cost segregation experience, passing of a rigorous qualification exam, and a thorough background check.

 

ICS Note: All ICS cost segregation studies are certified by one of our in-house CCSPs and meet the high standards set forth by the ASCSP. We take great pride in providing exceptional service backed by free audit support.

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If you have questions on cost segreation, please contact an ICS representative. ICS collaborates with taxpayers and their tax professionals to identify credits and incentives that reduce tax liabilities and increase profitability. ICS provides nationwide service through its offices located throughout the country.

ICS Tax welcomes Jonathan Walgrave as the Central Practice Leader. Jon has over 12 years of experience providing tax consulting services and 10 years of residential construction experience. As an established leader, Jon previously led the regional fixed asset practices of both middle market and Big Four public accounting firms. Serving a diverse array of industries and clients, his expertise includes comprehensive fixed asset reviews and cost segregation analyses with additional experience in tangible property regulations, energy efficiency incentives, and other tax planning strategies. Jon earned his Bachelor of Science in Corporate Finance with a dual-track in Financial Planning and Corporate Finance from the University of Minnesota, Mankato, and is an active member of the American Society of Cost Segregation Professionals (ASCSP). He is also a LEED® Green Associate™ from the U.S. Green Building Council.

Jon lives in Savage, Minnesota with his wife Tammi and their two children, Bryce and Ady. ICS Tax, LLC (ICS) is a consulting firm providing innovative tax planning strategies. ICS collaborates with taxpayers and their tax professionals to identify credits and incentives that reduce tax liabilities and increase profitability. ICS provides nationwide service through its offices located throughout the country.

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By Kevin Johnson, CCSP, LEED AP – Midwest Practice Leader

The U.S. Treasury Department and the IRS has issued proposed regulations (REG-104397-18) providing guidance on Section 168(k), which was amended by P.L. 115-97, known as the Tax Cuts and Jobs Act (TCJA). The TCJA increased the allowable first-year depreciation deduction for qualified property from 50% to 100% for property acquired and placed in service after Sept. 27, 2017. This will get phased down by 20% per year beginning after Dec. 22, 2022. The biggest change that arose from tax reform was the ability to now take bonus depreciation on used property by waiving the original-use requirement. These simple changes cause cascading issues and transition problems for taxpayers and needed to be addressed through further tax regulation.

The proposed regulations come in the form of an entirely new section at Prop. Regs. Sec. 1.168(k)-2 and also makes conforming amendments to the existing regulations. This new guidance provides that depreciable property must meet four requirements to be considered qualified property:

  • The depreciable property must be of a specified type;
  • The original use of the depreciable property must commence with the taxpayer, or used depreciable property must meet the acquisition requirements of Sec. 168(k)(2)(E)(ii);
  • The depreciable property must be placed in service by the taxpayer within a specified time period or must be planted or grafted by the taxpayer before a specified date; and
  • The depreciable property must be acquired by the taxpayer after Sept. 27, 2017.

Property of a specified type retains many of the original provisions and adds a few new categories. This section also clarifies that Qualified Improvement Property acquired and placed in service after Sept. 27, 2017, and before Jan. 1, 2018 does in fact qualify for 100% bonus depreciation as 39-year property. This category was inadvertently removed in the TCJA and will not qualify for bonus pending further technical correction legislation.

Used property still requires a taxpayer or a predecessor to have not held a depreciable interest in used property prior to the acquisition. This anti-churning provision limits related parties from trading property back and forth to achieve depreciation benefits. However, if a taxpayer lessee acquires the overall leased property of which the taxpayer already has a depreciable basis in the improvements, the acquired property would qualify. This is not to include any unadjusted depreciable basis attributable to the improvements of the lessee. Further, the Treasury and the IRS believe that additional first year depreciation should not be permitted to members of a consolidated group and for purposes of this rule consolidated members will be treated as having a depreciable interest in the property.

The proposed regulations provide rules applicable to the acquisition requirements to include self-constructed property or property described in 168(k)(2(B) or (C). Much of the guidance borrows language and concepts from the 1603 grant program for payments of Specified Energy Property in lieu of Tax Credits arising from the American Recovery and Reinvestment Tax Act of 2009. Central to the acquisition requirement is a written binding contract provision and examples that provide clarification.

Bonus depreciation is required on any property that meets the criteria unless a taxpayer makes an irrevocable election out. The election is on a class by class basis and is done on the current year Form 4562 “Depreciation and Amortization” and its instructions. Taxpayers may elect out of bonus depreciation altogether or the taxpayer may elect 50% additional first year depreciation deduction instead of 100%. The election must be made on a timely filed return. Taxpayers are allowed to rely on these proposed rules until final regulations are published. Taxpayers that have already filed their 2017 return and either did not claim the mandatory deduction on qualifying property, or did not elect out but still wish to do so, will need to file an amended return.

If you have questions on bonus depreciation, please contact an ICS representative. ICS collaborates with taxpayers and their tax professionals to identify credits and incentives that reduce tax liabilities and increase profitability. ICS provides nationwide service through its offices located throughout the country.

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ICS Tax welcomes Travis Cansler as Government Relations Specialist based out of Spring, Texas. Cansler will focus on business development, as well as creating and maintaining healthy working relationships with government building owners.

Cansler previously worked with a variety of governmental building owners throughout the country on the allocation of the §179D Energy Efficient Commercial Building Deduction for millions of square feet of building space. His experience with public agencies spans from small municipalities to the Federal government.

Cansler studied Business Management at St. Andrews University in Laurinburg, North Carolina. During his time in North Carolina, Cansler competed in the NCAA Cross Country National Championships. This past May, Cansler married his wife, Lexi Cansler-Pitt. Travis and Lexi reside in Spring, Texas where they enjoy rescuing and fostering animals that need their help.

ICS Tax, LLC (ICS) is a consulting firm providing innovative tax planning strategies. ICS collaborates with taxpayers and their tax professionals to identify credits and incentives that reduce tax liabilities and increase profitability. ICS provides nationwide service through its offices located throughout the country.

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April 6th, 2018 – CEO Mike Piper joined the Real Estate for Breakfast podcast to explain Public-Private Partnerships (P3s) and tax strategies. Mike shared his wealth of expertise regarding beneficial tax tactics to both public and private entities who invest in student housing facilities.

By using the example of public universities, Mike showed how pairing a taxpaying private entity with a tax-free public entity can create a win-win for the developer and the university. Mike then discussed the industry-leading software the ICS Tax team developed that assists both large and small companies in leveraging innovate tax strategies.

Click here to listen!

Simply put, accounting methods are how income and expenses are reported for tax purposes. Changing a taxpayer’s accounting method may seem as easy as switching a setting in QuickBooks, but it’s actually a complex process that requires knowledgeable, experienced professionals to help organizations deal with the required IRS formalities.

A couple of examples of common changes in accounting methods are going from the cash to the accrual method or accelerating the timing of depreciation schedules.

With a process like this, some organizations and/or tax professionals may question if it’s even worth the effort to make the switch. Here, we’ll go through some examples of where it might not only be financially beneficial for the company or client, but required.

So, why make a change? Read on to find out.

 


 

Depreciation & Cost Segregation

One popular reason companies change accounting methods is for depreciation changes, such as implementing a cost segregation study. Investments in residential buildings are spread out over 27½ years, but investments in commercial real estate are deducted for an even longer period of 39 years.

However, there are certain parts of a building that include personal property (furniture, carpeting, window blinds, network cabling, desk lighting, etc.) and land improvements, (parking lots and landscaping). When carved out, they can be deducted over five, seven or 15 years versus 27½ years or 39.

With this type of accounting method change, there’s a huge time value for money savings. And when the change is made in 2017, before the reduced 2018 tax reform rates go into effect, accelerating deductions also generates permanent tax savings.

For an example of this change, let’s say a taxpayer has a manufacturing facility. They incur costs for process-related electrical, plumbing, fire protection systems and HVAC systems. These are items that tend to get treated as part of the building. However, under the tax rules taxpayers can depreciate them as equipment. Taxpayers can change these items from building property to equipment property as part of an accounting method change and benefit from the accelerated deductions.

cost segregation study


 

Repair and Maintenance Costs

A new body of tax rules came into effect for 2014 called the Tangible Property Regulations (TPRs). These regulations provide much-needed guidance as far as what taxpayers can treat as an immediately deductible repair and maintenance expense versus an asset.

Before they existed, taxpayers were forced to rely on unclear tax rules and conflicting case law.

The best part about it? These rules can be applied retroactively.

For example, prior to the TPRs, taxpayers and tax professionals capitalized the costs of roof work on a building over 39 years. However, the TPRs provide, (in most situations), an immediate deduction when a taxpayer is only replacing the roof membrane or shingles without making significant replacements of the underlying decking, support structure, or insulation.

This means they can subtract these costs from their taxable income and pay less tax on their net income. If they were to continue to treat it as part of the building, they’d need to spread out the deduction over 39 years.

Some other examples of repair and maintenance costs would be if a taxpayer replaces eight of 20 sinks, replaces three of 10 roof-mounted HVAC units, or replaces 30 percent of a building’s electrical system wiring. These are all things taxpayers tended to capitalize and treat as new assets, but can often be treated as repair and maintenance costs.

tangible property regulations can be applied retroactively


 

§179D Energy Efficient Commercial Building Deduction

Another reason companies change their accounting method is to take advantage of energy efficiency incentives.

For the 179D efficiency incentive, taxpayers can take an immediate deduction of up to $1.80 per square foot of building property rather than depreciate these items over a lengthy 27½ or 39 years.

When a taxpayer constructs a new building or renovates an existing building to incorporate energy efficient lighting, energy efficient HVAC systems or adds insulation to the walls or roof – these things could qualify for the energy efficient commercial building deduction.

It’s akin to getting money today instead of spreading it out over time. It’s worth more to companies to have this deduction sooner.

“We had a client who replaced the lighting systems in a 100,000-square foot hotel,” said Alex Bagne, President of ICS Tax. “Since the building already had an energy-efficient HVAC system, we were able to get the full $1.80 per square foot deduction. This gave the company $180,000 additional deductions that year.”

alex bagne quote


 

Dispositions of Tangible Assets

Another reason companies change their accounting method is for dispositions of tangible assets. Taxpayers frequently have ghost assets on their fixed-asset schedules. “We often see this with retail and office buildings where they have tenants. The building owner builds out space for a new tenant and then that tenant leaves,” said Bagne, “At that point, the building owner demos the space and does a new build-out for the next new tenant.”

The problem is that these old tenant improvements don’t properly get written off the books. Most companies will depreciate the disposed of improvements over 39 years.

With the disposition of tangible assets, companies have the opportunity to take an abandonment loss on disposed assets.

Again, rather than continue to depreciate the assets over time, the taxpayer can take an immediate write-off.

abandonment loss


 

Compliance

Compliance is another reason many companies choose to change their accounting method. This is often the case when a company’s gross receipts exceed $5 million.

The cash accounting method is very easy to follow and provides greater control over when income and expenses are recognized. If companies have a bill they want to pay on December 31st of one year, they can choose to pay it and take the deduction that year. Or, if they’d rather hold off until the following year, they can simply pay it on or after January 1st.

For some companies, however, the accrual accounting method may be mandatory. For example, C-corporations with average annual gross receipts for the previous three years of more than $5 million are required to utilize the accrual accounting method.

more than $5 million means accrual


 

Whether to maintain compliance with the tax law or to reduce income tax, there many valid reasons for companies to change their accounting methods. To learn more about how to implement these accounting method changes in your organization or your client’s, register and attend Alex Bagne’s webinar on May 9th through the Clear Law Institute. Alex also presents at various state CPA societies and puts on this webinar for free for CPA firms. To book Alex to come speak at your firm, click here to get in touch.

Lacey J.S. Robb, JD, LLM – Northeast Practice Leader

Alex Bagne, JD, CPA, MBA, CCSP – President of ICS Tax, LLC

While many deductions and credits were repealed by TCJA, the final law preserved the Research and Development (“R&D”) tax credit, which was previously made permanent in the Protecting Americans against Tax Hikes (“PATH”) Act of 2015.  While the R&D tax credit was not directly changed, the following impact the value of the R&D credit:

Lower Corporate Tax Rate Increases the Net Benefit

  • The R&D tax credit’s net benefit is increased by approximately 21% due to the lowered corporate tax rate. The increase is due to IRC Section 280C(c), which was enacted to prevent double benefit of research related expenditures by being able to deduct the same expenditures used to calculate the R&D tax credit. 280C(c) requires taxpayers to reduce the R&D tax credit rate by the maximum corporate tax rate, which is now lower for 2018.

 

Repeal of the Corporate Alternative Minimum Tax (“AMT”) allows Increased Taxpayer Utilization

  • With the AMT repeal, taxpayers who would have been subject to AMT and were disallowed from utilizing the R&D tax credit are now able to do so without limitation to gross receipts earnings.
  • By eliminating the AMT’s Tentative Minimum Tax for corporations, the law allows the R&D tax credit to reduce a taxpayer’s liability down to 25% of the amount of net regular tax liability that exceeds $25,000, a limitation imposed by IRC Section 38(c).
  • For small and mid-sized companies, the new law does not have an impact, since the PATH Act allowed qualified small businesses (i.e., <$50 million gross receipts) to apply against AMT.

 

Limitation of Net Operating Loss (NOLs) Deductions Increases Value

  • NOLs are only able to offset 80% of taxable income for losses arising in tax years beginning after December 31, 2017.
  • Traditional R&D companies that carry a loss will find benefit now in the R&D tax credit to help offset taxes they will now have to pay.

 

The Orphan Drug Tax Credit is Significantly Reduced; Increases Value to R&D Tax Credit

  • The Orphan Drug tax credit has been lowered to 25% from 50% of a company’s costs related to clinical trials for developing rare disease treatments.
  • Companies that have not also piggybacked the R&D tax credit may need the additional tax relief.

The R&D tax credit benefits have been enhanced by the recent tax reform and can provide greater taxpayer benefits.  For a free consultation, please contact Lacey Robb or another ICS Tax Representative.

ABOUT US

ICS Tax, LLC (ICS) is a consulting firm providing innovative tax planning strategies. ICS collaborates with taxpayers and their tax professionals to identify credits and incentives that reduce tax liabilities and increase profitability. ICS provides nationwide service through its offices located throughout the country.

ICS Tax welcomes Andrew Archambeau as a Senior Engineer in our Columbus, Ohio practice office. After graduating in 2014 from the University of Cincinnati with a Bachelor of Science degree in civil engineering, Andrew began his career in specialized tax consulting. In addition to extensive experience performing cost segregation, he is highly proficient in preparing IRS Form 3115, application for change in accounting method, as well as comprehensive fixed asset reviews. In January 2017, Andrew attended the U.S. Marine Corps Officer Candidates School and earned a commission as a 2nd Lieutenant. He currently serves in the Marine Forces Reserves. Andrew is an avid fan of Cincinnati Bearcat football and loves watching the Columbus Blue Jackets hockey team.

 

by:

Alex Bagne, JD, CPA, MBA, CCSP – President of ICS Tax, LLC

On Friday, February 9, President Trump signed The Bipartisan Budget Act of 2018, which is a massive budget package that lifts spending caps while funding the government through March 23, 2018. Part of the Act retroactively extends the §179D Energy Efficient Commercial Building Deduction as well as the §45L Energy Efficient Home Credit.

BACKGROUND

179D Energy Efficient Commercial Building Deduction allows taxpayers who constructed new buildings or made improvements to existing ones between 2006 and 2016 can take an immediate deduction of up to $1.80/SF for investments in efficient lighting systems, HVAC and hot water systems, and the building envelope. For architects, engineers, and contractors who design public buildings, a special rule allows them to take the deduction for themselves. As a companion tax incentive but for residential properties, the §45L Energy Efficient Home Credit allows eligible developers to claim a $2,000 tax credit for each newly constructed or substantially reconstructed qualifying residence. Both of these incentives expired as of December 31, 2016.

THE BIPARTISAN BUDGET ACT OF 2018

This Act retroactively extends both the §179D Deduction and the §45L credit through December 31, 2017. The Act makes no other changes to these incentives and preserves the baselines used to determine if a particular building or residence qualifies.

NOW IS THE TIME TO ACT

Out of all the buildings and residences that qualify for these hugely beneficial incentives, very few taxpayers are taking the steps necessary to claim them. ICS can provide a free analysis to determine if either of these incentives are feasible, and if so, provide the necessary energy modeling, third-party certifications, and other assistance to benefit from them. For a free consultation, please contact an ICS Tax representative.

ABOUT ICS TAX, LLC

ICS Tax, LLC (ICS) is a consulting firm providing innovative tax planning strategies. ICS collaborates with taxpayers and their tax professionals to identify credits and incentives that reduce tax liabilities and increase profitability. ICS provides nationwide service through its offices located throughout the country.

 

tax-alert

by:

Alex Bagne, JD, CPA, MBA, CCSP – President of ICS Tax, LLC

The Bipartisan Budget Act of 2018 may retroactively extend §179D Energy Efficient Commercial Building Deduction as well as the §45L Energy Efficient Home Credit, and it might happen soon!!!

BACKGROUND

§179D Energy Efficient Commercial Building Deduction allows taxpayers who constructed new buildings or made improvements to existing ones between 2006 and 2016 can take an immediate deduction of up to $1.80/SF for investments in efficient lighting systems, HVAC and hot water systems, and the building envelope. For architects, engineers, and contractors who design public buildings, a special rule allows them to take the deduction for themselves. As a companion tax incentive but for residential properties, the §45L Energy Efficient Home Credit allows eligible developers to claim a $2,000 tax credit for each newly constructed or substantially reconstructed qualifying residence. Both of these incentives expired as of December 31, 2016.

THE BIPARTISAN BUDGET ACT OF 2018

This Act is the Senate’s version of the budget, which needs to be passed before February 8, 2018, and includes retroactive extension of both the §179D Deduction and the  §45L credit through December 31, 2017. If passed by the Senate, it would then need to be passed by the House, which is not a forgone conclusion as the House could reject it or other issues could create another shutdown and a revised bill. We should hear official word soon.

HOW WE CAN HELP

Out of all the buildings and residences that qualify for these hugely beneficial incentives, very few taxpayers are taking the steps necessary to claim them. ICS can provide a free analysis to determine if either of these incentives are feasible, and if so, provide the necessary energy modeling, third-party certifications, and other assistance to benefit from them. For a free consultation, please contact an ICS Tax representative.

ABOUT ICS TAX, LLC

ICS Tax, LLC (ICS) is a consulting firm providing innovative tax planning strategies. ICS collaborates with taxpayers and their tax professionals to identify credits and incentives that reduce tax liabilities and increase profitability. ICS provides nationwide service through its offices located throughout the country.

tax-alert

by:

Alex Bagne, JD, CPA, MBA, CCSP – President of ICS Tax, LLC

Greg K. Bryant, CCSP – Managing Partner of Bedford Cost Segregation, LLC

Curt Gautreau, CPA, CCSP – President of Cost Segregation Initiative

 

With the signing into law of the Tax Cuts and Jobs Act (the “Act”), Congress has enacted the biggest tax reform law in thirty years, one that will make fundamental changes in the taxation of businesses, particularly those who own real estate. For real estate investors, there are numerous opportunities to reduce tax, but there are also several misconceptions. Below are highlights.

LOWER TAX RATES

For tax years that begin after Dec. 31, 2017, the corporate tax rate, which had been at graduated rates as high as 35%, is reduced to a flat 21% rate. Similarly, pass-through businesses (e.g., sole proprietorships, partnerships, LLCs and S-corps) may be able enjoy lowered tax rates through a deduction of up to 20% of their business income. However the pass-through provisions are complicated and the rate reductions are limited for “specified service trades or businesses” (e.g., businesses that involve performance of services in the fields of health, law, consulting, athletics, financial services and brokerage services). Many taxpayers are already operating on the assumption that the 20% deduction is a “slam dunk” – it’s not.

For most real estate investors, the typical tax planning strategies to push income into future tax years and pull deductions into the current year have added value beyond the time value of money. With lower tax rates for 2018 and onward, shifting deductions into 2017 generates permanent tax savings due to the tax rate arbitrage. As such, said investors may want to review current and past depreciation treatment for their existing portfolios to determine if “look-back” Cost Segregation studies would produce favorable adjustments to depreciation (i.e., catch-up depreciation).

BONUS DEPRECIATION

In general, taxpayers will want to accelerate the purchase of depreciable assets to take advantage of the 100% bonus depreciation provision included in the Act for property placed in service after Sept. 27, 2017. The bonus rates begin to phase out after 2022 and are fully phased out by 2027. Also note that, under the Act, used property with a MACRS recovery period of 20 years or less now qualifies for bonus depreciation. While most Tax Reform provisions apply to tax years beginning in 2018, the bonus depreciation provision is unique in that it applies after Sept. 27, 2017. With bonus depreciation and its application to used property, Cost Segregation studies have now been given more importance and value for used buildings purchased from the effective date through 2027. Application of bonus depreciation will be subject to transition rules and other requirements but generally, this is great news for those who plan to purchase, build or renovate properties. Given that Cost Segregation studies will be utilized to a much greater degree now, the values associated with the accelerated property eligible for bonus depreciation as well as assets assigned 27.5 and 39-year lives will need to be accurate and defensible.

We suspect that many unqualified firms may attempt to “boost” the value of qualified property through “innovative” or “proprietary” approaches. With 100% bonus depreciation at stake and significant risk during audit if studies are sub-standard, it will be incumbent on the taxpayer and their advisors to utilize a Cost Segregation consultant with the requisite qualifications. The American Society of Cost Segregation Professionals (ASCSP) is the industry’s only organization devoted to the training, advancement, ethics and standards development. ASCSP Certified members must have a minimum of 7-years direct Cost Segregation experience and also pass a rigorous examination. Be sure to ask your consultant about their credentials.

§179 EXPENSE ELECTION

The Act increased the maximum amount a taxpayer may expense under §179 to $1 million and increased the phase-out threshold to $2.5 million. These amounts will be indexed for inflation after 2018. There is a state-specific income limitation to be aware of as well.

The Act also expanded the definition of §179 property to include certain depreciable tangible personal property used predominantly to furnish lodging or in connection with furnishing lodging. It also expanded the definition of Qualified Real Property (QRP) eligible for §179 expensing to include any of the following improvements to nonresidential real property: roofs, HVAC property, fire protection and alarm systems, and security systems. For significant renovation projects, many taxpayers will benefit from Cost Segregation to maximize the benefits of the increased §179 Expense Election in the case of phase-out thresholds or inability to utilize  §179 since this provision can only be used for expenditures incurred in a trade or business.

QUALIFIED IMPROVEMENT PROPERTY

Prior to the Act, three types of building improvements—Qualified Leasehold Improvement Property, Qualified Restaurant Property and Qualified Retail Improvement Property—had a 15-year recovery period and were depreciated using the straight-line method. For years after Dec. 31, 2017, the Act replaces these categories with a revamped Qualified Improvement Property (QIP) classification. The legislative intent was to depreciate these over 15 years using the straight-line method therefore making them eligible for bonus depreciation. However, the necessary language was not included in the final tax reform and, absent a Technical Correction; QIP is depreciated over 39 years and is ineligible for bonus depreciation.

By way of reference, Qualified Improvement Property is any improvement to an interior portion of a building that is nonresidential real property if the improvement is placed in service after the date the building was first placed in service except for any improvement for which the expenditure is attributable to (1) enlargement of the building, (2) any elevator or escalator, or (3) the internal structural framework of the building.

Immediately following the release of the Act, some professionals circulating marketing material stating that Qualified Improvement Property is eligible for 100% bonus depreciation, but absent a Technical Correction, it is 39 year property and ineligible for bonus.

§1031 LIKE-KIND EXCHANGES

Generally effective for transfers after Dec. 31, 2017, §1031 like-kind exchanges are limited to transfers of real property not held primarily for sale. It is unclear as to whether personal property attached to real property is eligible for §1031 treatment. The fact that virtually all buildings contain some §1245 personal property, whether already identified in a Cost Segregation study or embedded in the building’s depreciable real property basis, might cause one to wonder how this might work. In the case of a §1031 like-kind exchange, the issue is whether the §1245 personal property is eligible for carry-over treatment or would it be subject to recapture and higher tax rates. It may depend as to whether the IRS follows the tax or state law, as the rules are different. While there is no consensus in the industry and absent further clarification from the IRS, we are hopeful that personal property that is part of a building would eligible for the §1031 treatment.

HISTORIC TAX CREDIT

The Act modifies the Historic Tax Credit for years after Dec. 31, 2017. A 20% credit still applies with respect to a certified historic structure (i.e., any building that is listed in the National Register), but it must be taken ratably over 5 years. The 10% credit for qualified rehabilitation expenditures with respect to a pre-1936 building is repealed.

OTHER PROVISIONS

The Act has provisions that limit the deductibility of interest expense, changes to ADS lives, and many others. Please consult the full text of the Act for further detail.

 

ICS Tax, LLC (ICS) congratulates Kevin Johnson and Thomas Fellure for passing exams administered by the American Society of Cost Segregation Professionals (ASCSP).

Kevin is the ICS Midwest Practice Leader and heads its cost segregation practice. He sat for and passed the Certified Cost Segregation Professional (CCSP) exam. The CCSP designation is the highest credential in the cost segregation industry. Specialists with this designation have met the ASCSP’s strict level of standards as well as work experience requirements, which includes a minimum of 7 years direct experience performing cost segregation studies with at least 7,000 hours of direct cost segregation experience. He joins Alex Bagne, the President of ICS Tax, as its second CCSP member.

Thomas is a Senior Engineer for ICS who sat for and passed the Member exam. The Member designation is for individuals with at least 1 year and 1,000 hours of direct technical experience performing cost segregation studies. Both Kevin and Thomas work in the ICS Columbus, Ohio office.

ICS is passionate about bringing the best talent with the highest credentials to serve its clients and this is further proof of this dedication. Congratulations to both for their successful passing of these rigorous exams and their commitment to the cost segregation profession.

ABOUT ICS TAX, LLC

ICS Tax, LLC is a consulting firm providing innovative tax planning strategies. ICS collaborates with taxpayers and their tax professionals to identify credits and incentives that reduce tax liabilities and increase profitability. ICS provides nationwide service through its Twin Cities headquarters as well as its offices located in Cleveland, Los Angeles, New York, Boston, Columbus, and Sioux Falls.

Author: Alexander Bagne, JD, CPA, MBA, CCSP.

tax-alert

With the signing into law of the Tax Cuts and Jobs Act (the “Act”), Congress has enacted the biggest tax reform law in thirty years, one that will make fundamental changes in the taxation of businesses, particularly those who own real estate.

LOWER TAX RATES

For tax years that begin after Dec. 31, 2017, the corporate tax rate, which had been at graduated rates as high as 35%, is reduced to a flat 21% rate. Similarly, pass-through businesses (e.g., sole proprietorships, partnerships, LLCs and S-corps) may be able enjoy lowered tax rates through a deduction of up to 20% of their business income. However the pass-through provisions are complicated and the rate reductions are limited for “specified service trades or businesses” (e.g., businesses that involve performance of services in the fields of health, law, consulting, athletics, financial services and brokerage services).

For most real estate investors, the typical tax planning strategies to push income into future tax years and pull deductions into the current year have added value beyond the time value of money. With lower tax rates for 2018 and onward, shifting deductions into 2017 generates permanent tax savings due to the tax rate arbitrage.

ICS Tax Note: For real estate owners, there are numerous planning techniques to accelerate deductions into 2017, which include cost segregation, the §179D energy efficient commercial building deduction, capital to expense studies, retirement studies, and many more. By making a change in accounting method, taxpayers can retroactively take advantage of these planning ideas without amending. ICS Tax can perform a free analysis to determine what opportunities are available for you.

BONUS DEPRECIATION

In general, taxpayers will want to accelerate the purchase of depreciable assets to take advantage of the 100% bonus depreciation provision included in the Act for property placed in service after Sept. 27, 2017. The bonus rates begin to phase out after 2022 and are fully phased out by 2027. Also note that, under the Act, used property qualifies for bonus depreciation. Accelerating the purchase of qualifying property will offset income taxable at the 2017 higher tax rates.

ICS Tax Note: While most Tax Reform provisions apply to tax years beginning in 2018, the bonus depreciation provision is unique in that it applies after Sept. 27, 2017.

ICS Tax Note: With 100% bonus depreciation and its application to used property, Cost Segregation studies have added importance for used buildings purchased in 2018 and beyond.

§179 EXPENSE ELECTION

The act increased the maximum amount a taxpayer may expense under §179 to $1 million and increased the phase-out threshold to $2.5 million. These amounts will be indexed for inflation after 2018.

The act also expanded the definition of §179 property to include certain depreciable tangible personal property used predominantly to furnish lodging or in connection with furnishing lodging. It also expanded the definition of qualified real property eligible for §179 expensing to include any of the following improvements to nonresidential real property: roofs, HVAC property, fire protection and alarm systems, and security systems.

ICS Tax Note: For significant renovation projects, many taxpayers will benefit from Cost Segregation to maximize the benefits of the increased §179 Expense Election.

QUALIFIED IMPROVEMENT PROPERTY

Prior to the Act, three types of building improvements—qualified leasehold improvement property, qualified restaurant property and qualified retail improvement property—had a 15-year recovery period and were depreciated using the straight-line method. For years after Dec. 31, 2017, the Act replaces these categories with a revamped qualified improvement property classification. The legislative intent was to depreciate these over 15 years using the straight-line method and be eligible for bonus depreciation. However, the necessary language was not included in the final tax reform and, absent a technical correction, qualified improvement property is depreciated over 39 years and is ineligible for bonus depreciation.

“Qualified improvement property” is any improvement to an interior portion of a building that is nonresidential real property if the improvement is placed in service after the date the building was first placed in service except for any improvement for which the expenditure is attributable to (1) enlargement of the building, (2) any elevator or escalator, or (3) the internal structural framework of the building.

ICS Tax Note: Presuming a technical correction is made, most taxpayers benefit from the expanded definition of qualified improvement property. However, it is more restrictive in its exclusion of restaurant buildings and some restaurant improvements. For example, the definition of qualified restaurant property prior to the Act did not exclude building enlargements.

§1031 LIKE-KIND EXCHANGES

Generally effective for transfers after Dec. 31, 2017, §1031 like-kind exchanges are limited to transfers of real property not held primarily for sale. However, under a transition rule, the crackdown does not apply to exchanges of personal property if the taxpayer either disposed of the relinquished property or acquired the replacement property on or before Dec. 31, 2017.

HISTORIC TAX CREDIT

The Act modifies the Historic Tax Credit for years after Dec. 31, 2017. A 20% credit still applies with respect to a certified historic structure (i.e., any building that is listed in the National Register), but it must be taken ratably over 5 years. The 10% credit for qualified rehabilitation expenditures with respect to a pre-1936 building is repealed.

OTHER PROVISIONS

The Act has provisions that limit the deductibility of interest expense, changes to ADS lives, and many others. Please consult the full text of the Act for further detail.

HOW WE CAN HELP

ICS provides numerous strategies that can maximize the savings with tax reform. For a free evaluation, please contact an ICS Tax representative.

ABOUT ICS TAX, LLC

ICS Tax, LLC (ICS) is a consulting firm providing innovative tax planning strategies. ICS collaborates with taxpayers and their tax professionals to identify credits and incentives that reduce tax liabilities and increase profitability. ICS provides nationwide service through its Twin Cities headquarters as well as its offices located in Cleveland, Los Angeles, New York, Boston, Columbus, and Sioux Falls.

Author: Alexander Bagne, JD, CPA, MBA, CCSP. Contributing Authors: Mike Piper, LEED AP and Kevin Johnson, LEED AP

Updated: 1/3/2018

tax-alert

This week, the “Tax Extender Act of 2017” was filed in Senate, which extended several expired tax deductions including §179D Energy Efficient Commercial Building Deduction (§179D Deduction).

CURRENT LAW

The §179D Deduction is a Federal tax incentive promoting energy efficient buildings for both new and existing structures. Further, architects, engineers, contractors, environmental consultants or energy services providers may also be eligible for the incentive on public projects. This incentive is often referred to as the EPAct Deduction after the Energy Policy Act of 2005 that created it, or as the §179D Deduction, which relates to its tax code section. Commercial building owners can take a Federal tax deduction of up to $1.80 per square foot of the building’s floor area if they install certain property (e.g., efficient lights or HVAC systems, added wall or roof insulation, etc.) that reduces energy and power costs. The §179D Deduction is allowed for both new construction and renovations completed between 2006 through 2016.

PROPOSED LAW

The proposed legislation extends the §179D Deduction beyond 2016 and allows taxpayers to take it for projects completed in 2017 and 2018.

ECONOMIC IMPACT

A recent study published by a leading regional economic modeling and policy analysis firm published a report on of the economic effects of extending the §179D Deduction and the results were astounding. The analysis shows that in addition to advancing the goal of energy independence, the §179D Deduction is an engine of economic and employment growth.

HOW WE CAN HELP

Out of all the buildings that qualify, very few taxpayers are taking the steps necessary to claim this valuable incentive. While currently expired, the §179D Deduction often provides current benefit on projects from 2016 and prior. ICS can provide a free analysis to determine if this incentive is feasible, and if so, provide the necessary third-party certifications and other assistance to benefit from it. For a free consultation, please contact an ICS Tax representative.

ABOUT ICS TAX, LLC

ICS Tax, LLC (ICS) is a consulting firm providing innovative tax planning strategies. ICS collaborates with taxpayers and their tax professionals to identify credits and incentives that reduce tax liabilities and increase profitability. ICS provides nationwide service through its Twin Cities headquarters as well as its offices located in Northeast Ohio, on the Pacific Coast, in the Tristate area, and the Dakotas.

Author: Alexander Bagne, JD, CPA, MBA, CCSP. Contributing Authors: Mike Piper, LEED AP and Kevin Johnson, LEED AP

Alex Bagne, the President of ICS Tax as well as the President of the American Society of Cost Segregation Professionals (ASCSP), represented this vibrant trade organization at the American Institute of Certified Public Accountants (AICPA) at their annual Real Estate and Construction Conference in Las Vegas, NV.

The ASCSP represents the best cost segregation professionals and offers quality standards, a code of ethics, certification, and education. Perhaps most importantly, the ASCSP provides its members a forum to discuss new tax rules affecting the cost segregation profession as well as share ideas and vet issues.

Society President Alex Bagne CCSP (center) is joined by several fellow ASCSP members Chris Hitselberger, Greg Bell,  Will McCadden, Bruce Johnson and his associate.

Alex Bagne, the President of ICS Tax, presented on “Must Know Tax Planning Strategies for the Construction Industry.” ICS sponsored a booth and gave away a drone to one lucky attendee on November 10th. This conference was provided by the Ohio Society of CPAs.

 

tax-alert

The House Ways and Means Committee released draft tax reform legislation on November 3, 2017. The Tax Cuts and Jobs Act provides new detail on Republicans’ tax reform framework. It slashes the top corporate tax rate from 35% to 20% as well as significantly reduces tax for most individuals. Under the draft legislation, the tax rates do not go into effect until the 2018 tax year.

Click to view Draft Legislation

Click to view Communications and Policy Details

 

 

 

 

 

 

When tax rates are expected to decline, the smart strategy for most taxpayers is to defer income and to accelerate deductions. For example, $1,000,000 of deductions are worth $350,000 using 2017’s 35% corporate rate but only $200,000 using the proposed 20% rate. Below are several strategies to accelerate deductions into 2017:

  • Cost Segregation – Commercial buildings are depreciated slowly over 39 years. A cost segregation study carves out components from buildings that qualify for more rapid depreciation, such as land improvements and personal property.
  • 179D Energy Efficient Commercial Building Deduction – Taxpayers who constructed new buildings or made improvements to existing ones between 2006 and 2016 can take an immediate deduction of up to $1.80/SF for investments in efficient lighting systems, HVAC and hot water systems, and the building envelope.
  • Individual Asset Review – Individual assets are often inappropriately depreciated as part of a building, such as process-related plumbing, electrical, and ventilation systems. This study identifies assets qualifying for more rapid depreciation.
  • Capital to Expense Studies – Recent tax regulations allow taxpayers to retroactively review expenditures that were capitalized but qualify as repair and maintenance expenses, such as replacing roof membranes, resealing parking lots, and replacing of HVAC components.
  • Retirement Studies – Taxpayers often have ‘ghost assets’ in their fixed asset systems, such removed roofs and HVAC components. A retirement study identifies these assets, allowing taxpayers immediately deduct the remaining undepreciated basis.
  • Partial Dispositions – Taxpayers who make improvements to their facilities can immediately deduct the cost of removed building components and to instantly write-off undepreciated basis amounts.
  • Demolition Costs – Demolition costs for building improvements are often capitalized with the cost of a new asset but can now be immediately deducted.
  • Bonus Depreciation – Bonus depreciation allows taxpayers to immediately write off from 30% to 100% of the purchase price of a new asset, but is often missed. This study identifies missed bonus opportunities.

HOW WE CAN HELP

Our team of specialists is highly experienced in performing Comprehensive Fixed Asset Reviews and have done so for both small businesses as well as Fortune 500 companies. Using our proprietary software, ICS Tax can upload assets from any depreciation system and quickly identify potential opportunities. We do this preliminary analysis for free. For more information, please contact an ICS Tax representative.

Author: Alexander Bagne, JD, CPA, MBA, CCSP. Contributing Authors: Mike Piper, LEED AP; Lacey Robb, JD, LLM; and Kevin Johnson, LEED AP