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The IRS issued Notice 2017-6 to extend the time to make certain changes to comply with the tangible property regulations. This includes making accounting method changes for repair and maintenance expenses, depreciation, and certain property dispositions. This extension may present a significant opportunity to unlock tax savings for taxpayers who previously made accounting method changes to comply with the tangible property regulations. This will probably be the last opportunity these taxpayers have to realize these tax savings.
The tangible property regulations have been a work-in-process for more than a decade. The regulations were issued in 2011 in temporary form effective for tax years 2012 and in 2013 in final form, effective for 2014. There were significant differences between the temporary and final regulations.
Most of the rules found in the regulations are accounting method changes that require the consent of the IRS to change. The IRS issued a number of lengthy and nuanced revenue procedures and notices that explain how to obtain the IRS’s consent. This included guidance for automatic consent (via a Form 3115) and non-automatic consent (via a private letter ruling).
Tax advisors and their clients complained that the IRS’s guidance was not issued in time for them to fully analyze and comply with the complex rules. The IRS issuing this guidance as the regulations were changing also did not help. This resulted in the IRS taking steps to help taxpayers comply with the regulations and accounting method rules.
The Problem Notice 2017-6 Solves
One of the accounting method change rules prevents taxpayers from obtaining the IRS’s automatic consent if the taxpayer made a change for the issue in the prior five years. This means that taxpayers can only amend their initial accounting method changes using the non-automatic consent rules.
This can be particularly problematic for those taxpayers who adopted the temporary regulations and failed to make corrections to fully comply with the final regulations or who took overly conservative positions with respect to their accounting method changes given the uncertainties in the rules.
This is where Notice 2017-6 comes in. It extends the waiver of the five-year prohibition on changing prior accounting methods to comply with the final tangible property regulations through tax year 2016. So taxpayers who previously made accounting method changes to comply with the regulations can change their original method changes in 2016 by filing a Form 3115 with their timely filed 2016 tax returns. For some taxpayers, this could result in larger Section 481 catch-up adjustments in 2016 for expenses incurred in prior years.
It should be noted that Notice 2017-6 does not apply to all of the method changes associated with the final tangible property regulations. The Notice identifies the changes that it covers, which includes changing:
Limited Benefit for Some Small Taxpayers
It should also be noted that Notice 2017-6 does not waive the limitation on Section 481 catch-up adjustments for small taxpayers. This limits the benefit of Notice 2017-6 for these small taxpayers.
The small taxpayer limitation was promulgated in Rev. Proc. 2015-20 (and is now incorporated into later guidance). It generally applies to taxpayers with either less than $10 million in assets or $10 million or less in annual gross receipts for the prior three years leading up to 2014.
These small taxpayers were deemed to automatically adopt the tangible property regulations as of 2014 by simply filing their tax returns without including a Form 3115 and not including a statement that they opted out of the regulations.
For these small taxpayers who did not make method changes or opt out of the regulations in 2014, Notice 2017-6 merely provides a means for going back and picking up expenses incurred in 2014-2016. These small taxpayers cannot go back and pick up pre-2014 expenses via a Section 481 catch-up adjustment, as Notice 2017-6 did not waive the small taxpayer limitation.
Taxpayers who are not subject to the small taxpayer limitation in Rev. Proc. 2015-20 should view Notice 2017-6 as an opportunity to review their prior method changes to ensure that they fully complied with the rules and to look for opportunities to unlock the tax benefits associated with their prior method changes. This will probably be the last opportunity these taxpayers will have to realize these tax savings.
Whether you or your clients performed a Cost Segregation or Fixed Asset study over the past few years, our experts will help you re-visit your current depreciation schedule and current year costs to capture accelerated depreciation or current year wright-offs before filing your 2016 tax return. Please contact Engineered Tax Services as soon as possible to consult with our experts.
*This alert is a generalized summary and is not inclusive of all tax code changes or guidance. Please review the full Internal Revenue Notice here or contact us for more details. There are nuances involved in this that are beyond the scope of this writing.
With the surprising election of Donald Trump, and Republicans in control of both the House and Senate, the prospects for a major U.S. tax reform took a giant step forward recently. Or did they?
An interesting procedural anomaly may slow the pace of the aggressive strategy endorsed by the new President. Tax legislation starts in Congress, not with the President (who certainly has influence). The House Republicans have had a tax plan on the shelf waiting for just this moment. It provides tax simplification, lower individual and corporate tax rates, and a full repeal of estate taxes. But when the plan hits the Senate, the Republicans do not control enough of the chamber to pass the package without Democratic support. And Democratic support will be tough to find without changes that the House Republicans won’t accept.
There is one procedural tactic that allows highly partisan measures to pass. The Congress can pass an identical bill in both the Senate and the House under a provision called “budget reconciliation.” The Affordable Care Act (“Obamacare”) passed under this very provision, exclusively by Democrats. One major restriction on budget reconciliation is that it may be used only once each fiscal year.
Republicans are planning to use budget reconciliation as the vehicle to pass reforms to repeal and replace Obamacare early in 2017. This means that virtually the entire Republican body needs to agree on the reforms necessary, and it can pass without any Democratic support. Even this near-universal Republican goal breaks down at the detail level, because any large legislative undertakings will leave problems and uncertainty for many citizens.
Since the Obamacare legislation is going to be using the budget reconciliation bill this year, major tax reform is unlikely to be introduced early in 2017. If budget reconciliation is the vehicle of choice for tax reform (to avoid compromise with Democrats), the earliest such a bill would be voted on would be after September 30, 2017. As such, it’s likely not going to be effective for 2017, but more likely for 2018.
Tax reform provisions that are contemplated under the tax plans would likely include these provisions:
From an international perspective, the provisions that will most affect global trade include the proposal to permit immediate expensing of capital investments. In addition, the plan adopts a “territorial” approach for foreign business income to make the United States a more attractive place to headquarter multinational corporations. When combined with the lower corporate tax rate, the proposal would likely generate a large inflow of real investment, rather than repelling it as our current system does.
This article was written by: Daryl Petrick, Partner, Bowman & Company, LLP. You can contact him at email@example.com.
The Wealth & Finance International team has named the Engineered Tax Services with the Gonzalez Family Office as winner in the 2016 Real Estate awards for West Palm Beach, FL. When evaluating the leading players in the real estate industry and their teams, they found that the Gonzalez Family Office and its operational companies successfully showed investment strategies, returns for investors, innovation, money management, advisory services, and outstanding customer feedback.
The Gonzalez Family Office and its operational companies are honored to be recognized by such a prestigious organization. “It vindicates my vision as to how we are approaching real estate with our family office community and peers” says Julio Gonzalez of the Gonzalez Family Offices and CEO of operational companies Engineered Tax Services, ETS Family Office for Athletes, Calle Gato Ocho, and Engineered Venture Services.
The finance industry is a vital part of keeping the global economy growing and the Gonzalez Family Office is pleased to be part of it. Recently, they were able to co-invest with multiple family offices in a real estate project and used their sophisticated tax planning to bolster the pre-tax return by 6%. It is success stories such as these that have shown the dedication of the Gonzalez Family Office and its operational companies. “We will cherish the award and look forward to the opportunities and challenges in 2017.”
Mr. Gonzalez formed the Gonzalez Family Office, EVS and ETS Family Offices for Athletes to internally derisk investment strategies through forensic due diligence, provide wealth preservation and tax advantages to its members and find and allocate to alternative investments through engineered venture strategies. Mr. Gonzalez also recently launched his family foundation to focus on local charities in which the family office could make a meaningful difference.
Its operational company, Engineered Tax Services, is one of the largest boutique engineering tax services firm in the United States which provides significant wealth preservation tax studies through cost segregation, energy tax, and research and development tax credit studies. ETS works as a resource to Family Offices throughout the world to assist them in wealth preservation by generating tax efficiencies in their investments in real estate, private equity and venture capital.