Bruce Johnson | TaxConnections

08 Jun 2023

Rev. Proc. 2023-11 And The Mandatory Amortization Of Section 174 Expenses: What CPA’s Must Know

Summary
174 Research and Experimentation (“R&E”) Expenses paid or incurred in taxable years beginning after 12/31/2021 cannot be immediately deducted. They must be amortized over 5 years, or 15 years in the case of foreign R&E. There are several implications to this change:

1) This mandatory change will result in a short-term increase in taxable income;

2) Since there was previously no difference between Section 162 and Section 174 deductibility, many businesses will not even realize they are now affected;

3) Taxpayers have a limited time to take advantage of Rev. Proc. 2023-11 and avoid filing the complex Change of Accounting Form 3115;

4) While a change in these rules is generally expected eventually, in the immediate term taxpayers will have to account for these changes on their 2022 tax returns; and

5) The Section 41 Research and Development (“R&D”) Tax Credit is an excellent way to mitigate the effects of mandatory amortization under Section 174.

The Background: Section 174 and Section 41
Read More

Written by Bruce Johnson | Posted in Section 174 Expenses

09 May 2023

How To Determine R&D Tax Credit Eligibility: 4 Part Test

Takeaways

Since the R&D Tax Credit is activities-based, eligibility is determined by testing the research activities a company performs.
In order to qualify for the Credit, a research activity must pass all four parts of the Four-Part Test:

Part #1: The research activity must be related to developing a new or improved business component for a “qualified purpose”—i.e. related to new or improved functionality, quality, reliability, or performance. The development or improvement doesn’t have to be brand new or vast in scope.

Part #2: The research activity must be undertaken for the purpose of eliminating some uncertainty related to appropriate design, method, or capability. Even research that is ultimately unsuccessful in eliminating uncertainty may still qualify.

Part #3: The research activity must involve some Process of Experimentation designed to resolve the uncertainty. The “Substantially All” Test adds a quantitative aspect to Part #3.

Part #4: The research activity must fundamentally rely on principles of physical sciences, biological sciences, computer science, or engineering, or their applications.

Certain activities are automatically excluded from Credit eligibility, including foreign and funded research.
Thorough documentation is required to demonstrate compliance with all Four Parts of the Test. The recent Little Sandy Coal case serves as a cautionary tale.

Introduction: An Activities-Based Credit

The Federal Research and Development (R&D) Tax Credit is an activities-based tax credit for companies that incur R&D expenses in the United States. Based on IRC § 41 & § 174, the Credit is intended to incentivize innovation and experimentation.
Read More

Written by Bruce Johnson | Posted in TaxConnections

26 Apr 2023

Webinar Begins Within The Hour: The Inflation Reduction Act of 2022: Transforming 179D and 45L

Webinar Is Today! You Can Still Register As Webinar Begins In Less Than One Hour
Date: April 26th
Time: 12:00PM EST
Webinar Title:The Inflation Reduction Act of 2022: Transforming 179D and 45L
CPE Credit For Attendees: 1 CPE Credit
Field of Study: Taxes
Program Level: Beginner/Intermediate
Cost: Compliments Of Capstan Tax, Complimentary Education

Description:
The passage of the Inflation Reduction Act of 2022 (IRA) has transformed energy-efficient tax incentives for commercial real estate. The IRA will alter and amplify both the 179D Deduction and the Section 45L Tax Credit. In this all-new webinar, we will compare the current version of each incentive to the “IRA Version” of the incentive, addressing changes to reference standards, calculation of incentives, documentation procedures, and more. New exciting initiatives including utility sales tax recovery, C-PACE, and more will also be discussed. Numerous real-life case studies will be reviewed, and a variety of reference tables will be provided.

Learning Objectives:
• Compare the requirements for claiming the 179D deduction under both the old and new laws
• Understand how the 179D deduction is calculated under the Legacy Program and under the IRA
• Recognize other changes to 179D under the IRA, including the elimination of partial deductions and theestablishment of deduction reset
• Compare the requirements for claiming the 45L Tax Credit under both the old and new laws, and theassociated differences for single-family and multifamily dwelling units
• Become familiar with solar energy incentives, the benchmarking process, and C-PACE
• Learn about NYC’s Carbon Emissions Bill, and recognize potential implications in New York and beyond
Read More

Written by Bruce Johnson | Posted in 179D Webinar • The Inflation Reduction Act Of 2022

13 Apr 2023

How To Claim The R&D Tax Credit: Key Take Aways

Key Take Aways
– The activities-based Federal R&D Tax Credit allows qualified businesses to obtain a dollar-for-dollar reduction in tax liability.
– Qualifying activities include the development or improvement of products, processes, software, formulas, and more. Businesses in many different industries may claim the Credit.
– If research activity passes the Four-Part Test, it qualifies for the Credit.
– Qualified Research Expenses(QREs) include wages, supplies/materials, cloud hosting, and third-party contractors. The determination of QREs is a nuanced endeavor.
– A rough estimate of Credit amount can be easily calculated, but is dependent on the accuracy of the QREs employed. It can be quite difficult to determine accurate QRE values – there are
multiple caveats and nuances involved. Credit estimates are only as good as the QRE values used to obtain them. Online Credit Calculators are subject to the same inherent flaw.
– The Credit should be calculated by an R&D specialist, who will select between the Regular Research Credit (RRC) Method and the Alternative Simplified Credit (ASC) Method.
– The Credit is claimed using IRS Form 6765, and “sufficient documentation” is required.
– The Payroll R&D Credit is a modified version of the R&D Tax Credit for Qualified Small Businesses (QSBs).
– The Federal credit is permanent. It may be claimed back 3 years, and carried forward for 20 years.
– Claiming the Federal R&D Tax Credit does not increase the likelihood of an audit.
– Over 40 states have their own state-specific R&D Tax Credits, which can be used in conjunction with the Federal Credit.

What is the Federal Research and Development (R&D) Tax Credit?
The Federal Research and Development (R&D) Tax Credit — also known as the Research and Experimentation (R&E) Tax Credit — is an activities-based tax credit for companies that incur R&D expenses in the United States. Based on IRC § 41 & § 174, the Credit is intended to incentivize innovation and experimentation.
Eligible taxpayers may claim qualifying expenses – wages, supplies, contract research, cloud hosting – for a dollar-for-dollar reduction in tax liability.
The Credit has undergone quite an evolution over the years.

Click On Link To Access The Full Article:

Written by Bruce Johnson | Posted in Claim R&D Tax Credit

23 Mar 2023

Real Estate Tax Incentives And Strategies

The wide variety of real estate tax opportunities available can be overwhelming. To make sure you’ve considered all potential sources of benefit, review our expansive checklist.

☐ Accelerated Depreciation
Look-back studies via 3115, best results achieved for properties in service under 15 years
Recall depreciation potential inherent in 754 Step Ups and 1031 Exchanges, as well as tax-exempt property

☐ Bonus Depreciation
100% for properties placed-in-service between 9/28/17-12/31/2022
Acquired assets eligible under the TCJA

☐ Bonus-Eligible QIP (Qualified Improvement Property)
QIP placed-in-service on or after 1/1/2018 is 15-year property and bonus-eligible – major implications for renovations/retrofits

☐ Expensing Options under the Tangible Property Regulations (TPRs)
DeMinimus Safe Harbor (Itemized invoices will be helpful)
Small Taxpayer Safe Harbor
Routine Maintenance Safe Harbor (via 3115)
Read More

Written by Bruce Johnson | Posted in Real Estate Tax Incentives And Strategies

28 Feb 2023

Tax Cuts And Jobs Act (H.R.1) of 2017

The Tax Cuts and Jobs Act was signed into law on December 22, 2017. This marked the first comprehensive tax law reform since 1986, and has had an impact on every American taxpayer and industry. The TCJA brings new opportunities, as well as some challenges, to the commercial real estate community. Most of the legislation became effective January 1, 2018, with two important exceptions.

Capstan Tax Strategies is at your service as we navigate these changes together. We’ve done a thorough review of the TCJA- Tax Cuts and Jobs Act and analyzed the legislation most likely to have a major impact on our clients and colleagues. (Click HERE if you’d like to read the Act in full).

Corporate Tax Rate
The top corporate tax rate of 35% was reduced to 21%. Corporate AMT was eliminated.
Interest Deduction Limitation
For years beginning 1/1/2018, companies are subject to a limitation on deductible interest expense. The deductible amount is capped at 30% of adjusted taxable income, after certain adjustments.
Companies that are “real property development, redevelopment, construction, reconstruction, acquisition, conversion, rental, operation, management, leasing or brokerage trade or business” may “elect-out” of this limitation. However, any company that elects-out of the interest limitation will be required to depreciate its real property using the Alternative Depreciation System (ADS).

For a company electing-out for tax years after 12/31/17, the ADS lives below are applicable:
Read More

Written by Bruce Johnson | Posted in TaxConnections

15 Feb 2023

Cost Segregation And Multifamily Property: Busting The Myths

In J.P. Morgan’s 2023 Commercial Real Estate Outlook, multifamily property is designated as the highest performing of all asset classes. A recent study commissioned by the National Multifamily Housing Council and National Apartment Association revealed that the U.S. needs to build 4.3 million new apartments by 2035. The demand for multifamily units clearly remains strong, reinforcing its reputation as a “safe” investment.

Investors may initially be drawn to this vertical for safety, scalability, and predictable income, but they often stay for the significant tax benefits. Multiple tax strategies are available, including accelerated depreciation, which can be used to offset a portion of that predictable rental income. Cost segregation is the vehicle for these tax savings.

So why doesn’t every multifamily property owner consider cost segregation? Some simply aren’t aware of it, while others have been misinformed. Let’s debunk some of the common myths holding multifamily investors back from potential opportunity.

1. You can only do cost segregation studies on commercial property, not residential rental real estate.

[ False ]
Cost segregation can be performed on residential real estate, from multifamily to single family rental properties, and in fact multifamily properties are considered great candidates for cost segregation.

2. There aren’t a lot of assets to reclassify in a multifamily property.
[ False ]
While the exact yield will vary based on projects details, layout, and location, between 20-35% of assets in multifamily properties may be accelerated.

Without cost segregation, residential real estate capital assets are assigned a 27.5-year Class Life.

With cost segregation, these are just some of the asset categories that can be moved into much shorter Class Lives:
Read More

Written by Bruce Johnson | Posted in Cost Segregation • Multifamily Family Property

03 Feb 2023

What CPAs Must Know About Rev. Proc. 2023-11 And The Mandatory Amortization Of Section 174 Expenses

Summary

174 Research and Experimentation (“R&E”) Expenses paid or incurred in taxable years beginning after 12/31/2021 cannot be immediately deducted. They must be amortized over 5 years, or 15 years in the case of foreign R&E. There are several implications to this change:
1) This mandatory change will result in a short-term increase in taxable income;

2) Since there was previously no difference between Section 162 and Section 174 deductibility, many businesses will not even realize they are now affected;

3) Taxpayers have a limited time to take advantage of Rev. Proc. 2023-11 and avoid filing the complex Change of Accounting Form 3115;

4) While a change in these rules is generally expected eventually, in the immediate term taxpayers will have to account for these changes on their 2022 tax returns; and

5) The Section 41 Research and Development (“R&D”) Tax Credit is an excellent way to mitigate the effects of mandatory amortization under Section 174.

The Background: Section 174 and Section 41

In order to understand the impact of this legislation, it’s crucial to understand the relationship between Section 174 Expenses and Section 41 Expenses.

Section 174 Expenses are known as Research and Experimentation, or R&E Expenses. The expenses that fall under Sec. 174 can be divided into two categories, based on how essential each is to the activity being performed.

Section 41 Expenses are known as Research and Development, or R&D Expenses. These are known as “Direct Research Expenses,” and are what usually come to mind when you imagine research and development. Wages, supplies/materials, cloud hosting, and fees paid to 3rd party contractors are expenses integral to the research process.
Read More

Written by Bruce Johnson | Posted in Capstan Tax • Rev. Proc. 2023-11 • Sec. 174 R&E Expenses

09 Dec 2022

Industry Alert: Notice 2022-61 Clarifies Prevailing Wage And Apprenticeship Requirements Under The IRA

On November 30, 2022, the IRS issued Notice 2022-61, providing initial guidance on the wage and apprenticeship requirements included in the Inflation Reduction Act of 2022. The IRA established increased benefit levels for energy-efficient incentives related to EPAct 179D and 45L that may only be obtained when prevailing wage and apprenticeship requirements are satisfied. This Notice provides additional detail regarding these requirements, associated recordkeeping, and project timing.

The prevailing wage and apprenticeship requirements delineated in the Notice will apply to facilities for which construction begins on or after 1/30/2023.

PREVAILING WAGE RATE REQUIREMENTS

The “Prevailing Wage” requirement states that mechanics and laborers must be paid no less than the prevailing wages required to be paid for federal construction work. (The wage will vary based on exact job description and geographic location.)

Written by Bruce Johnson | Posted in Notice 2022-61

08 Dec 2022

3 Top Cost Segregation Trigger Events In Real Estate Life Cycle: Know Them To Proactively Recognize Savings Opportunities

3 Cost Segregation Trigger Events In Real Estate Life Cycle

While cost segregation is useful throughout the real estate life cycle, there are certain events that tee up particularly strong cost seg opportunities. These events should automatically trigger consideration of a cost segregation study, since picking the right moment can maximize benefit. Read on for our top 3 cost segregation study triggers – so you can proactively recognize opportunity.

1. New Construction of Commercial Property

Cost segregation takes advantage of the time value of money by front-loading depreciation to the early years of ownership. As such, to maximize savings from Year 1, a cost seg study should ideally be performed as soon as a newly constructed property is placed-in-service.

Consider a newly constructed hotel placed-in-service in 2021 (100% bonus in play.) Capstan was retained to perform a study immediately after construction was completed.

Written by Bruce Johnson | Posted in Cost Segregation Studies • Tax Savings Opportunities

30 Nov 2022

Top 10 Must Knows Before Diving Into Tax Year 2022

10. 179 Expensing May Play a Larger Role in 2023 and Beyond:

With 100% bonus rates set to phase down starting in 2023 (see #3 below), Section 179 Expensing may step up. With a larger deduction of $1.08M for TY 2022, and the ability to immediately expense the full cost of an asset, Section 179 Expensing may soon carry more weight in a comprehensive tax plan. There are several nuances to be aware of – including potential state-specific limitations – but we anticipate more strategic bonus/179 Expensing interplay moving forward.

9. New Audit Technique Guideline (ATG) Points Focus in New Directions:

In June of this year the IRS released an updated version of the Cost Segregation Audit Technique Guideline for the first time since 2017. By examining the ATG, taxpayers can anticipate what Examiners will focus on in the unlikely event of an audit. The 2022 update points out two new areas of focus – the importance of identifying land values is stressed, and an entire new chapter is added on electrical distribution systems.

8. Rise of the Non-Profit Tenant:

We’re seeing many retail and office buildings bringing non-profit or government tenants into their properties. This trend may have a huge impact on the way depreciation rules are applied in those properties. The good news is that – depending on circumstances – the taxpayer might not be locked into ADS class lives. This topic is very nuanced, so we covered it in both a feature article and an episode of our podcast, Capstan Live!

7. 754 Step-Ups – Don’t Miss the Opportunity:

Written by Bruce Johnson | Posted in Capstan Tax • Cost Segregation

08 Nov 2022

The Inflation Reduction Act Of 2022: Transforming 179D And 45L (Wednesday, November 9th Complimentary CPE)

Date: Wednesday, November 9th 2022
Time: 12:00PM EST, 1 CPE CREDIT

The passage of the Inflation Reduction Act of 2022 (IRA) has transformed energy-efficient tax incentives for commercial real estate. The IRA will alter and amplify both the 179D Deduction and the Section 45L Tax Credit. In this all-new webinar, we will compare the current version of each incentive to the “IRA Version” of the incentive, addressing changes to reference standards, calculation of incentives, documentation procedures, and more. New exciting initiatives including utility sales tax recovery, C-PACE, and more will also be discussed. Numerous real-life case studies will be reviewed, and a variety of reference tables will be provided.

Learning Objectives:
* Compare the requirements for claiming the 179D deduction under both the old and new laws
* Understand how the 179D deduction is calculated under the Legacy Program and under the IRA
* Recognize other changes to 179D under the IRA, including the elimination of partial deductions and the establishment of deduction reset
* Compare the requirements for claiming the 45L Tax Credit under both the old and new laws, and the associated differences for single-family and multifamily dwelling units
* Become familiar with solar energy incentives, the benchmarking process, and C-PACE
* Learn about NYC’s new Carbon Emissions Bill, and recognize potential implications in New York and beyond

Meet Bruce Johnson, Capstan Tax

Written by Bruce Johnson | Posted in Free Tax Webinar - 1 CPE Credit