Latest Tax Law Updates

Obama Signs PATH Act into Tax Law:  Several Major Incentives Become Permanent, Bonus Depreciation Extended

The “Protecting Americans from Tax Hikes Act of 2015” (PATH Act) was signed into law by President Obama on December 18, 2015.  This Act contains a number of subsections that create tremendous opportunity for commercial real estate owners.

Over the years, tax extender packages have come and gone, extending incentives for a short period of time without guarantee of renewal.  This has resulted in a constant state of uncertainty, interfering with a taxpayer’s planning and decision making processes.   The PATH Act, however, makes permanent the R&D tax credit and the 15-year cost-recovery status of Qualified Leasehold Improvements (QLI), Qualified Restaurant Buildings and Improvements, and Qualified Retail Improvements (QRI).   Furthermore, the Act extends bonus depreciation for five years and the 179D tax credit for two.  This will allow taxpayers to proceed without hesitation when planning expansions, innovations, and energy-efficient improvements.

The legislation clocks in at a total of 233 pages, encompassing a broad swath of topics.  The document in its entirety can be accessed through the House of Representatives website, at http://docs.house.gov/billsthisweek/20151214/121515.250_xml.pdf.  Our discussion will focus on the incentives that pertain most specifically to the commercial real estate owner and their CPA.

First and foremost, Bonus Depreciation has been extended for a record five years.  Immediate expensing of capital expenditures is such a powerful tool, and the PATH Act permits bonus depreciation at 50% for Tax Years 2015, 2016, and 2017 before being reduced to 40% in 2018 and 30% in 2019.   Bonus depreciation has played a tremendous role in new construction projects over the years and being able to rely on these deductions will have a huge impact on overall tax planning strategy.  The Act also allows taxpayers to continue to accelerate the use of AMT credits in lieu of bonus depreciation, and even increases the amount of AMT credits that may be used in this manner.   Furthermore, the Act modifies bonus depreciation to include qualified improvement property and states that certain trees, vines and plants may be eligible for bonus depreciation when planted or grafted.   For more, see Sec. 143., Extension and Modification of Bonus Depreciation. 

Significantly, the Act also permanently extends 15-year straight-line cost recovery for Qualified Leasehold Improvements (QLI), Qualified Restaurant Buildings and Improvements, and Qualified Retail Improvements (QRI).   See Sec. 123., Extension of 15-Year Straight-Line Cost Recovery for Qualified Leasehold Improvements, Qualified Restaurant Buildings and Improvements, and Qualified Retail Improvements. 

The R&D Credit has been rolled over time and time again since the Reagan era, with no guarantee of renewal. The PATH Act permanently extends the research credit.  Beginning in 2016, the Act will allow small businesses (less than 50M in gross receipts) to use the credit to offset alternative minimum tax (AMT) liability.  Furthermore, certain small firms may even be able to offset payroll tax with this credit.  For more, see Sec. 121., Extension and Modification of Research Credit.

EPAct 179D deductions have been extended for two years under the Act.  For tax year 2015, the provision is reinstated retroactively, and will continue to use ASHRAE 90.1-2001 standards as a benchmark for determining the eligibility of a building’s energy-efficient improvements.    In tax year 2016 however, buildings will be compared to ASHRAE standards 90.1-2007.   The 2007 standards are very similar to those established in 2001, with the exception of more stringent interior lighting requirements – to meet the 2007 standards, taxpayers must show an average of 25% greater improvement in energy-efficiency.   For more, see Sec. 190., Extension of Energy-Efficient Commercial Buildings Deduction.  Also see Sec. 431., Updated ASHRAE Standards for Energy-Efficient Commercial Buildings Deduction.

The impact of the PATH Act is going to be felt in all areas of the commercial real estate world.   Obviously, many of these changes will apply retroactively to 2015.  The Capstan team will be in touch with all clients whose reports may require an update, and clients should certainly feel free to contact us with any questions or concerns.

We are currently scheduling new webinars to discuss the PATH Act, which will explore the pertinent legislation in detail and explain how to incorporate the relevant provisions into an existing 2015 tax strategy.    The finalized schedule will be available in the Training section of our website and webinars will begin in January.

The last several months have been action-packed, and the Capstan team is committed to providing you with the most up-to-date information and industry-specific analysis.  Keep an eye on the Blog, Training, and Tax Law Update sections of our website for breaking news, as well as a breakdown of how you may be affected.


Tax Law Alert: Revenue Procedure 2015-56

Safe Harbor for Retail or Restaurant Establishment Refresh

December 3, 2015

The IRS recently released Rev. Proc. 2015-56, which provides owners of retail or restaurant establishments with additional clarity as they determine whether expenses incurred for remodel/refresh must be capitalized or may be deducted. Effective for tax year 2014 and beyond, it establishes a safe harbor method of accounting for qualified taxpayers incurring qualified costs while performing a remodel/refresh on a qualified building. Once adopted, the safe harbor will allow for 75% of the qualified costs to be appropriately treated as a current deduction, with the remaining 25% of costs to be capitalized.

Qualified taxpayers include those in the trade or business of selling merchandise at retail with NAICS codes of 44 or 45 as well as those in the trade or business of preparing and selling meals, snacks, or beverages to customer order for immediate on-premises and/or off-premises consumption. Notably, however, the safe harbor does not apply to other venues that may contain food-service establishments, such as amusement parks, theaters, casinos, country clubs, or any establishment with the “special food services” code (code 7223). Other industries specifically precluded from the use of this safe harbor include auto dealers, gas stations, manufactured homes dealers, non-store retailers, hotels and motels and civic or social organizations.

Costs eligible for deduction under this safe harbor are those typical to a remodel/refresh project, with a number of important exclusions. Significantly, costs related to Section 1245 property are excluded. Costs related to land and non-depreciable land improvements as well as those related to depreciable land improvements covered under 00.3 Asset Class are all excluded. Initial acquisition, production, or leasing of a building and initial build-out of a leased building for a new lessee are excluded. Costs related to any property where the taxpayer claimed Sec. 179, 179D or 190 deductions are excluded. Costs used to make material additions to the building, including the building systems, are excluded, as are costs incurred in adapting more than 20% of the total square feet to a new or different use. For a full list of excluded costs, please see https://www.irs.gov/pub/irs-drop/rp-15-56.pdf.

To use the safe harbor above for the first time, a change of accounting method form will need to be filed (DCN #222). In order to use the safe harbor, the taxpayer must have an Applicable Financial Statement (“AFS”) and must be willing to put the building into a tax General Asset Account (GAA). An AFS may be a financial statement issued to the SEC, a certified audited financial statement or a financial statement required to be provided to a federal or state government or any Federal/state agency (other than SEC/IRS). A GAA requires that all assets contained within must have the same life, convention, method of depreciation, etc., and its contents are treated collectively as one asset. This means that the safe harbor would apply to the building as a whole and not to each individual building system.
The establishment of a GAA has several important implications. In a GAA, if there is a partial asset disposition (PAD), the adjusted basis of that partial component is deemed to be zero. This can result in gain unexpectedly being recognized. However, this safe harbor requires that no partial asset disposition be elected on the building in question. For example, if a new roof is installed on a building already placed in a GAA, the new asset will require capitalization, but the taxpayer is precluded from electing PAD treatment and writing off the remainder of the old roof’s depreciable basis. Any assets removed as a part of the refresh are also precluded from being removed from the books as a PAD under the safe harbor.

This Rev. Proc. allows taxpayers to make a “late GAA” election if they choose to take advantage of this safe harbor. This is filed with the change of accounting method to adopt the safe harbor above (method #222). The Rev. Proc. also allows taxpayers to revoke a historical PAD election and bring the entire adjustment into income in the current tax year the revocation occurs. This revocation also requires an amended tax return or additional change of accounting method that MUST be filed in either the first or second tax year after December 31, 2013 (i.e. 2014 or 2015). If a taxpayer chooses NOT to revoke his previous PAD election, the change of accounting method to use the safe harbor above will be done on a “cut-off” basis and will not apply to any costs paid prior to the year of change.

A taxpayer that claimed a loss on the disposition of a building component in a tax year beginning in 2012 or 2013 under former Temporary Reg. §1.168(i)-8T, or in a tax year beginning before January 1, 2012, may not use the safe harbor unless it files an accounting method change to comply with the disposition rules in Reg. §1.168(i)-8 by redefining the asset disposed of and including the previously claimed loss in income in a single tax year as a positive Code Sec. 481(a) adjustment. Failure to do this means the safe harbor above is inapplicable to any building where the taxpayer recognized a gain or loss on the disposition of a component under 1.168(i)-1T or 1.168(i)-8T or in a taxable year prior to 2012.

This safe harbor has several significant merits. First, it eliminates the need to determine whether or not incurred costs are “adaptations.” Taxpayers only have to exclude costs of the remodel from the safe harbor percentages if they adapt more than 20% of the total square footage to a new or different use. Furthermore, this safe harbor removes the need for taxpayers subject to 263A to analyze expenses and determine if they were incurred to “produce property.”

Rev. Proc. 2015-56 — The Capstan Conclusion
Clearly, this safe harbor will not be universally applicable. Non-AFS taxpayers and those who don’t want to conform to the GAA grouping requirements will not be able to benefit from this safe harbor. Taxpayers who do not wish to revoke past PAD elections, or who hope to use PAD elections in future, will also find this election lacking. This safe harbor will likely not apply to a single restaurant or retail location in need of a refresh. Chain restaurants or retail facilities amenable to GAA groupings are the most likely candidates to find benefit in this election.


Tax Law Alert – IRS Raises Safe Harbor Threshold

As of November 24th 2015, the IRS has significantly increased the de minimus safe harbor limit for taxpayers without an applicable financial statement (AFS). While the final Tangible Property Regulations initially capped such deductions at $500, this notice raises the threshold to $2,500 per item substantiated by an invoice. This will allow for the immediate deduction of many tangible property items that would otherwise remain left to slowly depreciate.

Small businesses have petitioned the IRS for an increase in this limit for some time, stating that the cost of many commonly expensed items certainly exceed the $500 threshold (tablets, smartphones, etc.)

Furthermore, they argued that the limit was too low to effectively decrease the administrative burden on small businesses, an expressly stated purpose of the final TPRs. Finally, many commenters noted that the discrepancy between the $5,000 threshold established for taxpayers with an AFS and the $500 threshold established for non-AFS taxpayers was simply unreasonable. Obtaining an AFS is financially prohibitive for many small businesses, and those taxpayers felt unfairly penalized by the significantly lower non-AFS threshold.

The new $2,500 threshold takes effect beginning in tax year 2016. Furthermore, the IRS will provide audit protection to eligible businesses by not challenging their use of the new $2500 threshold in tax years prior to 2016.