In order to calculate depreciation for Federal income tax purposes, taxpayers must use the correct method and proper recovery period for each asset or property owned. Property, whether acquired or constructed, often consists of numerous asset types with different recovery periods. Thus, property must be separated into individual components or asset groups having the same recovery periods and placed-in-service dates in order to properly compute depreciation.
What is Cost Segregation:
When lumpsum cost of a project is known, cost estimating techniques may be required to "segregate" or "allocate" costs to individual components of property (e.g., land, land improvements, buildings, equipment, furniture and fixtures, etc.). This type of analysis is generally called a "cost segregation study," "cost segregation analysis," or "cost allocation study."
Two important things to note in a cost segregation study:
1. Rationale used to segregate property into its various components and
2. Method used to allocate the total project costs among these components.
Benefits of Cost Segregation:
The most common situation is the allocation or reallocation of building costs to tangible personal property. A building, termed "section (§) 1250 property", is generally 39-year property eligible for straight-line depreciation. Equipment, furniture and fixtures, termed "section (§) 1245 property", are tangible personal property. Tangible personal property has a short recovery period (e.g., 5 or 7 years) and is also eligible for accelerated depreciation (e.g., double declining balance). Thus, a faster depreciation write-off (and tax benefit) can be obtained by allocating property costs to § 1245 property, or by reallocating § 1250 property costs to § 1245 property.
Cost Segregation Methods:
Neither the Service nor any group or association of practitioners has established any requirements or standards for the preparation of cost segregation studies. The courts have addressed component depreciateion, but have not specifically addressed the methodologies of cost segregation studies. So there is no standardized method to use. Various methodologies are utilized in preparing cost segregation studies, including:
1. Detailed Engineering Approach from Actual Cost Records
2. Detailed Engineering Cost Estimate Approach
3. Survey or Letter Approach
4. Residual Estimation Approach
5. Sampling or Modeling Approach
6. "Rule of Thumb" Approach
Though there is not standardized method, generally the IRS documents emphasize that the determination of § 1245 property must be factually intensive and must be supported by corroborating evidence.
Thursday, August 20, 2009
IRS to Receive Unprecedented Amount of Information in UBS Agreement
The Internal Revenue Service and the Department of Justice today announced the successful negotiation of an agreement that will result in the IRS receiving an unprecedented amount of information on United States holders of accounts at the Swiss bank UBS.
As a result of this agreement, the IRS will receive substantially all of the accounts that it was interested in when it initiated the John Doe summons against UBS.
Under the agreement, the IRS will submit a treaty request to the Swiss government describing the accounts for which it is requesting information. The Swiss government will then direct UBS to initiate procedures to turn over information on thousands of accounts to the IRS. The IRS will receive information on accounts of various amounts and types, including bank-only accounts, custody accounts in which securities or other investment assets were held and offshore company nominee accounts through which an individual indirectly held beneficial ownership in the accounts.
Also, the agreement retains the U.S. Government’s right, if the results are significantly lower than expected and other measures fail, to seek appropriate judicial remedies, including resuming actions to enforce the John Doe summons.
The agreement involves a number of simultaneous legal actions:
The judicial enforcement of the John Doe summons will be dismissed. While this enforcement motion will be withdrawn, the underlying summons remains in effect.
Upon receiving the treaty request, the Swiss government will direct UBS to notify account holders that their information is included in the IRS treaty request. It is expected that these notices will be sent on a rolling basis with some being sent over the coming weeks and others over the coming months. Receipt of this notice will not by itself preclude the account holder from coming into the IRS under the Voluntary Disclosure Program.
In addition, the Swiss Government has agreed to review and process additional requests for information for other banks regarding their account holders to the extent that such a request is based on a pattern of facts and circumstances equivalent to those of the UBS case.
Information provided to the IRS through this process will be thoroughly examined for all potential civil and criminal tax violations. The IRS will assess any additional tax, interest and a number of applicable penalties. This includes the penalty for the willful failure to file an FBAR. This penalty can be up to 50 percent of the value of the account for each year an FBAR was not filed.
The IRS will also recommend criminal prosecution in those cases where the facts warrant such an action. To date, the IRS and the Department of Justice have successfully prosecuted four United States customers of UBS whose information was provided to the IRS by UBS as part of the Deferred Prosecution Agreement.
Individuals whose information is obtained by the IRS through this process will, by longstanding policy, not be eligible for the voluntary disclosure program.
Source: IR-2009-075
As a result of this agreement, the IRS will receive substantially all of the accounts that it was interested in when it initiated the John Doe summons against UBS.
Under the agreement, the IRS will submit a treaty request to the Swiss government describing the accounts for which it is requesting information. The Swiss government will then direct UBS to initiate procedures to turn over information on thousands of accounts to the IRS. The IRS will receive information on accounts of various amounts and types, including bank-only accounts, custody accounts in which securities or other investment assets were held and offshore company nominee accounts through which an individual indirectly held beneficial ownership in the accounts.
Also, the agreement retains the U.S. Government’s right, if the results are significantly lower than expected and other measures fail, to seek appropriate judicial remedies, including resuming actions to enforce the John Doe summons.
The agreement involves a number of simultaneous legal actions:
The judicial enforcement of the John Doe summons will be dismissed. While this enforcement motion will be withdrawn, the underlying summons remains in effect.
Upon receiving the treaty request, the Swiss government will direct UBS to notify account holders that their information is included in the IRS treaty request. It is expected that these notices will be sent on a rolling basis with some being sent over the coming weeks and others over the coming months. Receipt of this notice will not by itself preclude the account holder from coming into the IRS under the Voluntary Disclosure Program.
In addition, the Swiss Government has agreed to review and process additional requests for information for other banks regarding their account holders to the extent that such a request is based on a pattern of facts and circumstances equivalent to those of the UBS case.
Information provided to the IRS through this process will be thoroughly examined for all potential civil and criminal tax violations. The IRS will assess any additional tax, interest and a number of applicable penalties. This includes the penalty for the willful failure to file an FBAR. This penalty can be up to 50 percent of the value of the account for each year an FBAR was not filed.
The IRS will also recommend criminal prosecution in those cases where the facts warrant such an action. To date, the IRS and the Department of Justice have successfully prosecuted four United States customers of UBS whose information was provided to the IRS by UBS as part of the Deferred Prosecution Agreement.
Individuals whose information is obtained by the IRS through this process will, by longstanding policy, not be eligible for the voluntary disclosure program.
Source: IR-2009-075
Wednesday, August 19, 2009
Small Business and Cash for Clunkers Program
The Cash for Clunkers program starts July 1st and ends November 1st 2009, or whenever funds run out, whichever happens first. The entire program is centered towards scrapping the old gas guzzlers and protect environment by destroying these clunkers and provide better cars to the consumers. Eligible cars (clunkers) can be traded in for a voucher redeemable toward the purchase of a new, more fuel efficient vehicle. Vouchers are worth either $3,500 (or $4,500 if the new car is 10 mpg higher than the trade-in)
Small businesses can take advantage of the Cash for Clunkers Program by trading in their work truck and buying another qualifying vehicle or taking up a five year auto lease contract. Generally, to qualify for the credit under this program your vehicle must be:
• manufactured less than 25 years before the date you trade it in and, in the case of a category 3 vehicle, must also have been manufactured not later than model year 2001
• get 18 miles a gallon or less.
• be drivable.
• registered to the same owner for atleast a year and
• insured for the past year.
When you apply for the program, you initially will receive $3,500(or $4,500) voucher towards your new fuel saving vehicle. You won’t actually receive the cash value of the vouchers in hand. Instead the government will provide the credit to the dealership where the qualifying new vehicle is being purchased or leased electronically. This credit will be applied towards all or part of the down payment. Note that the new vehicle must have a sale price of $45,000 or less and get at least 22 mpg.
Before you apply for this program: DO YOUR HOMEWORK!
1. Evaluate your decision - The voucher value replaces the trade-in value, and does not add to the trade-in value. Hence the small businesses should evaluate their decision on whether to utilize the voucher program based upon the value of their trade-in vehicle. If the trade-in value is greater than the voucher amount, it may not be beneficial to apply to this program for your old vehicle. On the other hand, if it is worth less, then you certainly will want the higher voucher value.
2. Consider the tax impact -The vouchers are not treated as taxable income. They take the place of your trade-in value. Hence a business that utilizes the voucher program is treated as if it traded in the old vehicle and received zero for it. Its basis in the new vehicle would be the amount paid net of the voucher and any other rebates. There is no tax due on trading-in their old vehicle for new under this program.
3. Compare Scenarios - In fact for a business, it may be more beneficial to use the voucher program and defer taxes rather than selling the old vehicle (which is fully depreciated) for a price equal to or less than the credit amount and paying taxes on the gain on sale of the vehicle. Hence, tax impact on sale of old vehicle versus trade-in needs to be considered too.
Small businesses can take advantage of the Cash for Clunkers Program by trading in their work truck and buying another qualifying vehicle or taking up a five year auto lease contract. Generally, to qualify for the credit under this program your vehicle must be:
• manufactured less than 25 years before the date you trade it in and, in the case of a category 3 vehicle, must also have been manufactured not later than model year 2001
• get 18 miles a gallon or less.
• be drivable.
• registered to the same owner for atleast a year and
• insured for the past year.
When you apply for the program, you initially will receive $3,500(or $4,500) voucher towards your new fuel saving vehicle. You won’t actually receive the cash value of the vouchers in hand. Instead the government will provide the credit to the dealership where the qualifying new vehicle is being purchased or leased electronically. This credit will be applied towards all or part of the down payment. Note that the new vehicle must have a sale price of $45,000 or less and get at least 22 mpg.
Before you apply for this program: DO YOUR HOMEWORK!
1. Evaluate your decision - The voucher value replaces the trade-in value, and does not add to the trade-in value. Hence the small businesses should evaluate their decision on whether to utilize the voucher program based upon the value of their trade-in vehicle. If the trade-in value is greater than the voucher amount, it may not be beneficial to apply to this program for your old vehicle. On the other hand, if it is worth less, then you certainly will want the higher voucher value.
2. Consider the tax impact -The vouchers are not treated as taxable income. They take the place of your trade-in value. Hence a business that utilizes the voucher program is treated as if it traded in the old vehicle and received zero for it. Its basis in the new vehicle would be the amount paid net of the voucher and any other rebates. There is no tax due on trading-in their old vehicle for new under this program.
3. Compare Scenarios - In fact for a business, it may be more beneficial to use the voucher program and defer taxes rather than selling the old vehicle (which is fully depreciated) for a price equal to or less than the credit amount and paying taxes on the gain on sale of the vehicle. Hence, tax impact on sale of old vehicle versus trade-in needs to be considered too.
Monday, August 17, 2009
Small Businesses-Deadline Approaching for Special Refund Claims
Under ARRA, eligible taxpayers can choose to carry back a NOL arising in a taxable year beginning or ending in 2008 for three, four or five years instead of two. The option is available for an eligible small business (ESB) that has no more than an average of $15 million in gross receipts over a three-year period ending with the tax year of the NOL. This choice may be made for only one tax year. This means that a business that had a net operating loss (NOL) in 2008 could carry that loss as far back as tax-year 2003, rather than the usual 2006.
By doing this the small businesses can
-Offset the loss against income earned in up to five prior tax years,
-Get a refund of taxes paid up to five years ago,
-Use up part or all of the loss now, rather than waiting to claim it on future tax returns.
Most taxpayers still have time to choose this special carryback and get a refund. A calendar-year corporation that qualifies as an ESB must file a claim by Sept. 15, 2009. For individuals, the deadline is Oct. 15, 2009. This includes a sole proprietor that qualifies as an ESB, an individual partner in a partnership that qualifies as an ESB and a shareholder in an S corporation that qualifies as an ESB. Deadlines vary for fiscal-year taxpayers, depending upon when their fiscal year ends and whether they are making the choice for the tax year that ends or begins in 2008.
Individuals can accelerate a refund by filing Form 1045, Application for Tentative Refund. Similarly, corporations with NOLs may also accelerate a refund by using Form 1139, Corporation Application for Tentative Refund. Normally, refunds are issued within 45 days.
Source: IR-2009-072
Thursday, August 13, 2009
Due date extended for Report of Foreign Bank and Financial Accounts
Extension available to file FBAR
The Internal Revenue Service has issued Notice 2009-62, which extends until June 30, 2010 the filing date for filing the Report of Foreign Bank and Financial Accounts (FBAR) for 2008 and earlier calendar years with respect to their foreign financial accounts for:
(i) persons with signature authority over, but no financial interest in, a foreign financial account, and
(ii) persons with a financial interest in, or signature authority over, a foreign commingled fund.
When do you file a Report of Foreign Bank and Financial Accounts(FBAR)
Generally if you own or have authority over a foreign financial account, including a bank account, brokerage account, mutual fund, unit trust, or other types of financial accounts, then you may be required to report the account yearly to the Internal Revenue Service. Under the Bank Secrecy Act, each United States person must file a Report of Foreign Bank and Financial Accounts (FBAR), if
1. The person has a financial interest in, or signature authority (or other authority that is comparable to signature authority) over one or more accounts in a foreign country, and
2. The aggregate value of all foreign financial accounts exceeds $10,000 at any time during the calendar year.
Form TD F 90-22.1, Report of Foreign Bank and Financial Accounts
Hence, holding a foreign account requires some reporting though no income is earned on such account. Checking the appropriate block on Form 1040 Schedule B, and filing Form TD F 90-22.1, Report of Foreign Bank and Financial Accounts, satisfies the account holder’s reporting obligation.
The Form TD F 90-22.1 must be mailed on or before June 30 of the following year to:
U.S. Department of the Treasury
P.O. Box 32621
Detroit, MI 48232-0621.
The FBAR is not to be filed with the filer’s Federal income tax return.
The granting, by IRS, of an extension to file Federal income tax returns does not extend the due date for filing an FBAR. There is no extension available for filing the FBAR.
Account holders who do not comply with the FBAR reporting requirements may be subject to civil penalties, criminal penalties, or both.
The Internal Revenue Service has issued Notice 2009-62, which extends until June 30, 2010 the filing date for filing the Report of Foreign Bank and Financial Accounts (FBAR) for 2008 and earlier calendar years with respect to their foreign financial accounts for:
(i) persons with signature authority over, but no financial interest in, a foreign financial account, and
(ii) persons with a financial interest in, or signature authority over, a foreign commingled fund.
When do you file a Report of Foreign Bank and Financial Accounts(FBAR)
Generally if you own or have authority over a foreign financial account, including a bank account, brokerage account, mutual fund, unit trust, or other types of financial accounts, then you may be required to report the account yearly to the Internal Revenue Service. Under the Bank Secrecy Act, each United States person must file a Report of Foreign Bank and Financial Accounts (FBAR), if
1. The person has a financial interest in, or signature authority (or other authority that is comparable to signature authority) over one or more accounts in a foreign country, and
2. The aggregate value of all foreign financial accounts exceeds $10,000 at any time during the calendar year.
Form TD F 90-22.1, Report of Foreign Bank and Financial Accounts
Hence, holding a foreign account requires some reporting though no income is earned on such account. Checking the appropriate block on Form 1040 Schedule B, and filing Form TD F 90-22.1, Report of Foreign Bank and Financial Accounts, satisfies the account holder’s reporting obligation.
The Form TD F 90-22.1 must be mailed on or before June 30 of the following year to:
U.S. Department of the Treasury
P.O. Box 32621
Detroit, MI 48232-0621.
The FBAR is not to be filed with the filer’s Federal income tax return.
The granting, by IRS, of an extension to file Federal income tax returns does not extend the due date for filing an FBAR. There is no extension available for filing the FBAR.
Account holders who do not comply with the FBAR reporting requirements may be subject to civil penalties, criminal penalties, or both.
Seven Tax Facts About Selling Your Home
During summer months, some people sell their home. Many of those individuals will make a profit on the sale and still will not have to pay a single dime of additional income tax to the IRS.
Here are seven tax facts about selling your home.
1. Ownership and Use Tests In general, you are eligible to exclude from your income all or part of any gain from the sale of your main home if you have owned and used your home as your main home for a period aggregating at least two years out of the five years prior to its sale. Refer to Publication 523, Selling Your Home, for the complete eligibility requirements as well as exceptions to the two year rule.
2. Main Home Your main home is the one in which you live most of the time.
3. Capital Gain Exclusion If you have a gain from the sale of your main home and you meet the ownership and use tests, you may be able to exclude up to $250,000 of the gain from your income or $500,000 on a joint return in most cases. The exclusion may be claimed each time that you sell your main home, but generally no more often than once every two years.
4. Reduced Exclusion If you do not meet the requirements to qualify for the $250,000 or $500,000 exclusion, you may still qualify for a reduced maximum exclusion. But you must have sold the home for other specific reasons such as serious health issues, a change in your place of employment, or certain unforeseen circumstances such as a divorce or legal separation, natural or man-made disasters resulting in a casualty to your home, or an involuntary conversion of your home.
5. Reporting the Gain Do not report the gain of your main home on your tax return unless you have a gain and at least part of it is taxable. Report any taxable gain on Form 1040, Schedule D, Capital Gains and Losses.
6. More Than One Home If you have more than one home, you can exclude gain only from the sale of your main home. You must pay tax on the gain from selling any other home. If you have two homes and live in both of them, your main home is ordinarily the one you live in most of the time.
7. Loss You cannot deduct a loss from the sale of your main home. If you have a loss on the sale of your main home for which you received a Form 1099-S, Proceeds From Real Estate Transactions you must report the loss on Form 1040 Schedule D, even though the loss is not deductible.
Source: http://www.irs.gov/
Here are seven tax facts about selling your home.
1. Ownership and Use Tests In general, you are eligible to exclude from your income all or part of any gain from the sale of your main home if you have owned and used your home as your main home for a period aggregating at least two years out of the five years prior to its sale. Refer to Publication 523, Selling Your Home, for the complete eligibility requirements as well as exceptions to the two year rule.
2. Main Home Your main home is the one in which you live most of the time.
3. Capital Gain Exclusion If you have a gain from the sale of your main home and you meet the ownership and use tests, you may be able to exclude up to $250,000 of the gain from your income or $500,000 on a joint return in most cases. The exclusion may be claimed each time that you sell your main home, but generally no more often than once every two years.
4. Reduced Exclusion If you do not meet the requirements to qualify for the $250,000 or $500,000 exclusion, you may still qualify for a reduced maximum exclusion. But you must have sold the home for other specific reasons such as serious health issues, a change in your place of employment, or certain unforeseen circumstances such as a divorce or legal separation, natural or man-made disasters resulting in a casualty to your home, or an involuntary conversion of your home.
5. Reporting the Gain Do not report the gain of your main home on your tax return unless you have a gain and at least part of it is taxable. Report any taxable gain on Form 1040, Schedule D, Capital Gains and Losses.
6. More Than One Home If you have more than one home, you can exclude gain only from the sale of your main home. You must pay tax on the gain from selling any other home. If you have two homes and live in both of them, your main home is ordinarily the one you live in most of the time.
7. Loss You cannot deduct a loss from the sale of your main home. If you have a loss on the sale of your main home for which you received a Form 1099-S, Proceeds From Real Estate Transactions you must report the loss on Form 1040 Schedule D, even though the loss is not deductible.
Source: http://www.irs.gov/
Thursday, August 6, 2009
Residential Energy Credits - Saves taxes and energy bills
In 2009- you can save on utility bills and taxes by making energy efficient improvements to your house. So it is the right time to start planning to take advantage of these credits...
Nonbusiness energy property credit.
This credit, which expired after 2007, has been reinstated. You may be able to claim a nonbusiness energy property credit of 30% of the cost of certain energy-efficient property or improvements you placed in service in 2009. This property can include high-efficiency heat pumps, air conditioners, and water heaters. It also may include energy-efficient windows, doors, insulation materials, and certain roofs. The credit has been expanded to include certain asphalt roofs and stoves that burn biomass fuel.
Limitation.
The total amount of credit you can claim in 2009 and 2010 is limited to $1,500.
Residential energy efficient property credit.
Beginning in 2009, there is no limitation on the credit amount for qualified solar electric property costs, qualified solar water heating property costs, qualified small wind energy property costs, and qualified geothermal heat pump property costs. The limitation on the credit amount for qualified fuel cell property costs remains the same.
Nonbusiness energy property credit.
This credit, which expired after 2007, has been reinstated. You may be able to claim a nonbusiness energy property credit of 30% of the cost of certain energy-efficient property or improvements you placed in service in 2009. This property can include high-efficiency heat pumps, air conditioners, and water heaters. It also may include energy-efficient windows, doors, insulation materials, and certain roofs. The credit has been expanded to include certain asphalt roofs and stoves that burn biomass fuel.
Limitation.
The total amount of credit you can claim in 2009 and 2010 is limited to $1,500.
Residential energy efficient property credit.
Beginning in 2009, there is no limitation on the credit amount for qualified solar electric property costs, qualified solar water heating property costs, qualified small wind energy property costs, and qualified geothermal heat pump property costs. The limitation on the credit amount for qualified fuel cell property costs remains the same.
Tax Relief for Ponzi-Scheme Victims
Generally investment losses are capital losses. Capital losses can only be deducted to the extent of capital gains for the year, plus another $3,000 ($1,500 if you use married filing separate status). Any balance capital losses get carried forward to the following year, and is subject to similar limitation in future years.
Hence, it can take years to fully deduct huge capital losses.
In contrast, ordinary losses can be written off against any other type of income. Also, If you have a big ordinary loss that exceeds the income for the year, the excess will result in net operating loss which can be carried back to previous years and/or carried forward to offset income in future years.
IRS now allows Ordinary Loss Treatment for Ponzi-Scheme Victims
According to IRS Revenue Ruling 2009-9 and IRS Revenue Procedure 2009-20, the ordinary loss from a Ponzi investment scheme can be written off as an itemized deduction (on Schedule A of Form 1040) as Casualty and Theft Losses.
Note that-
· It can be deducted in full without regard to the limitations that apply to personal theft losses.
· It can be deducted in full without regard to other rules that reduce write-offs for other types of itemized deductions.
· It can be deducted in full under the alternative minimum tax (AMT) rules.
· It can be deducted on Form 1040 for the year in which you discover the loss. However, the loss must be reduced by claims for reimbursement for which you have a reasonable prospect of recovery.
· Losses that create a net operating loss can be carried back to the three previous years or forward to the next 20 years. You may also be able to carry back a net operating loss created by a 2008 Ponzi loss for up to five years.
· Losses are deductible in the year in which the loss was suffered. Determining the amount and timing of losses from these schemes is difficult and dependent on the prospect of recovering the lost money timing of losses from these schemes. Hence IRS now allows you to deduct a safe-harbor loss amount on the return for the year that the loss is discovered. The safe-harbor privilege is only allowed for losses discovered after 2007. IRS Revenue Procedure 2009-20 simplifies compliance for taxpayers by providing a safe-harbor means of determining the year in which the loss is deemed to occur and a simplified means of computing the amount of the loss.
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