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
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