6A — May 13 - 26, 2016 — Financial Digest — M id A tlantic
Real Estate Journal
www.marejournal.com
F inancial D igest
By Fred Clapp, Cost Segregation Services, Inc. What’s your BRA size?
ments, Reno- vations, and A d a p t i o n s (BRA), size matters if an- nual repair costs exceed thirty percent of an effected building sys- W
the IRS as electrical, security, fire and safety, HVAC, gas distribution, elevators, plumb- ing, and other, if the annual M&R costs associated with one of those building systems exceed 30%, the costs have to be depreciated (capitalized) over the straight line life of the building. Me a n i n g : Y o u s p e n d $187,000 for a new chiller and the value of your HVAC system is $525,000. The M&R ratio test is 35%. Instead of $187,000 expense against current in- come, you have to capitalize that cost at $4,794 annually the next 39 years. This ratio
hen the IRS looks at CRE through the tax world of Better-
of the 2014 Tangible Property Regulations (new Regs). Every commercial building owner in America needs to pay atten- tion to their annual budgets because, as of January 1, 2014, Uncle Sam has determined what dollar amounts have to be capitalized and defined what dollar amounts can be expensed. The new Regs require an annual 30% ratio test be ap- plied with all M&R costs to determine what costs qualify. Additionally, those M&R costs have to associate with the value of a designated (nine) building system. Identified by
test must be applied annually to every building system. What happens if an audit finds that item as an expense? The IRS will disallow it either way and your return gets whacked. With 2015 taxes just ending, many tax professionals have realized their CRE clients may not be in compliance with the new Regs. Consequently, if your CPA has suggested an extension, chances are good your return may fall into this category. Don’t press your luck about M&R compliance because the IRS looks at BRA (RABI) size.
Instead, ask the following: Have I established a value for the nine building systems in my building? Do I have a written spending policy that meets the safe harbors for de minimus expenses under the new Regs? Did I property “cost-out” the disposal of that pile of building materials hauled off in a dumpster? According to the AICPA, one of the biggest challenges fac- ing CPAs is the valuation of designated building systems. If your tax advisor needs to know the value of an existing plumbing system that came with a building you purchased four years ago, can you provide an audit-proof document sup- porting the cost basis of just that system? Most tax advi- sors are not capable of valuing building assets and need help. The only IRS audit proof “Certain Method “ that an- swers these questions is an en- gineering based cost segrega- tion study (CS). It may finally be time to put CS at the top of your “to-do” list. When you bring a CS specialist into the mix, they incorporate the IRS approved 15 year “look-back” to even identify past costs that, under the new Regs, were capitalized but now may qualify as an expense. CS pro- vides audit proof documenta- tion your CPA needs help you comply with the newRegs. Tell the IRS to try that on for size! Fred Clapp is Cost Seg- regation Services, Inc.’s re- gional director. In 2015 he managed projects totaling $85M generating $14M in savings for CRE owners. n a section of the MARE Journal P.O. Box 26, Accord, MA 02018 781-871-5298 • 800-584-1062 fax 781-871-5299 www.marejournal.com Section Publisher Barbara Holyoke bholyoke@marejournal.com Section Editor Julie King jking@marejournal.com Financial Digest
Fred Clapp
tems. Include an “I” for Im- provements, change the order, and you’ve got the official RABI rules for Maintenance and Repair (M&R), which is one important compliance element
Time Out! Off Setting Penalties
Ratio Test Violation Capitalized Assets Should be Expensed Existing Building Systems Out of Value OfÞcials Will Review the PlayÉ.
The Call: Team had a CSSI Cost Segregation Study
▶︎ Find Money in your BuildingÕs Walls & Generate Cash Flow ▶︎ Are Experts for Valuing Building Systems & Units of Property ▶︎ Create Savings from Material that went into a Dumpster ▶︎ Provide IRS Approved Documentation & Ensure Maximum Tax BeneÞt The Play: Get a No-Cost Analysis of your Building(s) Fred W. Clapp, Regional Director 703.298.0705 fred@bamprojects.com www.costsegserve.com Put time back on the clock and win if youÕre working with CSSI. As the NationÕs premier Þrm delivering cost segregation we:
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