[IMGCAP(1)]The final tangible property regulations issued by the Internal Revenue Service last year included a new provision for small taxpayers to help alleviate the tedious process and extent of documentation now required for compliance.
CPAs can significantly help their real estate clients who don’t realize that a cost segregation can make the difference between allowing them to benefit and fall within the parameters of the Small Taxpayer Safe Harbor election.
So, what is the Small Taxpayer Safe Harbor? It’s a great new tool for the CPA, among other things. The Small Taxpayer Safe Harbor allows small taxpayers to deduct capital improvements, including repairs, maintenance and routine maintenance costs incurred during the year that do not exceed the lesser of $10,000 or 2 percent of the unadjusted basis of the building. In order to qualify the taxpayer must meet these requirements:
Less than $10 Million in gross receipts (prior three-year average);
Building basis of less than $1 million (unadjusted basis);
This is an annual election;
Applies on a building-by-building basis.
The unadjusted basis is before depreciation, and any additions or improvements increase the basis, whereas, any downward adjustments (such as casualty loss or disposition) will reduce the basis.
CPAs can also enhance the Safe Harbor benefits derived from a cost segregation study with the proper expensing of costs under Sec. 179. It would make sense to examine potential expensing opportunities rather than capitalizing to ensure that Small Taxpayers retain the opportunity to qualify under this election by maintaining the lower building basis.
The Tangible Property Regulations that provide guidance on the proper treatment of repairs, maintenance and dispositions have been described as being taxpayer favorable. If CPAs clearly understand each of the definitions and criteria for apply facts and circumstances, many client costs which were previously treated as improvements can now be considered repair expenses.
As a case in point, if a client purchased a building for $800,000 and later made $300,000 in capital improvements, the building will not meet the $1,000,000 unadjusted basis rule. However, if the taxpayer performs a cost segregation study in which 30 percent ($330,000) of the total basis is reclassified as 1245 personal property, the building’s basis is now $770,000 and will now qualify for the Small Taxpayer Safe Harbor.
Although Washington has been at a standstill lately, the latest changes to 263a have provided a great opportunity for CPAs to consult with their clients on tax planning strategies which can generate substantial wealth preservation for them. The application of cost segregation, 263a and 179 can create improved cash flow to the small real estate investor. The proactive and educated CPA is the real estate investor’s best friend.
Heidi Henderson is director of marketing and business development at Engineered Tax Services. She previously worked as a staff accountant for over 15 years with multiple companies in the real estate finance, development, construction and commercial property industries. She can be reached at (801) 689-3232.
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