Capitalization Regulations in Taxation

Capitalization Regulations

To Infinity and Beyond!

Cameron L. Hess, CPA, Esq.

Wagner Kirkman Blaine

Klomparens & Youmans LLP

Sacramento                    Walnut Creek

   (916) 920-5286

Items You Must Know

•

Unit of Property

•

Building Systems

•

Safe Harbors

–

De Minimis Election “f” election

–

Routine Maintenance

–

Small Taxpayers Expenditures – “(h)” election

•

Partial disposition election

•

Rev. Proc. 2015-20

8/23/2016

WKBK&Y 1066733  C. Hess 916-920-5286

2

Items You Must Know

“[E]xcept as otherwise stated, a change to

comply with the final regulations is a 

change in

method of accounting

 to which the provisions of

sections 446 and 481 and the accompanying

regulations apply.”

(Preamble to TD 9636 Guidance Regarding

Deduction and Capitalization of Expenditures

Related to Tangible Personal Property)

8/23/2016

WKBK&Y 1066733  C. Hess 916-920-5286

3

Evolution of  “§263 Regs”

•

History:

–

01/20/04. Announcement

–

08/21/06.  1

st

 Proposed Regs

–

03/10/08.  2

nd

 Proposed Regs

–

12/23/11.  Temporary Regulations

–

9/19/2013.  Final Regs. (2103-13 IRB 331)

•

64 pages, including preamble.

•

More examples

8/23/2016

WKBK&Y 1066733  C. Hess 916-920-5286

4

Evolution of  “§263 Regs”

•

History:

–

Rev. Proc. 2015-14, 

mandatory

 a “no fee” Form

3115 for new capitalization/repair regulations

–

Rev. Proc. 2015-20, 2015-9 IRB 694.  No Form

3115 (“non-filing” option) for qualified small

taxpayers

•

No Safe Harbor Protection

8/23/2016

WKBK&Y 1066733  C. Hess 916-920-5286

5

Evolution of  “§263 Regs”

•

History:

–

Warning – Final Regs don’t tell the “whole story”

–

Concepts hidden in prior Proposed Regs.

•

Casualty Loss issue

•

Exploration of Continuing Rev. Procs

•

History of 50% replacement rule tossed.

8/23/2016

WKBK&Y 1066733  C. Hess 916-920-5286

6

New 263 Regs

•

Why Change?

–

IRS:

•

The standards for …Section 263…are difficult to discern

and apply …

•

considerable uncertainty and controversy for taxpayers

.

8/23/2016

WKBK&Y 1066733  C. Hess 916-920-5286

7

Background

•

Final

 Regs.

–

Effective:

09/19/2013

–

Applies:

1/1/14 (tax years

beginning on/after)

–

Can elect retroactively 

some

 provisions

–

Simplifies some “objective standards”

–

Clarifies subjective standards (friendlier)

8/23/2016

WKBK&Y 1066733  C. Hess 916-920-5286

8

Still Unchanged

•

Some Basic Principles Unchanged (1.263(a)-1)

–

Capitalize Improvements (263(a)) =

•

Betterment

•

Restoration

•

New use

–

Incidental repair/maint not an improvement (162)

–

263A applies to inventory and self-produced

property.

8/23/2016

WKBK&Y 1066733  C. Hess 916-920-5286

9

Still Unchanged

•

Improvement =

–

Betterment – fixes, adds, increases capacity

–

Restoration 

– replaces item of loss (165)

– replaces item sold

– restores item nonfunctional

– rebuilds to like-new @ life end

 – replaces a major component

–

New Use – adapts for a different use

8/23/2016

WKBK&Y 1066733  C. Hess 916-920-5286

10

Final 263 Regulations - Overview

•

New Concepts (1.263(a)-3):

–

 “Unit of Property”

–

“Major Component” (MP) (significant importance

and value is material)

–

“Substantial Structural Part” (SSP) (large)

8/23/2016

WKBK&Y 1066733  C. Hess 916-920-5286

11

Unit of Property - Overview

•

“Unit of Property” - *** 

New

–

 A “Unit” = all parts 

functionally interdependent

.

–

Example:

electric lathe + dedicated computer = 1 Unit.

•

Real Property (2 types):

–

Owner: = Whole Building + Its structural components

–

Lessee: = Leased Unit

•

“improvement” = “primary components” of building.

(building broken into distinct parts, e.g., roof 

structure

)

8/23/2016

WKBK&Y 1066733  C. Hess 916-920-5286

12

Final 263 Regulations - Overview

•

Replacing a

–

Major Component (MP)  or

–

Substantial Structural Part (SSP)

usually

 means capitalization.

But it is based on facts & circumstances.  One may

argue it’s not betterment, restoration, like new.

8/23/2016

WKBK&Y 1066733  C. Hess 916-920-5286

13

Improvement - Overview

•

Improvements (real/personal) - includes

•

= “Major replacements”.

–

2008 (proposed) - > 50 % cost test (cap vs deduct).

–

2008  Tossed (claims practitioners complained)

–

Temp/Final Regs:  

Facts & Circumstances

:

•

“

quantitative and qualitative significance of the

part or combination of parts in relation to the

unit of property.”

–

Means “we don’t know” - 

Subjective

8/23/2016

WKBK&Y 1066733  C. Hess 916-920-5286

14

Improvement - Overview

•

“Major Replacement” includes (

no surprise

)

–

“Major Component” (1.263-3(k)(6)(A))

•

Part performs a UOP critical function

–

“Substantial Structural Part” (-3(k)(6)(B))

•

Major Replacement involves

•

A large or critical part of the Unit of Property

•

Facts & Circumstance Approach

•

36 examples

 replacement is capitalized or expensed.

•

About 

75 examples

 overall (all areas).

8/23/2016

WKBK&Y 1066733  C. Hess 916-920-5286

15

Unit of Property - Building

•

Real Property - Buildings

–

Replacements that are (i) an 

improvement

 to (ii) a

“building component” or “

building system

” must

be capitalized.

8/23/2016

WKBK&Y 1066733  C. Hess 916-920-5286

16

Not Improvements – Safe Harbors

•

De Minimis Safe Harbor (“f”) election

•

Routine Maintenance (1.263(a)-3(i))

•

Small Taxpayer Expenditures (“h”) election

8/23/2016

WKBK&Y 1066733  C. Hess 916-920-5286

17

New De Minimis Rule

•

De Minimis Election

–

1.263(a)-1(f):

–

Optional

–

Annual election

: if elect, covers year’s

 purchases

•

Be consistent

 (financial statements/books)

•

Apply items on invoice-by-invoice basis.

–

Not for 

inventory, land, rotables

8/23/2016

WKBK&Y 1066733  C. Hess 916-920-5286

18

New De Minimis Rule

•

Election Statement:

Section 1.263(a)-1(f) DeMinimis Safe Harbor

Election

Taxpayer Name

Address

Taxpayer Identification #

Taxpayer is making the de minimis safe harbor

election under §1.263(a)-1(f)

8/23/2016

WKBK&Y 1066733  C. Hess 916-920-5286

19

New De Minimis Rule

•

Two Types:

–

 “AFS”

•

“applicable financial statement” = FS for SEC, gov’t

agency, general audit (attest)

•

$5,000 limit

•

Witten accounting policy at beginning of year required

–

“No AFS”

•

$500  limit ($200 materials/supplies)

•

Taxpayer must adopt a “policy”, but it need not be

written

8/23/2016

WKBK&Y 1066733  C. Hess 916-920-5286

20

New De Minimis Rule

•

“AFS”

–

May deduct item if

•

1)  Useful life  = < 1 year; 

or

•

2)  Cost </=“X” (written policy), n.t.e. 

$5,000/item.

•

On each invoice, add integrated items (parts and

installation)

–

E.g., cannot buy a car, but 

itemize

 it as engine -$2,000,

4 seats – 1,000, body - $3,000, tires - $800, A/C -

$100.

8/23/2016

WKBK&Y 1066733  C. Hess 916-920-5286

21

New De Minimis Rule

•

Everybody Else (No AFS)

–

Meet Basic requirements

–

Procedure in place 1/1/xx (need not be written)

–

Item </=  $500.00

•

For capital items.  (Same rule to add on separate

invoice cost items that integrate to 

one

 unit)

•

$200.00 for materials and supplies

–

Tossed: 

Material Distortion Test

 in Temp Regs.

8/23/2016

WKBK&Y 1066733  C. Hess 916-920-5286

22

New De Minimis Rule

•

Warning:

–

Later re-sale = 1245 property

•

Example (no AFS):

–

1.  All these are deductible:

•

$2,500 for 10 printers (250.00 each).

•

$4,000 for Conference room - $600 to designer, $400 table,

10 chairs - $300 each. (Split up designer fee).

•

10 hand held restaurant POS-$300 each; 3 tablets-$500 each

–

2.  This must be capitalized:

•

10 computers/ tablets@ $600.00 each.

8/23/2016

WKBK&Y 1066733  C. Hess 916-920-5286

23

New De Minimis Rule

•

Note:  No 3115 for (f) election:

–

1.263-1

–

“

Except for …“(f)”

…a change to comply…is a

change in method of accounting….A

taxpayer…must secure...consent……

8/23/2016

WKBK&Y 1066733  C. Hess 916-920-5286

24

Not Improvements – Safe Harbors

•

Routine Maintenance (1.263(a)-3(i))

–

Do more than once every 10 years.

•

Escalator hand rails (4/yrs), HVAC maint. (4./yrs) (repl.

condenser).

–

Allowable for rotables.

8/23/2016

WKBK&Y 1066733  C. Hess 916-920-5286

25

Fun Test:  Routine Maintenace

•

Raj Wolowitz Apartments. 

Owner forgot to

certify his elevator.  It has not been working

for 3 years. Maintenance is usually in 3 year

cycles.  

–

Sheldon Cooper complains to Penny, his manager.

She gets Raj to do maintenance for $1,100 and to

pay a $100 inspection fee.

–

According Example 12, the $1,100 paid probably

is: 

 a) deductible (repair) or b) capitalized.

8/23/2016

WKBK&Y 1066733  C. Hess 916-920-5286

26

Not Improvements – Safe Harbors

•

Small taxpayers expenditures (1.263(a)-3(h)

–

Ave Gross Receipts < $10 Million (See Rev. Proc.

2002-28)

–

Un adjusted basis </= $1 million

–

Total repair/improvements

  = lesser of:

•

2% of unadjusted basis

•

$10,000/building

–

All

 repairs/improvements lumped in for $10K limit

8/23/2016

WKBK&Y 1066733  C. Hess 916-920-5286

27

Not Improvements – Safe Harbors

•

$10 Million Ave Gross Receipts Limit

•

All sources

•

Can deduct returns & allowances

•

Can exclude sales tax (if buyer imposed) – CA.

–

3 Prior Year (shorter if < 3 years operating)

•

Annual election

–

If elect, but exceeds > $10K, only disqualified for

that building

8/23/2016

WKBK&Y 1066733  C. Hess 916-920-5286

28

Not Improvements – Safe Harbors

•

Form of Election:

Section 1.263(a)-3(h) Safe Harbor Election for Qualified

Small Taxpayers.

Taxpayer’s Name

Address

Identification Number

Identify Each Building

While not required by regulations  add:

Taxpayer is making the §1.263(a)-3(h) safe harbor

election for qualified small taxpayers.

8/23/2016

WKBK&Y 1066733  C. Hess 916-920-5286

29

Partial Disposition Election

•

1.168(i)-8(d).

•

If capitalize an improvement, then taxpayer

may 

election to write-off part of existing

asset disposed of.

–

Example:  Remodel pool in 2012 – pipe breaks,

must do 2

nd

 remodel in 2015.

•

No form of election required:  “Just do it.”

8/23/2016

WKBK&Y 1066733  C. Hess 916-920-5286

30

Unit of Property - Building

•

Buildings:  IRS Takes “Split” Approach

–

Whole Building:  Systems = parts of buildings).

•

Identify 9 common “systems” in buildings

•

Systems are 

NOT

 a Unit of Property; but decide capital

improvement at a systems level.

–

Tenant:  Tenant’s Unit – 1 Unit (unless divisions)

–

Condo/Co-op: (Each Unit = 1  Unit)

8/23/2016

WKBK&Y 1066733  C. Hess 916-920-5286

31

Unit of Property - Building

•

Building systems (examples):

–

HVAC (heat, ventilation, and A.C.);

–

Plumbing

–

electrical systems;

–

Escalators and elevators;

–

fire protection,

–

alarm, security systems;

–

gas distribution systems; and

–

other systems identified in published guidance.

8/23/2016

WKBK&Y 1066733  C. Hess 916-920-5286

32

Unit of Property - Building

•

Building systems – Capitalize or Deduct

–

Facts & Circumstances Approach

–

No safe harbor

–

Lots of examples provided to illustrate

8/23/2016

WKBK&Y 1066733  C. Hess 916-920-5286

33

Learning by Example

•

Betterments – Equipment

–

If purchase and intend to fix.

–

Tractor needing new motor

•

Betterment – Building (paper towel; refresh)

•

Clean up environmental after purchase

•

Building purchased “below standard”, then repaired

•

Expand/improve in addition to a “refresh”.

•

Abandon at loss; later restoration (casualty not req’d)

8/23/2016

WKBK&Y 1066733  C. Hess 916-920-5286

34

Examples

•

Betterments – Major Component

–

Gas Stations.  New tanks have leak detection.

–

Sprinkler System.  New fire system

–

100% Remodel.

•

All hotel bathrooms over 4 years (including furnishing

replaced).

•

All flooring of public areas of hotel.  (b/c not

refreshment)

8/23/2016

WKBK&Y 1066733  C. Hess 916-920-5286

35

Examples

•

Not Betterments – Equipment (“caps”)

–

Relocation & reinstall (moved)

–

Reconditioning to meet regulations (not restored)

[new smog system]

•

Not Betterments – Building (“caps”)

–

New mandated reg.  Earthquake retrofit

–

Safety. Oil seeping in from outside; fix to avoid

health code closure.

8/23/2016

WKBK&Y 1066733  C. Hess 916-920-5286

36

Test Your Knowledge (Real Story)

•

PTSD Property Mang’t, Inc.’s owner puts 82-year old Dad to work.

Dad attends seminar on “soft understructure apartments”.  As a

favor

every apartment owner

 (about 100) receives a “free” quote -

($6,500) by an engineer/friend (lots of pictures of owner’s building)

and 12 newspaper articles. Letter says:

–

You may be next.  Act now to save $$.  One Tenant got $2 million.

County may soon set ordinances; costs will rise.

”

–

Dad estimates that + $6,500, $100,000-$200,000 per building.

–

Dad says “I’m just trying to help you.

•

Question:  To try to claim a deduction, does it make a different if

owner acts now or waits for an ordinance to pass.

–

(1.263(a)-3(j)(3),Example 12)

•

Question:  If building collapses, next EQ, is owner liable?

8/23/2016

WKBK&Y 1066733  C. Hess 916-920-5286

37

Examples

•

Not Betterments

–

Replace 100 of 300 damaged exterior windows

–

Replace 4 of 10 old sinks (40%)

–

Replace Top Layer of “Roof”

•

M = Owner, replaces entire “membrane” (top layer).

–

Remove “drop ceiling” – paint exposed ducts.

–

Replace 2 of 10 roof-top worn HVAC systems, even

if better! 

8/23/2016

WKBK&Y 1066733  C. Hess 916-920-5286

38

Examples

•

Building Systems –Betterment! (Surgery)

–

Blown insulation into walls to improve efficiency

–

Add in a new drive-through window

–

Electrical load capacity upgrade

–

Add stairs and mezzanine to make a 2

nd

 floor.

8/23/2016

WKBK&Y 1066733  C. Hess 916-920-5286

39

Leased Buildings

•

Leased buildings – Unit of Property.

–

It is Both:

•

 Owner:  the whole building and

•

 Lessee:  each 

separate

 leased “unit”

–

LH Improvements

•

Capitalize whether as owner or tenant paid.

8/23/2016

WKBK&Y 1066733  C. Hess 916-920-5286

40

Condos/Co-ops

•

Condominiums/Coops – Unit of Property.

–

For the owner

•

 the unit owned and the structural components of the

unit

•

the portion possessed by the coop owner and the

structural components of the unit possessed.

8/23/2016

WKBK&Y 1066733  C. Hess 916-920-5286

41

Fun Problems

•

The roof leaks. Out of 10 units, 3 are most

affected.  Just over the 3 units is membrane

and 12 sheets of plywood are replaced.

–

Is this a repair?

–

Is this an improvement?

•

Tsakapoulous

.

•

Would the result be different if the whole

membrane was replaced, but not the

plywood?

8/23/2016

WKBK&Y 1066733  C. Hess 916-920-5286

42

Fun Problems

•

A’s office building (leased) has:

–

 10 A/C Units, each separately piped.

•

How many HVAC systems are there?

  i) 1 or ii) 10.

–

1.263(a)-3(e)(2)(ii)(v)(B)(6), Example 1

–

2 banks of 3 lifts (6 total) and two escalators

•

How many systems are there:  i) 1, ii) 2, iii) 3, iii) 7, iv) 8

–

Example 2

–

Tenant leases 2 Units, each w/ separate A/Cs

•

How many systems does tenant have:  i) 1 or ii) 2.

–

Example 13

8/23/2016

WKBK&Y 1066733  C. Hess 916-920-5286

43

Wait!:  Before Covering More:

•

Rev. Proc. 2015-14

–

New law is an “accounting method change”

–

File Form 3115

–

Section 481 adjustments required.

•

Rev. Proc. 2015- 20  (non-safe harbor)

–

No Form 3115

•

Beginning Assets < $10 Million or

•

Qualified small taxpayers (Ave Gross Receipts < $10 Mil)

–

No audit protection for prior years

8/23/2016

WKBK&Y 1066733  C. Hess 916-920-5286

44

Acquisitions (1.263-2)

•

No surprises in basics

•

Must Capitalize Before Start Operations:

–

Pre-commencement repairs

–

Installation and pre-operational testing

–

Facilitative costs

•

Transport, secure, negotiate, costs to acquire, costs to

examine, fees, studies, intermediary

–

Optional

 – may (

not

 required to) capitalize

employee payroll to facilitate acquisition

8/23/2016

WKBK&Y 1066733  C. Hess 916-920-5286

45

Purchases/Acquisition Costs

•

1.263(a)-2.  Basic Rule:  Capitalize:

–

purchases,

–

build or create an 

improvement

•

Pre-development (builder rights/permits)

•

Repairs before placed in service

•

Acquisition costs (broker/attorney fees)

–

Defend/protect title

•

Need not capitalize:

–

Cost to relocate (remove and reinstall).

–

Failed acquisition

–

Not related – fight ordinance that would close business

8/23/2016

WKBK&Y 1066733  C. Hess 916-920-5286

46

Purchases/Acquisition

•

What is adapting to a different use?

–

1.263(a)-3(l)(2) Pg. 57,752

–

Example 2 - Commercial retail building

•

Removable walls

•

Convert 3 lease spaces into 1 rental unit

•

May deduct conversion, not a new or different use

–

Example 3

•

Prep building for sale – re-paint, refinish floors

•

May deduct expenses

8/23/2016

WKBK&Y 1066733  C. Hess 916-920-5286

47

Improvement (263 Regs)

•

What is new or different use?

–

Example 4: Toxic land – Prep for sale

–

pre-existing contamination, when bought

–

contamination that owner created

•

Land contaminated, no longer in use; trying to sell

•

Clean up to sell to developer for houses (Aerojet)

•

Grade land

–

IRS:  Clean up to restore not an improvement –

deductible; but capitalize grading of land –

because adapts land for different use.

8/23/2016

WKBK&Y 1066733  C. Hess 916-920-5286

48

Cam’s Rules (silly rules that work)

•

Environmental (Paper Towel Theory).

–

Wiping up the prior owner’s mess is a betterment;

therefore, just clean up your own mess.

•

Significant deferred maintenance eliminated

•

Environmental clean up

•

Buy proximate to scheduled maintenance

•

Not, clean your own or blocking some one else’s mess.

•

Freshen Up.

–

A bit of evening “make-up” is deductible

–

But, major “surgery” is probably a betterment.

8/23/2016

WKBK&Y 1066733  C. Hess 916-920-5286

49

Not Changed

•

Section 263A

–

Capitalization for property produced by taxpayer

•

Real or personal property (e.g., costs to perfect title)

–

Capitalization of property acquired for resale

•

Section 162

–

Materials & supplies (under 1.163-3)

8/23/2016

WKBK&Y 1066733  C. Hess 916-920-5286

50

Deductible (Not an improvement)

•

Deduct:

–

Repairs & maintenance

•

1.162-4.  Anything not capitalized

•

Any change to comply with regs is a Section 481 item

and requires IRS approval.  1.446-1(e)(3)(ii).

–

Repair Allowances?

•

Not yet.  Service thinking about.

8/23/2016

WKBK&Y 1066733  C. Hess 916-920-5286

51

Deductible Repairs/Maintenance

•

Examples (Deductible)

1.

T undertakes an asbestos abatement project to

remove and replace insulation.  The removal does

not improve insulation efficiency.

2.

T does “Cosmetic” refreshing (minor

improvement):

•

Hotel lobby floor changed (not whole hotel floor);

•

Retail store shelving changed (no greater storage).

•

IRS conceding some small cases.

8/23/2016

WKBK&Y 1066733  C. Hess 916-920-5286

52

Summary:  263 Regs

•

Section 263 Regs

–

IRS Goal:

•

Not to end disputes

•

But to redirect the issues/arguments.

8/23/2016

WKBK&Y 1066733  C. Hess 916-920-5286

53

Summary

•

Do these regs. affect your reporting?

–

Yes – you are adopting a different method.

–

Yes – you reported differently in any prior year

–



 A

ccounting method change.

•

Impact:

–

Must

•

File Form 3115 (as automatic adjustment);

•

Adjust all opening accounts 1/1/2012. (1/1/2013)

•

Report 481 adjustment in 2012 (2014)—positive or

negative—to true up all accounts

–

Rev. Proc. 2012-19 and Rev. Proc. 2012-20

8/23/2016

WKBK&Y 1066733  C. Hess 916-920-5286

54

Materials & Supplies (1.162-3)

•

Do not Supercede Rev. Procs.

–

2002-12 – Smallwares Deduction (restaurants)

–

2012-28 – Cash Basis for 

Qual. Small Taxp

 (<$10

M)

•

M&S = tangible personal property

–

Incidental (i.e., napkins) – not defined

–

Non-incidental (everything else)

8/23/2016

WKBK&Y 1066733  C. Hess 916-920-5286

55

Materials & Supplies (1.162-3)

•

M&S = tangible personal property

–

Not inventory

–

Used or consumed in business

–

Is either

•

Component to maintain, repair or improve a U of Tang

Prop:

•

Fuel, lubricants, water, expected < 12 month life;

•

UOP < 12 months life

•

UOP costing $200 or less

•

Is identified by regs

8/23/2016

WKBK&Y 1066733  C. Hess 916-920-5286

56

M&S: Rotables, Spares

•

Unusual Concept

–

Feature – item, if broken, can be removed, fixed,

then reinstalled.  But, takes time to fix.

–

Rotables: “rotated” out, fixed, then put back.

–

Standby Parts:  expensive, special order, critical

•

Historical – spare propeller, rudder, blade

•

Current – spare tank, engine, tire (re-tread)

8/23/2016

WKBK&Y 1066733  C. Hess 916-920-5286

57

M&S: Rotables, Spares

•

Options for Tax Purposes:

–

Applicable financial statement – depreciate over same

useful life (AFS = audited, government, SEC)

–

Deduct when finally thrown out

–

Capitalize and depreciate over tax useful life

–

(New):

•

Write-off when installed

•

Add-back to income/basis, fmv when removed;

•

Capitalize repairs

•

Write-off when re-installed, add to income/basis fmv when

removed – i.e., repeat.

8/23/2016

WKBK&Y 1066733  C. Hess 916-920-5286

58

M&S Examples

•

Under $200.00

–

Party supply rental – deduct every small item < $200.00.

(plates, cups, dishes) - deduct

–

Print Toner cartridges – box of 10 for $200.00 – deduct.

–

Office chairs under $200.00 if treated as M&S – deduct

–

50 desktop scanners, use 35 (small ware, treat as M&S)

•

Over $200.00 (not rotables)

–

Airplane parts.  Deduct when installed

–

Repair parts for machines.  Same.

–

Mods, jigs < 12 months.  Same, but Section 263A controls.

•

Not rotables

–

Aircraft engines

8/23/2016

WKBK&Y 1066733  C. Hess 916-920-5286

59

Retirement (New!)

•

New but it depends:

–

Before:  Roof replaced = no deduction until whole

building disposed. (IRC Section 168).

–

New:  Replace 

part

 of a system/component:

•

If repair, may elect instead:

•

New basis capitalized

•

Old basis deducted

 (Section 1250/1231 loss)

–

Note:  Enhances doing cost segregation studies.

(still Section 1250 property.)

8/23/2016

WKBK&Y 1066733  C. Hess 916-920-5286

60

Retirement (New!) 1.263(a)-3

•

Cost of removal:

–

If not part of major replacement can deduct,

rather than capitalize

–

If for major replacement, must capitalize

•

Example 30 – elevator.  1 of 4 retired/replaced

–

Option 1:  No cost segmentation of old elevator,

but can write-off replacement (not major

replacement)

–

Option 2:  Write-off old; capitalize new.

8/23/2016

WKBK&Y 1066733  C. Hess 916-920-5286

61

Not Finalized

•

Treas. Reg. 1.168(i)-1T. General Asset Account

–

Not finalized; status unknown.

–

Do not follow the repair/replacement rules.

–

Example:

•

$10 million building; roof leak and 

replace entire roof

.

Must capitalize replacement; no write-off of portion of

building that is “roof component”.

•

Sell all 2010-year purchased calculators over

2013/2014.  Get write-off in 2014 of basis.

8/23/2016

WKBK&Y 1066733  C. Hess 916-920-5286

62

Not Finalized

•

Treas. Reg. 1.168(i)-8T. Dispositions

–

1.168(i)-8T.  Not finalized; status unknown.

–

Effect of cost segregation

•

Retirement entitles write-off (worn out, replaced).

–

Mass Assets (large quantity, lumped; not as an

election)

•

Example, depreciate all chairs as a mass asset.

•

Right to write-off based on portion disposed.

–

Identifies what dispositions trigger gain/loss

8/23/2016

WKBK&Y 1066733  C. Hess 916-920-5286

63

Thank You

•

Cameron L. Hess

chess@wkblaw.com

Wagner Kirkman Blaine

Klomparens & Youmans LLP

(916) 920-5286

8/23/2016

WKBK&Y 1066733  C. Hess 916-920-5286

64