Archive for the ‘Tax Deductions’ Category

Issue Number: IR-2011-126

December 27, 2011

WASHINGTON—The Internal Revenue Service and Treasury Department today published in the Federal Register temporary regulations that provide guidance to taxpayers on the treatment of amounts paid to acquire, produce or improve tangible property and regarding the accounting for, and dispositions of, property subject to depreciation. These regulations provide objective standards and bright-line rules intended to simplify compliance with the capitalization provisions contained in section 263(a) of the Internal Revenue Code.

The temporary regulations generally are effective for expenditures made on or after Jan. 1, 2012, and therefore these regulations do not affect taxpayers’ 2011 tax returns. The IRS and Treasury Department anticipate publishing additional guidance that will advise taxpayers regarding how to obtain automatic consent to change to a method of accounting provided in the temporary regulations for taxable years beginning on or after Jan. 1, 2012. These automatic consent requests may be filed beginning with taxpayers’ 2012 tax returns. Taxpayers may not request a change to a method described in the temporary regulations on their 2011 tax returns.

The temporary regulations also were released as a notice of proposed rulemaking, offering taxpayers the opportunity to comment on the rules. Written comments are requested by March 26, 2012, and a public hearing on the regulations is scheduled for April 4, 2012.

Total Tax Deduction of $5,771,823, in Total Identified Expenses, to be applied in Federal Income Taxes by this owner of Nursing Homes in Texas, who implemented our comprehensive Repairs and Maintenance Services to benefit from the results.

Join Chris Oster of ETS with Gish Seiden at Woodlands Hill, CA  on March 9, 2011 for the latest information on the 179D Energy Tax Deduction and the new laws.  For details contact Gish Seiden on PH: 818.854.6100.

By John J. Cummings, ESQ

IRS Revenue Procedure 2011-14, just released, now makes it possible to take tax deductions under section 179D (energy efficient building property) by way of an automatic “change of accounting” method instead of amending prior tax returns. Previously, taxpayers could only enjoy the benefits of the Energy Policy Act by amending tax returns. This also makes it possible to reach back and get deductions as far back as the 2006 tax year.

Although the IRS does not always make accounting easier when it issues new revenue procedures, it appears that they have handed a huge win to all taxpayers who can claim tax deductions under 179D. If you don’t understand why this is great news, read on.

PROBLEM:

Under the standing interpretation of the Energy Policy Act tax before this Revenue Procedure, taxpayers wishing to take this tax deduction for qualifying energy efficient commercial buildings had to either take the deduction in the current tax year (if they were able to qualify their deductions in time for tax filings) or, if they wanted to take the deduction for properties placed in service in prior tax years, they would need to amend their tax returns for those prior years. Worse, the accounting rules for taking this type of deduction only allow taxpayers to amend a return within three years.

As set forth in more detail in my article about the basics of the Energy Policy Act, a 179D tax deduction is available for a qualifying energy efficient commercial building in the year which includes the date on which the building was placed in service.

Example: Owner designs a building beginning in 2004. The building is constructed during 2005 and 2006. On December 22, 2006, the building opens pursuant to a validly issued C.O. On January 24, 2007, the building obtains a final C.O.

Note that in the example, the “in service date” is 2006, not 2007, because the “in service” date and not the final C.O. date (typically) governs the tax year in which a taxpayer can take the tax deduction.

The net effect is that (1) a taxpayer currently desiring to take a tax deduction for the example building would need to amend the 2006 tax return to obtain the benefit (expensive, burdensome) and (2) the taxpayer would be precluded from taking the deduction for this building because more than 3 years have elapsed since the 2006 return would have been filed (missed opportunity altogether).

SOLUTION:

Enter Rev. Proc. 2011-14. This express guidance from the IRS tells us (among many other things) that instead of having to amend a prior return (you still can, by the way), you can instead change your accounting method. What that means is that you don’t have to amend a prior return. You can adjust the current year’s income and expense using the “change of accounting” and make the adjustments on your current tax return. To wit, section 8.04 of the revenue procedure, entitled “Elective Expensing Provisions” provides:

.04 Deduction for Energy Efficient Commercial Buildings (§ 179D)

(1) Description of Change. . . . The deduction for energy efficient commercial building property must be claimed in the taxable year in which the property is placed in service and is subject to the limits of §179D(b). The basis of the energy efficient commercial building property is reduced by the amount of the § 179D deduction taken and the remaining basis of the energy efficient commercial building property is depreciated over its recovery period.

(2) Applicability. This change applies to:

(a) energy efficient commercial building property that is installed on or in any building that is located in the United States and is within the scope of ANSI/ASHRAE/IESNA Standard 90.1-2001, Energy Standard for Buildings Except Low- Rise Residential Buildings, developed for the American National Standards Institute by the American Society of Heating, Refrigerating, and Air Conditioning Engineers and the Illuminating Engineering Society of North America (as in effect on April 2, 2003, including addenda 90.1a-2003, 90.1b-2002, 90.1c-2002, 90.1d-2002, and 90.1k-2002 as in effect on that date) (Standard 90.1-2001);

(b) energy efficient commercial building property that is installed as part of the interior lighting systems; the heating, cooling, ventilation, and hot water systems; or the building envelope of a commercial building; and

(c) it is certified that the interior lighting systems, heating, cooling, ventilation, and hot water systems, or the building envelope that have been incorporated into the building, or that the taxpayer plans to incorporate into the building subsequent to the installation of such property, will reduce the total annual energy and power costs with respect to combined usage of the building’s heating, cooling, ventilation, hot water, and interior lighting systems by 50 percent or more as compared to a Reference Building that meets the minimum requirements of Standard 90.1-2001.

(3) Manner of making change. A taxpayer making this change must attach a statement with a detailed description of the tax treatment of the property under the taxpayer’s present and proposed methods of accounting.

(4) Additional filing requirement. In addition to the statement required by section 8.04(3) of the APPENDIX of this revenue procedure, a taxpayer making this change must attach a certification as required by section 4 of Notice 2006-52, 2006-1 C.B. 1175, and section 5 of Notice 2008-40, 2008-14 I.R.B. 725, to demonstrate the energy efficient commercial building property has achieved the reduction energy and energy efficient commercial building property has achieved the reduction energy and power costs to qualify for the § 179D deduction. In the case of a publicly owned building for which a designer has been allocated a deduction under § 179D, the designer becomes the taxpayer for purposes of the deduction and must attach a certification as required by Notice 2006-52 and Notice 2008-40, and an allocation from the owner of the building to the designer as required by section 3.04 of Notice 2008-40.

(5) No audit protection. A taxpayer does not receive audit protection under section 7 of this revenue procedure in connection with this change.

(6) Designated automatic accounting method change number. The designated automatic accounting method change number for a change in method of accounting under this section 8.04 of the APPENDIX is “152.” See section 6.02(4) of this revenue procedure.

Whether the Revenue Procedure makes it possible for you to make adjustments to prior year’s tax deductions (2006 for example) is something you should consult your tax professional about. Many factors are involved and the Revenue Procedure on the whole, is a rather complex document involving a myriad of issues affecting tax basis, accounting methods and multiple income and expense issues in addition to just 179D.

With that disclaimer aside, you should definitely take this opportunity to consult your CPA or other tax advisor to make sure that your company is not missing out on tax deductions now made more readily available through these new change in accounting rules.

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What is a Change of Accounting?

(1) Section 1.446-1(e)(2)(ii)(a) provides that a change in method of accounting includes a change in the overall plan of accounting for gross income or deductions, or a change in the treatment of any material item. A material item is any item that involves the proper time for the inclusion of the item in income or the taking of the item as a deduction. In determining whether a taxpayer’s accounting practice for an item involves timing, generally the relevant question is whether the practice permanently changes the amount of the taxpayer’s lifetime income. If the practice does not permanently affect the taxpayer’s lifetime income, but does or could change the taxable year in which income is reported, it involves timing and is therefore a method of accounting. See Rev. Proc. 91-31, 1991-1 C.B. 566.

(2) Although a method of accounting may exist under this definition without a pattern of consistent treatment of an item, a method of accounting is not adopted in most instances without consistent treatment. The treatment of a material item in the same way in determining the gross income or deductions in two or more consecutively filed federal income tax returns (without regard to any change in status of the method as permissible or impermissible) represents consistent treatment of that item for purposes of § 1.446-1(e)(2)(ii)(a). If a taxpayer treats an item properly in the first return that reflects the item, however, it is not necessary for the taxpayer to treat the item consistently in two or more consecutive returns to have adopted a method of accounting. If a taxpayer has adopted a method of accounting under these rules, the taxpayer may not change the method by amending its prior income tax return(s). See Rev. Rul. 90-38, 1990-1 C.B. 57.

Curious about where you can find an ETS event? Check out our company Facebook Events Calendar!  There are dozens of events coming up in the next few weeks, and more are scheduled every day. If you don’t see your city listed, check back again soon. We will likely be in your neck of the woods in the very near future.

Would you like to schedule us for an outstanding 179D Energy Tax seminar, webinar or conference? Please contact us. We are adding new events all the time and welcome requests.

For more information about our Green By Design: Understanding 179D Energy Tax Benefits for Architects and Designers series of seminars, or to schedule a speaking engagement, please contact Loryn Nash at 888.607.2425.

By Don McDougall

With Circular 230, tax preparers were made responsible for decisions that were not theirs and are now acting as much as anything else as the first line of enforcement. EPACT certification creates a major issue for CPAs, as many do not have enough experience with the process to protect themselves and their firms. EPACT has provisions to prevent fraud that are embedded in the regulations. Under Circular 230, it becomes the CPA’s responsibility to confirm that the requirements have been met. In order to protect your firm and yourself, please read on.

WARNING! EPACT is not just like Cost Segregation. EPACT generates a tax deduction; Cost Segregation accelerates the depreciation of an asset by giving it a shorter life. If you have been told they are just versions of the same accounting issue, you need to beware.

Who can do your reports? – More importantly, who can sign your reports? The reports MUST be completed by a licensed firm or individual. This means both the field verification and the energy calculations must be done by licensed people.

The reports themselves must be signed by a licensed firm (engineering or contactor) and should contain copies of the licenses for the individuals who did the work. Consider an example of a company that has CPAs on staff. Exxon-Mobile has CPAs on staff, but Exxon cannot do your tax returns. Likewise, a CPA firm or consulting firm cannot sign your EPACT certification. The reports may completed by firms that are not licensed engineering firms, but must be signed by the licensed engineer who actually did the work. The firm that subcontracted them or hired them cannot sign the report. In addition, that engineer carries 100% of the liability for any errors. Like the example above, you can have a friend who is a CPA that works at Exxon to do your taxes, but he cannot do it on Exxon letterhead.

There are also issues of liability and coverage in the event of an audit. If the firm is not licensed as an engineering firm, not only can they not sign the work, they also cannot defend it to the IRS. This frequently leaves you, their tax-preparing CPA, holding the liability bag. Who signs the reports matters to you even more than it matters to the IRS (because there will be consequences for YOU, not the IRS).

In addition, ALL of the field work and the calculations must be completed by licensed individuals. A common mistake many Cost Segregation firms make is using their non-licensed staff to complete the field inspections to save money. This is clearly not allowed under the guidelines: all work must be completed by licensed individuals.

Another caveat in the certification process: the firm performing the EPACT Certification may not be related to any part of the transaction. For example, a lighting contractor may not certify his/her own work. Contingency fees that rely on the conclusions of the certification to set the cost of the study are also to be avoided.

Summary – The 179D Certification must be signed by a licensed engineering firm, or a licensed individual. Reports not completed by a licensed engineering firm put you (the Tax Preparer) at risk. The firm completing the certification also cannot be involved in the installation or design of the properties that are being certified.

Follow these simple guidelines and you will protect your licensure as well as your firm.

Don McDougall is a National Director with Engineered Tax Services. He is responsible for operations on the West Cost with some national efforts as well. Don is an innovator in the fields of valuation and tax-based engineering. He has proudly contributed and pioneered many of the commonly-integrated services and components used in the industry. He has been providing cost segregation services since before cost segregation existed, having worked heavily in the field of investment tax credits (the depreciation services that pre-date cost segregation).

The Research & Development (R&D) tax credit is one of the most significant domestic tax credits remaining under current tax law – a substantial tool for maximizing a company’s cash flow and bottom line. No one can afford to leave money on the table. Nevertheless, when it comes to the R&D credit, cash is left untouched all the time. Despite the fact that the R&D credit has been available off and on since 1981, only a third of eligible companies recognize that they qualify for the credit. Even if companies claim an R&D credit, they frequently do not claim the entire credit to which they are entitled, either because they do not understand what qualifies or do not have the processes in place to properly document the credit. Without competing for your accounting work, we can help you and your clients identify and capture the R&D credit and increase cash flow for all involved.

Read the Full Article for details.

Joel Ackerman, CPA

The Energy Policy Act of 2005 (EPACT) provides substantial tax benefits. Under Section 179D of the Internal Revenue Code, owners of energy-efficient commercial buildings may take a tax deduction of up to $1.80 per square foot for qualifying construction or retrofits.

To help reduce the energy consumption and CO2 pollution from commercial properties, Congress passed The Energy Policy Act of 2005, which provides substantial tax benefits where energy efficiencies are designed within a building.

The IRS Regulations require an independent engineering study in order to substantiate and make a valid claim for these federal tax deductions. These deductions became available as of January 1, 2006 and have recently been extended through December 31, 2013.

How does entity type affect the taxable income to building owners? Read the Full Article for details about the general tax treatment of each type of entity.

By James K. Zahn, FALA, Esq.

Recently, I received a call from my accountant. She called to inquire if I have ever had one of my architect clients attempt to receive a § 179D Deduction for Energy Efficient Commercial Buildings granted under Title 26 of the US Federal Regulations (fondly known as the “IRS Tax Code”). I was unaware of this particular section of the Code until her call, as none of my clients have ever asked about it or brought it to my attention. This article will concentrate on publicly-owned commercial buildings, because that’s where the architect is really in a position to greatly benefit from this unusual regulation.

According to the US Government Printing Office, the IRS Tax Code is 13,458 pages long, and is contained in twenty volumes available for purchase at only $974, plus shipping and handling. Section 179D is a very small provision buried within a voluminous document and can easily be missed. I looked up § 179D on the internet and was astounded by what I found. This particular section of the tax code is a must read for all practicing architects and their accountants!

Read the Full Article for information every architect should know.