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Monthly Archives: December 2013

Factors Affecting Discounts in Valuing Asset-Holding Companies By Sharon F. Foote, ASA CFE

Posted on December 30, 2013 by Scott Bouchner

Asset-holding companies are generally described as entities that possess assets such as real estate, marketable securities, notes or loans receivable, and/or interests in other entities. These entities may take the form of a corporation (S or C), a limited liability company, a general partnership or a limited partnership.

Valuation professionals are often asked to determine the value of fractional interests in asset-holding companies. These entities are commonly structured with a general partner, managing member or voting shareholder who has a small percentage ownership interest as well as exclusive control of the day-to-day business of the enterprise. The limited partners, non-manager members or nonvoting shareholders lack the ability to control the management, acquisition or disposition of the entity’s assets or the distribution of its profits and capital gains. Neither do they have the ability to liquidate or dissolve the entity. Therefore, the valuation of these fractional interests would qualify for a Discount for Lack of Control (DLOC).

The time and effort required to transfer these fractional interests and the lack of a ready market, are reflected in the application of a Discount for Lack of Marketability (DLOM).

In addition, there are other factors that must be considered when determining of the size of the discounts for lack of control and marketability.

  • The specific size of the ownership interest being valued and the bundle of rights attached to the ownership of the interest. These are commonly set forth in the entity’s operating agreement, shareholder agreement, by-laws or other governing document
  • The transfer restrictions typically imposed in the operating agreements of these asset-holding companies
  • The ownership structure of the entity being valued
  • The size and the diversification of the assets owned by these entities. Asset-holding entities are typically much smaller and less diversified in their holdings than similar publicly traded entities.
  • The amount of debt and equity the entity uses to support and grow its operations. For example, an interest in an entity with significantly more debt than equity would be considered highly leveraged, riskier and would likely sell at a higher discount.
  • The level and stability of the earnings generated by these entities. Businesses with higher profits or stable earnings would likely sell at a lower discount, as these factors mitigate some of the risk of these investments.
  • The level and frequency of distributions to owners affect discounts; an entity that has consistently distributed a significant amount of its earnings would sell at a lower discount as the owners are receiving a return on their investment before its liquidation or dissolution.
  • The expected holding period of the investment – the ending date of the entity may be specifically identified, or may be identified as perpetual, in the formation documents.
  • The state of the industry as well as the national, local and/or regional economies in which the entity participates.

It is also important to remember that asset-holding entities typically do not have the same level of professional management as a publicly traded entity may possess.

The extent to which a valuator takes a Discount for Lack of Control (DLOC) may also be affected by the methodology used in valuing the subject interest. The DLOC determined under the Adjusted Net Asset Value Method will be higher than that determined under some other methods as it is based on the current market values of the assets and liabilities of the entity on a controlling basis.

Under a Market Approach, Price to Net Asset Value ratios of noncontrolling interests in similar publicly traded closed-end funds and/or real estate limited partnerships are utilized to estimate a value of the assets in the entity being valued. The Income Approach uses cash flows available to noncontrolling interests and a capitalization or discount rate based on returns in the public market to minority owners. Accordingly, no additional DLOC may be warranted under the market or income approaches.

It is widely recognized that there is some overlap of the lack of control and lack of marketability discounts in the studies used to quantify these discounts, which is also taken into consideration when determining the size of the discounts taken in valuing interest in an asset-holding company.

The bottom-line question – “How big a discount from net asset value can you get me?”- often depends on the specific facts and circumstances of the situation. The valuation team at Berkowitz Pollack Brant has experience in conducting valuations in different types of scenarios.

 

About the Author: Sharon Foote ASA CFE is a manager in the Valuation and Litigation Support practice of Berkowitz Pollack Brant. For more information, call (305) 379-7000 or e-mail sfoote@bpbcpa.com.

IRS Updates Standard Mileage Rates for 2014

Posted on December 23, 2013 by Richard Berkowitz, JD, CPA

The IRS recently released new standard mileage rates for 2014 that are one-half cent less than 2013 rates. Beginning Jan. 1, 2014, taxpayers may use the following calculations to deduct the costs of using a car, van or truck for business, medical and moving expenses:

  • 56 cents per mile for business miles driven
  • 23.5 cents per mile driven for medical or moving purposes

The cost of driving a vehicle in service for charitable organizations remains unchanged at 14 cents per mile.

Companies that reimburse employees for the miles employees drive for business use of personal vehicles may deduct that amount as business expenses. When companies do not reimburse employees for business miles driven, they may not claim the deductions on their corporate returns. Rather, employees may deduct the expenses on their personal returns.

 

The use of standard mileage rates is optional. Taxpayers may instead elect to claim the actual expenses they incur for operating their vehicles. In either case, taxpayers should take special care to maintain accurate and appropriate records.

It’s Not Too Late for End-of-Year Tax Planning by Joseph L. Saka

Posted on December 20, 2013 by Joseph Saka

While end-of-year shopping and celebrations may be a distraction, now is also a good time for individuals to step back, review their finances and see if there are any last-minute strategies to minimize their tax liabilities for 2013.

 

  • Max out contributions to tax-deferred retirement plans. By contributing to retirement plans, taxpayers not only save for the future, they also reduce their taxable income.  For 2013, taxpayers under 50 may invest up to $17,500 in 401(k) plans, while those over 50 may contribute up to $23,000.  For IRAs, the maximum allowable contribution in 2013 is $5,500 for taxpayers under 50, and $6,100 for those 50 and older.

 

  • Set up a self-employed retirement plan for 2013.  Business owners that do not already have a retirement plan in place, can get started now.  Although retroactive income deferrals are not allowed, individuals have until Jan. 15 to contribute fourth-quarter funds to the 401(k) portion. There is additional time to contribute the profit-sharing component to the plan.

 

  • Offset taxable capital gains by selling losing investments.  Given this year’s market gains, it might be difficult to find assets that lost their value over the past 12 months.  However, by selling underperforming investments and harvesting tax losses, taxpayers may be able to reduce their tax liabilities, especially those relating to the new for 2013 3.8 percent Net Investment Income Tax on high-income earners.

 

  • Use or Lose Flexible Spending Accounts (FSAs). Taxpayers can use up pre-tax money contributed to employer-sponsored FSAs by visiting doctors or purchasing prescriptions prior to Dec. 31.  If they do nothing, they risk forfeiting the excess funds. Some companies offer employees a  grace period that extends spending of FSA funds into the New Year.  

 

  • Make deductable charitable contributions. Before embarking on holiday shopping sprees, taxpayers should spend time going through their closets and donating clothing, toys and furniture to charitable organizations.

 

  • Purchase needed equipment, furniture and fixtures for your business. The ability to write off up to $500,000 for purchases made this year rather than claiming their depreciation over time (section 179 deduction) will drop to $25,000 in 2014.  Moreover, the current $2 million cap on annual purchase deductions is also set to drop in 2014 to $200,000.  Taxpayers who spend more than $2 million on new equipment in 2013 gain a bonus depreciation of 50 percent.

 

  • Take advantage of expiring research and development credits. There is no guarantee that Congress will extend R&D credits and allow businesses to write off 20 percent of qualified research expenses after this year.

 

As the hours tick away to the New Year, taxpayers would be well-served to take the time now to reconcile financial data, gather supporting documentation and speak with their accountant to assess tax liabilities and take advantage of last-minute tax savings opportunities.

 

About the Author: Joseph L. Saka CPA/PFS is director in charge of the Tax Services practice at Berkowitz Pollack Brant. For more information, call (305) 379-7000 or e-mail jsaka@bpbcpa.com.

Taxpayers Should Not Overlook the Many Benefits of End-of-Year Charitable Giving by Adam Cohen CPA

Posted on December 18, 2013 by Adam Cohen

Year-end giving is a perfect way to ring in holiday cheer and help those in need while also providing donors with favorable tax benefits. Before opening their hearts and wallets, taxpayers should consider the following tips.

Research the Charity.

According to Charity Navigator, the nation’s largest evaluator of charities, donors should focus year-end giving on organizations that are financially efficient and sustainable, follow appropriate and ethical governance practices, maintain transparency and can demonstrate their results. Moreover, when planning to claim a donation as a tax deduction, donors should make sure that the receiving organization is qualified as a tax-exempt charity by the IRS. Taxpayers can see IRS Publication 526, Charitable Contributions, for rules on what constitutes a qualified organization, or they may search for qualified charities online at http://apps.irs.gov/app/eos/.

Save receipts.

To claim a charitable donation in excess of $250, the IRS requires written acknowledgement from that charity in the form of a receipt or thank you letter. Donors who make contributions via text message should save telephone bills showing the names of the receiving organizations, the dates of the contributions and the amounts given.

When donating an item or similar items, such as art, antiques or collections of coins, stamps or other collectibles valued at more than $5,000, donors must also obtain a written appraisal by a qualified appraiser. The IRS requires taxpayers to meet additional documentation requirements when claiming deductions for donations of items valued over $20,000.

Schedule the timing of donation to maximize deductions.

Charitable gifts are typically deductible in the tax year they are made. Therefore, donations of tangible household goods, such as clothing and furniture, must be made on or before Dec. 31, 2013. Similarly, monetary contributions via check must be dated and postmarked, if sent by mail, no later than Dec. 31. When charging a charitable contribution via credit card, the charge must be made on or before Dec. 31, even though the donor will not pay the bill until January of the following year.

Consider out-of-the ordinary donations

With the market gains of the past year, tax-savvy investors may consider donating to charities appreciated investment securities, such as stocks or mutual funds that they have held for a year or longer. By doing so, taxpayers may deduct the market value of the investment and avoid paying taxes on the capital gains.

Taxpayers should always check with their accountants or tax advisors when making charitable donations of investment securities, real estate or cars, to ensure they follow appropriate IRS regulations for recording, timing and determining the deductible value of their contributions.

 

About the Author: Adam Cohen is an associate director in the Tax Services practice of Berkowitz Pollack Brant. For additional information, call (954) 712-7000 or e-mail acohen@bpbcpa.com

 

 

IRS Announces Annual Limits for Retirement Plans in 2014

Posted on December 13, 2013 by Richard Berkowitz, JD, CPA

IRS Announces Annual Limits for Retirement Plans in 2014

 

 

Type 2014 Contribution Limit Catch-Up Contributions for Taxpayers 50 and Older
401(k), 403 (b) and 457 Deferral Limit $17,500 $5,500
SIMPLE Deferral Limit $12,000 $2,500
IRA Contribution Limit $5,500 $1,000
Compensation Limit $260,000 n/a

 

 

Health Savings Account Contribution Limits 2014 Limit Catch-Up Contribution for Taxpayers 55 and Older
Individual Coverage $3,300 $1,000
Family Coverage $6,550

 

 

Highly Compensated Threshold Limits

 

Top-Paid 20% $115,000
Note – Testing is based on prior year information

 

 

Other Thresholds

 

Type Limit
Social Security Wage Base $117,000
Social Security Limit on Outside Earnings Under Full Retirement Age $15,480
Defined Benefit Plan Limit $210,000
Defined Contribution Plan Limit $52,000

 

Tax CPA Joanie Stein Included in Miami Herald Article about Holiday Gift Giving

Posted on December 11, 2013 by Joanie Stein

Gift-giving in the workplace: Proceed with caution

 

The Miami Herald
By Cindy Krischer Goodman
December 11, 2013

 

One day in the company lunchroom, Jason Ibarra and his co-workers had a conversation about what they were going to buy their boss for the holidays. As the agency director at Exults Internet Marketing, Ibarra considered aloud how much to spend and asked: “What do you get a guy who probably has money to buy himself more than I can afford?”

In the workplace, holiday gifting can have big implications. Buy too extravagant a gift for a boss and you look like a suck-up. Worse, don’t buy a gift and you could come off as unappreciative. “It can be a little awkward,” Ibarra says.

Ibarra solved his dilemma by putting a black-painted jar in the lunchroom at his Fort Lauderdale firm. He suggested staff put in whatever they feel comfortable giving for the boss’ gift. They collected $250 and bought the boss a fishing rod, which they presented to him as a group gift for Hanukkah.

Etiquette experts say bosses should give their employees gifts to thank them for performance or dedication, but employees don’t need to give a gift back. In the workplace, giving should be down — supervisors to employees — rather than up. “Don’t feel the need to reciprocate if your boss is showing appreciation for your year of hard work,” says Amanda Augustine, a careers expert with TheLadders, an online job-matching site for career-driven professionals.

If you do give the boss a gift, do it for the right reason. “If you feel appreciative of opportunities this year to work in your organization and you’re pleased with the way you were treated, it’s nice to acknowledge a supervisor with something small and a handwritten note,” says Alice Bredin, small-business advisor to American Express Open.

Experts say the best gifts are handwritten notes and something consumable such as a platter or basket of treats. The worst gifts are expensive or too personal such as jewelry, cologne, or intimate apparel. If you’re giving a gift to curry favor, you might want to reconsider. “If you are not a cultural fit or under-performing, sending the boss a really nice gift is not going to save your job,” says Augustine of TheLadders. “The person is going to feel uncomfortable or offended, and, either way, I don’t think the outcome is going to be favorable.”

If you are new to the company, it pays to do a little research on precedent by asking a veteran employee. “On-boarding 101 is always enlisting someone who can tell you what you will not find in the company handbook,” Augustine says. If there isn’t a gift-giving precedent, she advises erring on the side of caution and avoiding giving “up.”

Surveys show the majority of employees spend less than $50 on a supervisor’s gift and the $10 to $25 range is the average. “Bosses usually make more than you so if you spend too much money, they are going to feel embarrassed,” said Elena Brouwer, director of the International Etiquette Centre in Hollywood.

This year, only about a third of employers of all sizes plan to give employees holiday gifts, and about a fifth will give non-performance based bonuses, according to a member survey by the Society for Human Resource Management. However, small-business owners may be less generous. This holiday season, fewer small business owners will give staff gifts (30 percent compared to 44 percent in 2012) or plan holiday activities to celebrate the season with their employees (32 percent vs. 40 percent in 2012), according to the 2013 American Express Small Business Holiday Monitor.

At South Florida’s Berkowitz Pollack Brant Advisors and Accountants, all employees received a handwritten note from their supervisor and a $100 bill during the firm-wide holiday party. It is a 15-year tradition. Joanie Stein, a senior manager in the tax department, says the notes, presented in person by the supervisor, are as appreciated as the money. Beyond the firm’s gift, she prefers not to give or receive presents at work to either those above or below her in the hierarchy. “In our office, staff works for multiple managers. You don’t want to show favoritism so it would be all or none.”

Of course, company culture, size, and politics factor into workplace gift-giving, too, Stein notes. “In some businesses, it’s common for a secretary to buy something for the boss because they have a one-on-one relationship on a daily basis. We work with multiple staff during the day so it’s different,” she says.

For bosses gift giving can be just as thorny as it is for employees. You don’t want to get too personal or show favoritism. Each year, Rosalie Hagel, a senior partner at M Silver in Fort Lauderdale, gives her staff carefully selected gifts. “I try to come up with something personalized to each member of the staff, but I have to give the same level of gift to everyone to be fair.” She says she doesn’t expect a gift in return but has received small gifts from employees such as cookies, lip gloss, and nail polish. “It’s usually accompanied by a note, so it’s more about the nice gesture, and I appreciate it. I don’t think bosses today should expect to go home with armfuls of presents from staff.”

Even as Hagel chooses gifts for employees, she is pondering the complexity of what to buy her new bosses. In January. her public-relations firm merged and became a division of Finn Partners. Now, she has three supervisors in New York and plans to buy them something related to their interests without going overboard. “One loves chocolate, so maybe I’ll do that.”

Meanwhile, some businesses organize gift exchanges to simplify gift-giving. This year, a little more than half of companies plan to arrange Secret Santa or White Elephant exchanges, according to the SHRM holiday survey. Most set a price limit. Augustine advises: Stick to the rules, and if you want to exchange with a co-worker with whom you have a rapport or friendship, do it outside of the office. “In the workplace, you don’t want to make gift-giving awkward.”

 

From left, Joanie Stein, a senior manager in the tax department, shares a laugh with Celia Cue, the director of human resources and Richard Berkowitz, the CEO of Berkowitz Pollack Brant Advisors and Accountants. EMILY MICHOT / MIAMI HERALD

 

Berkowitz Pollack Brant Advisors and Accountants held their annual holiday party at Hard Rock Hotel ballroom, Dec. 6. Richard Fechter, left, receives a very special envelope from Richard Pollack during the party. Each employee gets an envelope containing a $100 bill and a special note. EMILY MICHOT / MIAMI HERALD STAFF

Read more here: http://www.miamiherald.com/2013/12/10/v-print/3810512/gift-giving-in-the-workplace-proceed.html#storylink=cpy

 

 

Cost Segregation Studies Can Offset Tax Liability by John G. Ebenger

Posted on December 10, 2013 by John Ebenger

Property owners and tenants can benefit from the accelerated depreciation benefits associated with a cost segregation study. This valuable strategy can prove to be a useful tool to offset tax liability in the early years of ownership.

The IRS provides guidance on how commercial and residential properties must be depreciated over a period of 39 and 27.5 years, respectively. However, certain provisions also allow taxpayers to reclassify portions of their building and tenant improvements into shorter lives. These shorter lives can include five, seven and 15 year periods resulting in accelerated depreciation as compared to the longer straight lines methods as mentioned above.

An engineered-based cost segregation study will provide you with the appropriate data to take advantage of this important tax savings tool. Here is how the process works:

  1. An initial consultation will occur to determine if accelerated depreciation will be available based on the property type, year place in service and current methodology for asset classification.
  2. An estimate of benefits is generated and the taxpayer and the tax professional will determine whether the enhanced benefits can be used.
  3. If there is a projected benefit, the cost segregation study is performed. The process takes about 30 days and does not create a large imposition on the company’s time. An engineer conducts a site visit and completes the study based on information such as construction drawings, cost records or simply a purchase agreement (in the case of acquired properties).
  4. When the study is completed, the results are incorporated with the current year’s tax return.

Many people wonder about the most appropriate time to conduct a study. Ideally it is performed immediately following an acquisition, construction of a facility or major capital improvements. The IRS permits a “look-back study,” which allows owners to catch up on accelerated depreciation that could have been taken had the cost segregation study been performed in the first year of ownership. This can be done without filing amended tax returns.

While everyone’s circumstances are different, it should be noted that in most cases, these studies can offer significant benefits. Since 2001, there have been many variations of bonus depreciation treatments for a number of building assets. Additionally, there are special provisions regarding leasehold improvements.

A cost segregation study can help property owners properly classify assets and possibly yield some additional bonus depreciation not previously identified. Also, recently released repair regulations suggest that a cost segregation study may be a good exercise to help determine the best ways to expense and capitalized items in the future.

For more information about cost segregation studies, contact any member of our real estate services group.

 

About the Author: John G. Ebenger CPA is a director in the Real Estate and Tax Services practice of Berkowitz Pollack Brant. For more information, call (561) 361-2010 or e-mail jebenger@bpbcpa.com.

New Financial Reporting Framework Provides Options Small- and Medium-Sized Businesses by Robert Aldir

Posted on December 05, 2013 by Robert Aldir

Currently, generally accepted accounting principles in the United States (U.S. GAAP) do not provide separate implementation and adoption requirements for public and nonpublic entities. As a result, in recent decades there has been a growing voice of concern from nonpublic entities and their stakeholders for a financial reporting framework that is better tailored to meet their specific needs. In June of 2013, the American Institute of Certified Public Accountants (AICPA) introduced a self-contained and nonauthoritative financial reporting framework (FRF) that provides small- and medium-sized entities (SMEs) with the option to adopt a more simplified and less costly method of presenting their financial information to their various stakeholders. SMEs are defined by the FRF as entities that do not have a requirement to report financial information in accordance with U.S. GAAP. Given the framework is nonauthoritative, SMEs are not required to adopt this framework and therefore its implementation is optional. Also, because the framework is optional, there is no effective date for implementation and as a result entities may elect to adopt this framework on a retrospective basis.

Perhaps the most significant aspect of the new FRF for SMEs is its departure from the primarily rules-based framework under U.S. GAAP that includes approximately 25,000 pages of literature. At approximately 200 pages of literature, the new principles-based framework utilizes a blend of traditional accounting principles and income tax methods of accounting to present a simplified presentation of an SMEs’ financial position, results of operations, and cash flows. As a result, financial statements produced under the new framework are likely to be desirable by both the preparers of financial information and those relying on them to make sound business decisions.

The FRF for SMEs allows SMEs to primarily use the historical cost convention to present their financial information. This is likely to provide a cost savings versus the preparation of more complex fair value measurements that are required by U.S. GAAP. The new framework also does not recognize the concept of comprehensive income, which is often required under U.S. GAAP for certain types of transactions. Thus, under this framework, all operational results are recognized through the income statement. Revenue recognition, another topic which has been long debated and is continually evolving under U.S. GAAP, has been simplified under one principles-based definition. Other notable changes include the removal of recognition requirements for derivatives, hedging activities and stock-based compensation. However, there are still requirements to present certain disclosures concerning these types of instruments under the FRF for SMEs.

In being central to its theme of removing complexity, the reporting and disclosure requirements of a complex and ever evolving topic under U.S. GAAP, Variable Interest Entities, has been removed altogether from the consolidation requirements under this new framework. In addition, SMEs are allowed the option to present parent company only financial statements which is currently not allowable under U.S. GAAP. SMEs have an option on how to present their income taxes. Currently, under U.S. GAAP, entities are required to use the deferred income tax method of recognition. Under the FRF for SMEs framework, entities can elect either this or another method, income taxes payable method, whereby an entity only reports current period income tax assets and liabilities. The new framework also removes the U.S. GAAP requirement to evaluate and possibly record uncertain tax positions.

Being true to its theme of primarily being a historical cost basis framework, the FRF for SMEs framework eliminates the impairment test requirements for goodwill and long-lived assets. Goodwill will be amortized using a 15 year period under the framework.

In order to facilitate the adoption of this framework, the AICPA has also released an implementation guide which provides a sample set of financial statements with a suggested full set of footnote disclosures, a financial reporting checklist and comparisons between financial statements prepared under FRF for SMEs and other financial reporting frameworks such as U.S. GAAP and International Financial Reporting Standards. In addition, the AICPA has also released adoption toolkits for three distinct types of stakeholders: Preparers, Users and Certified Public Accountants (CPA), to use in the implementation of this framework.

Although this new framework offers simplicity and provides optionality to preparers and users of financial information, all stakeholders should carefully analyze the pros and cons of adopting this new framework. Some notable challenges of adoption can be the inherent risk of losing transparency of the economic activity of an entity that engages in more complex types of transactions, such as those with derivatives and/or stock options. Also, because this framework is primarily principles-based and not industry specific, there is a risk of having two issuers of financial statements prepared under this framework that operate in the same industry that may not provide comparable results of operations. Because of these and many other concerns of adoption, users and stakeholders alike, should carefully examine what is the intended purpose of presenting an organization’s financial information as well as the intended user’s needs. As with other comprehensive bases of accounting, a CPA can compile, review and/or audit financial statements prepared under the FRF for SMEs. Accordingly, any organization that is considering adopting this new framework should consult with a knowledgeable CPA.

At Berkowitz Pollack Brant we have extensive experience providing audit, review and compilation services of financial statements prepared under U.S. GAAP and other comprehensive bases of accounting for companies of all sizes and across a wide range of industries.

 

 

About the Author: Robert C. Aldir CPA is a senior manager in the Audit and Attest Services practice of Berkowitz Pollack Brant. For more information, call (305) 379-7000 or e-mail raldir@bpbcpa.com.

The Challenges and Opportunities Businesses Face with the New Final Tangible Property Repair Regulations by Andreea Cioara Schinas

Posted on December 02, 2013 by Andreea Cioara Schinas

Following seven years of temporary proposals and commentary, the IRS recently released final regulations governing the tax treatment of expenditures related to tangible property. According to the IRS, these long-anticipated regulations will affect more than 4 million taxpayers who own or lease buildings, equipment, machinery or other tangible property.

While the framework intends to simplify how and when taxpayers capitalize or deduct expenses for acquiring, maintaining, repairing and improving assets, there are quite a few complexities hidden in its 222 pages and several opportunities. As a result, taxpayers need to take the time now to carefully review and prepare for the provisions before they go into effect in 2014.

Opportunity Alert: one of the most significant rules that did not change from the temporary regulations allows taxpayers to claim retirement loss deductions for structural components that are removed from buildings. Taxpayers that have renovated their buildings in prior years should consider having a study performed to quantify the basis of assets demolished. This will allow taxpayers to accelerate deductions that they normally would have continued to depreciate, and can even create a permanent tax savings upon sale of the property.

Other important provisions for 2013 and 2014 are:

Materials and Supplies

Materials and supplies costing $200 or less are exempt from capitalization. As a result, taxpayers may now deduct as business expenses more office supplies, such as coffee makers and calculators, in their first year of use. This exception applies solely to portable, temporary and standby spare parts.

Distinguishing between Repairs, Maintenance and Improvements

The new regulations clarify when taxpayers may deduct expenses to repair or maintain existing real or personal property. Under this routine maintenance safe harbor rule, taxpayers may deduct the costs of performing recurring maintenance, such as cleaning or inspections, in order to keep a property in its ordinary efficient operating condition.

For the first time, the IRS extends this safe harbor to cover those expenses incurred for routine maintenance on buildings and their structural components (including “building systems” such as plumbing, heating or electrical work), but limits its application to instances when taxpayers expect to perform these activities more than once during a 10-year period.

On the other hand, activities intended to better or restore a unit of property, or to adapt the property for a new or different use must be capitalized.

De Minimis Expensing Safe Harbor

The final regulation replaces the complicated accounting of aggregate ceiling limits set by the temporary regulations with a more easy-to-manage invoice-level test. Now, taxpayers with an applicable financial statement (AFS), such as certified audited statements prepared by an independent CPA, may now deduct up to $5,000 per cost of the item, or all items per invoice.

However, small businesses that typically do not have AFS face a reduced limit of $500 per item or invoice. In either case, to qualify for the de minimis safe harbor, taxpayers must already have a written book policy in place, and they must elect to apply the safe harbor rule to all amounts paid for all tangible property, including materials and supplies, during a tax year.

Despite the intended simplification of the de minimis safe harbor, there are instances when amounts paid for property under this provision may be subject to capitalization.

Safe Harbor for Small Businesses Owning or Leasing Real Property

The final regulations make an attempt to accommodate small businesses that own or lease real property by enabling them to avoid the improvement rules to buildings costing $1 million or less when the business’s average annual gross receipts total $10 million or less for the preceding three tax years. Under this rule, taxpayers may elect to deduct the lesser of $10,000 or two percent of the adjusted basis of the property for amounts paid for repairs, maintenance, improvements and similar activities performed on the building.

While the final regulations accomplish the goal of simplifying the treatment of tangible property, all taxpayers owning fixed assets will have to make certain elections and take steps under the guidance of their professional accountants to plan for and apply these rules on the Jan. 1, 2014, start date. Our real estate tax services practice has studied the regulations and can answer any questions that may arise.

 

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