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

Some promising news for responsible building owners, home builders, and those who design energy efficient public buildings…the “Taxpayer Certainty and Disaster Tax Relief Act of 2019” seeks to extend the §179D Energy Efficient Commercial Building Deduction (§179D Deduction) and the §45L Energy Efficient Home Credit (§45L Credit) through December 31, 2020. Currently, these valuable incentives expired December 31, 2017. The full Act is below:

THE §179D AND §45L ENERGY EFFICIENCY TAX INCENTIVES

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.

HOW WE CAN HELP

While the §179D and §45L incentives are currently expired, taxpayers with construction projects completed prior to December 31, 2017 may still benefit. 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.

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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.

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The following article is a reprint from an article written on behalf of the Manufacturing Money Newsletter published by Lakeview Consulting, Inc. To learn more about Lakeview Consulting, visit www.lakeviewconsulting.net

By Lacey Robb, R&D Tax Credit Leader, ICS Tax LLC
Email:  laceyr@ics-tax.com
 

While many manufacturing tax breaks have been reduced or have expired, one tax incentive has been in existence for over 30 years and recently made permanent. The Research and Development (R&D) Tax Credit, a dollar-for-dollar tax reduction, has generated over $12 billion dollars annually for companies engaging in research activities. While most Fortune 500 firms claim it, many small to medium-sized manufacturers erroneously believe they do not qualify. In fact, only about 10% of eligible businesses actually take the R&D Tax Credit.Even more surprising, many manufacturers are unaware that some important changes have been made to the R&D Tax Credit that make it more valuable and easier for manufacturers to claim it.

How Is It More Valuable?

  • Lower tax rates in 2018 have increased the value of the R&D Tax Credit by up to 14%.
  • While new rules limit Net Operating Losses (NOL) to offset only 80% taxable income, the R&D Credit can be used to offset taxes on the remaining 20%.
  • The R&D Tax Credit can apply to payroll taxes for startup businesses (i.e., ones in operation less than 5 years).
  • The Alternative Minimum Tax (AMT) is gone for corporations, allowing the R&D Credit to be more accessible for individual owners of flow through business.

What Expenditures Qualify for the R&D Credit?
Eligible expenditures for the R&D Credit are the following:

      1. Wages paid to employees involved in the R&D process;
      2. Supplies used or consumed in the process of research; and
      3. 65% of contract costs paid to others doing research.

In order for the above expenditures to qualify for the R&D Credit, the qualified research must satisfy a four-part test. The following example describes each component of this test.

  • A manufacturer developed a new heat application to its process in order to increase product durability. Its research process met the “elimination of uncertainty” test because the company was uncertain if the heat application could make the product more durable and if it did work, would it be able to maintain the required consistent temperature during manufacturing.
  • The manufacturer’s project passes the “technological in nature” test because it relied upon chemistry, mathematics and physics to determine what heat temperature and settings would be needed, the position to hold the product, and the angle to apply the heat.
  • The research on the new process meets the “permitted purpose” test because it would improve their product strength that they could use in their manufacturing process.
  • For the “process of experimentation” test, the manufacturer conducted a series of tests with different heat settings, different placements and positioning of the product, different angles to apply the heat application and different stages in the manufacturing process to apply the heat treatment. Further, it had to experiment how long to apply the heat treatment and determine whether its equipment could hold the heat consistent.
What Activities May Qualify for the R&D Credit?

      1. Engineering Process and Design
      2. Technical Sales Team Meetings (determining specifications to bring back to engineering team)
      3. Tool & Jig Making for Products
      4. Quality Approval & Control (beyond routine testing and general inspection)
      5. First Time Trial and Article Run
      6. Bid & Quoting Time for New and Redesigned Products
      7. Shipping and Packaging (new package methods to reduce breakage or damage)
      8. Design Meetings (informal or formal brainstorming and tinkering time)

What Are Some Common Misunderstandings in Taking the R&D Credit?

1. We are usually able to sell the prototype for a profit, so it won’t be eligible for the R&D Credit…

Many manufacturers develop prototypes that require new materials and capabilities. These prototypes often have trial runs to resolve underlying technical uncertainties of the product or process development. These expenditures could be eligible for the R&D Tax Credit. Even though the prototype can either be sold or used in manufacturing, the underlying costs could still qualify. As long as there is an engineering-based uncertainty, the ultimate success of the failure, whether it is scrapped, or the sale or use of the product is irrelevant.

2. We haven’t created any new products, all we’ve done is some lean manufacturing or created an ERP system…

Costs to develop new manufacturing processes or improving existing ones can often qualify for the R&D tax credit. Lean manufacturing activities such as evaluating the effect of process improvement on quality of products, reducing costs and environmental impacts; and improving throughput, safety and waste stream disposal. Additionally, ERP implementations are often complex and are rarely simple and routine.

Conclusion
Manufacturers consistently create and improve products and processes, making them eligible for the R&D credit. While not all activities and projects will qualify, the R&D credit is worth considering as it could provide a lucrative benefit.

About the Author: Lacey Robb is the R&D Tax Credit Practice Leader for ICS Tax, LLC. She is an attorney and has an LLM in Taxation and has helped numerous taxpayers in a variety of industries take the R&D tax credit. She can be reached by phone at 310-968-0970 or by email at laceyr@ics-tax.com. To learn more about the R&D credit and other specialized tax planning strategies, visit www.ics-tax.com.

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The Senate Finance Committee has established bipartisan task forces to evaluate tax provisions that expired or expire between December 31, 2017 and December 31, 2019. Chairman Chuck Grassley said on the Senate floor that their work would begin immediately and wrap up by the end of June. Among other provision, the §179D Energy Efficient Commercial Building Deduction (§179D Deduction) and the §45L Energy Efficient Home Credit (§45L Credit) are under consideration. The official Senate Finance Committee press release is below:

Video: Grassley on Launch of Bipartisan Taskforces to Resolve Temporary Tax Policy: https://www.youtube.com/watch?v=HZbIKOA8CY4

Video transcript: https://www.finance.senate.gov/chairmans-news/grassley-on-launch-of-bipartisan-taskforces-to-resolve-temporary-tax-policy

THE §179D AND §45L ENERGY EFFICIENCY TAX INCENTIVES

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.

HOW WE CAN HELP

While the §179D and §45L incentives are currently expired, taxpayers with construction projects completed prior to December 31, 2017 may still benefit. 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.

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Alex Bagne, the President of both ICS Tax, LLC as well as he President of the American Society of Cost Segregation Professionals (ASCSP), co-authored an article on the interplay between Cost Segregation and the Historic Tax Credit for the ASCSP Spring 2019 Quarterly Newsletter. While the Historic Tax Credit, which is a Federal incentive to encourage preservation of historic buildings, can limit the value of a Cost Segregation, there are many situations where a Cost Segregation may still add significant value. Click below to view the full text of the article.

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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, incentives, and planning ideas that reduce tax liabilities and increase profitability. ICS provides nationwide service through its offices throughout the country.

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Today, the “Tax Extender and Disaster Relief Act of 2019” was introduced by Chairman Grassley and Ranking Member Wydenhis, 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 through December 31, 2019.

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.

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A recent court case denied a taxpayer the Energy Efficient Commercial Building Deduction under IRC §179D since it could not substantiate that it was the “Designer” under the incentive’s allocation rule.

BACKGROUND

The §179D Deduction is a Federal tax incentive designed to promote taxpayers to construct energy efficient buildings as well as encourage building owners to make improvements to existing structures that reduce energy and power costs. The §179D Deduction provides a maximum deduction of up to $1.80 per square foot of the building’s floor area and applies to interior lighting systems, heating, cooling, ventilation, hot water systems or building envelope.

A special rule under §179D provides that architects, engineers, contractors, environmental consultants or energy services providers may also be eligible for the incentive on public projects. On a public project, only a “designer” is eligible to take the incentive, as defined below:

A designer is a person that creates the technical specifications for installation of energy efficient commercial building property (or partially qualifying commercial building property for which a deduction is allowed under §179D). A designer may include, for example, an architect, engineer, contractor, environmental consultant or energy services provider who creates the technical specifications for a new building or an addition to an existing building that incorporates energy efficient commercial building property (or partially qualifying commercial building property for which a deduction is allowed under § 179D). A person that merely installs, repairs, or maintains the property is not a designer.

The IRS recently released Chief Counsel Memorandum 2018-005, which provides further clarification. Click here to learn more about this Memorandum.

THE CASE

In this case, the taxpayer installed energy efficient lights for several public buildings. Here, the court found that the taxpayer failed to demonstrate that the taxpayer’s role was more than an installer and that it was involved in the design of the lighting system.

U.S. v. QUEBE, 123 AFTR 2d 2019-XXXX, (DC OH), 01/25/2019

Many professional service providers lack the expertise to properly analyze the complex tax rules and engineering requirements for the §179D Deduction. For a tax incentive requiring both a thorough knowledge of the tax code and engineering principles, it is essential to hire a fully qualified and experienced team that includes CPAs, attorneys, and professional engineers.

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

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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.

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A recent court case denied a taxpayer the Research Credit under IRC §41 since it could not substantiate proper use of the “start-up” base period to calculate its credit rather than use of the 1984-1988 base period. IRC §41 permits a taxpayer to use a base period of either 1984-1988 or, if certain criteria are met, an alternative base period intended to make the credit available to “start-up” companies that were not in business from 1984-1988. The taxpayer’s service provider calculated the R&D credit using “start-up” method, contending that there was no evidence that the taxpayer engaged in R&D activities during the 1980’s. The court determined that the government does not bear the burden of proving when R&D first started, but that the taxpayer has the burden of showing its right to any claimed tax benefit. Here, the taxpayer failed to meet this burden and was denied the credit. Dennis F. Quebe, 123 AFTR 2d 2019-XXXX (DC OH).

Many professional service providers lack the expertise to properly calculate and document the 1984-1988 base period. For a tax credit as complex as the Research Credit, it is critical to hire a fully qualified and experienced team that includes attorneys, CPAs, and engineers. The R&D tax credit experts at ICS Tax know how to properly calculate the 1984-1988 base period as well as to provide proper documentation and substantiation for the credit.

Authors: Lacey J.S. Robb, JD, LLM; Contributing Author: Alexander Bagne, JD, CPA, MBA, CCSP

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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.

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ICS Tax welcomes Robert Hancock as Project Manager and Business Development Specialist. Bob works with CPAs and taxpayers developing and implementing strategies to reduce tax liabilities and increase cash flow through Cost Segregation, the R&D Tax Credit, the §179D and §45L energy efficiency tax incentives, accounting method optimization, and the IC-DISC export incentive. With over 25 years working with professional service firms and their clients, Bob is passionate about helping people grow their businesses.

Bob is a graduate of The Ohio State University living in Chicago’s Southwest Suburbs with his wife and two children He enjoys golf, fishing, watching sports and walking their Siberian Husky named Bowie.

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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 located throughout the country.

On December 7, 2018, the IRS Office of Chief Counsel released AM 2018-005, which is a memorandum explaining the eligibility for allocation of the §179D Energy Efficient Commercial Building Property Deduction (§179D Deduction) for “designers” of public projects.

BACKGROUND

The §179D Deduction is a Federal tax incentive designed to promote taxpayers to construct energy efficient buildings as well as encourage building owners to make improvements to existing structures that reduce energy and power costs. The §179D incentive provides a maximum deduction of up to $1.80 per square foot of the building’s floor area and applies to interior lighting systems, heating, cooling, ventilation, hot water systems or building envelope.

A special rule under §179D provides that architects, engineers, contractors, environmental consultants or energy services providers may also be eligible for the incentive on public projects. On a public project, only a “designer” is eligible to take the incentive, as defined below:

A designer is a person that creates the technical specifications for installation of energy efficient commercial building property (or partially qualifying commercial building property for which a deduction is allowed under §179D). A designer may include, for example, an architect, engineer, contractor, environmental consultant or energy services provider who creates the technical specifications for a new building or an addition to an existing building that incorporates energy efficient commercial building property (or partially qualifying commercial building property for which a deduction is allowed under § 179D). A person that merely installs, repairs, or maintains the property is not a designer.

MEMORANDUM 2018-005

The Chief Counsel Memorandum clarifies ambiguity as to whom is eligible to take the §179D Deduction and for how much. While the Memorandum cannot be cited as precedent, it provides taxpayers guidance by providing eight scenarios, as summarized below:

Scenario 1: During preconstruction of a government warehouse involving an architect/engineering team and a separate general contractor, the general contractor suggested changes to the placement of roof-top HVAC/hot water units and corresponding electrical conduit and ductwork to avoid interference with the roof support structure. Absent other design responsibilities, the general contractor is ineligible for the §179D Deduction.

Scenario 2: An architect entered into a contract with a government building owner solely to design the exterior shell of a building and no other systems. This contract was one of several contracts the owner entered with firms to design the government building. Even though the architect neither designed the HVAC/hot water nor the lighting systems, the architect may be eligible to claim the full $1.80 per square foot §179D Deduction.

Scenario 3: A construction manager that neither had a contractual relationship with the various trades that designed and installed the energy efficiency commercial building property nor created technical specifications for a project is ineligible for the §179D Deduction.

Scenario 4: A contractor who installed a replacement HVAC/hot water system in a government-owned building designed by a separate engineer is ineligible for the §179D Deduction.

Scenario 5: Same as Scenario 4, whereby subcontractor hired by contractor to provide required HVAC/hot water system controls as well as related shop drawings was not eligible for §179D Deduction because subcontractor did not meet requirements of a designer.

Scenario 6: Same as Scenario 4, whereby contractor sized ductwork and provided shop drawings was ineligible for §179D Deduction, as shop drawings are not considered technical specifications.

Scenario 7: Lighting firm created design specifications for the building’s lighting system but did not design the building envelope or HVAC/hot water systems was eligible for full $1.80 §179D Deduction.

Scenario 8: A mechanical engineer on a design team hired a specialty subcontractor to design and install control systems for the HVAC/hot water systems, interior lighting, elevator, escalator, automatic door, back-up power and several other building systems that use power (i.e., energy management system) may be eligible for §179D Deduction.

HOW WE CAN HELP

With a team that includes CPAs, attorneys, and professional engineers, ICS provides free analyses to determine if the §179D Deduction 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.

Author: Alexander Bagne, JD, CPA, MBA, CCSP. Contributing Authors: Mike Piper, LEED AP; Travis Cansler.

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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.

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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.

December 21, 2018 Update: This Legislation has passed the House and is awaiting to pass in the Senate.

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.

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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 located throughout the country.

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.

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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 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.