News for CPAs: New Tax Regulations allow you to retire individual building components. Must be Done This Tax Season. CPAs and Building Owners Take FullAdvantage of this New IRS Tax Regulation and Save Thousands of Dollars.
Many accountants and tax professionals are not yet aware of the new partial disposition tax regulations that were enacted in the middle of tax season this past August. For the first time ever, a structural component of a building can be disposed of individually, allowing the taxpayer to realize significant additional depreciation deductions. However, if the component was replaced after 1/1/14 it MUST be addressed on this year's tax return, or it will forever be embedded in the building's basis.
Here’s the example summarized from Treasury Decision 9689:
- $20MM bldg placed in service 2011. On 1/1/14, depreciation reserve is $1,261,000.
- Replaced the entire roof in 2014.
- Assume $1 million is the cost of the retired roof.
- On the 2014 return, the depreciation for the building is computed as follows:
On 12/31/13, the depreciation for the retired roof is $63,050.
On 1/1/14, the unadjusted basis of the building is reduced to $19,000,000 ($20,000,000 less $1,000,000 for the retired roof)
The depreciation reserve of the account is decreased to $1,197,950 ($1,261,000 less the depreciation of $63,050 for the retired roof as of 12/31/13).
The 2014 depreciation for the building is $487,160 ($19,000,000 x 2.564%).
- On the 2014 return, gain or loss for the retired roof is determined as follows:
The depreciation for the retired roof is $11,752 (($1,000,000 x 2.564%) x 5.5/12).
The adjusted basis of the retired roof is $925,198 (the adjusted basis of $936,950 removed from the building less the depreciation of $11,752 in 2014).
- As a result, the loss recognized in 2014 for the retired roof is $925,198.
- The replacement roof is a separate asset for depreciation purposes.
The challenge with these regulations is the IRS requirement that the component’s basis must be appropriately determined, not “assumed” (even though an assumption was made for purposes of this example). Historically, this meant conducting a full-blown cost segregation study to determine the roof’s disposition basis. Unfortunately, this is cost prohibitive for most taxpayers who only need to dispose of a small fraction of the building’s basis this tax season.
Fortunately, there is a much more cost-effective, defensible solution. Titan Echo is a fast, easy-to-use software platform that allows accountants (or their clients) to determine the component’s basis for less than a thousand dollars. Originally developed to empower CPAs to do their own cost segregation studies (without the need of an on-staff engineer or a third-party consultant), Titan Armor is an affordable solution for addressing these new partial disposition regulations as well.
With Titan’s back-office engineering support, construction cost-estimating experience, and IRS audit expertise, CPAs are taking full advantage of this tax strategy this year, saving their clients thousands of dollars by leveraging these additional depreciation deductions. Here’s how:
- CPA gets access to Echo’s web-based, mobile-friendly platform for $295.
- CPA (or client’s facility manager) follows the “tour” within Echo to complete the necessary site inspection.
- Titan’s engineers remotely complete the construction cost estimating effort to determine the disposed component’s basis. Titan provides the verbal results to the CPA at no extra cost.
- At the CPA’s request, Titan can provide a Professional Engineer’s Letter backing up the findings for an additional fee of $700.
The good news is, for smaller projects, an Engineer’s Letter may not be warranted, saving the taxpayer unnecessary costs. This approach is significantly more cost effective than hiring a consultant to do a full-blown cost segregation study.