| Capturing tax benefits in repair/maintenance rules
This essentially creates a smaller unit of property, or component, to measure the expenditure against. When a lessee makes an alteration to a leased space, the capitalization tests used to determine how the expenditure need to be classified - as a restoration/replacement, betterment or adaptation - are applied to the suite space structure and its eight building systems, rather than to the entire building that houses the space. If you make your mind up to change your accounting method to recognize gain or loss on retired or disposed-of structural components or building systems, consider talking to a cost segregation expert to establish a practical way to estimate past costs and the remaining basis of the components. To ensure that lessors are treated like other property owners when making renovations or alterations, an individual space - such as a retail suite - is not viewed as a unit of property that's separate from the overall building or structure. If the replacement component is capitalized, taxpayers are now permitted to write off the remaining cost of the building component that's being improved. The tests must now be applied separately to the building structure and eight specific building systems that the regulations identify - plumbing, HVAC, electrical, escalator, elevator, fire protection, security and gas distribution systems. The opposite is true for lessors. A building and its structural components are still considered to be the "unit of property. Retirement of a building structural component can be treated as a disposition of property The new rule mitigates the unfair result that could occur when an original building component and its subsequent replacement are expected to be capitalized and depreciated at the same time. The new guidelines also offer numerous examples of how to apply the rules to buildings and structural components, which may be difficult for the taxpayer to interpret; 45 examples are provided for betterment-related scenarios alone. Some of the most noteworthy updates in the 255-page guidance package include: New direction on capitalizing building alterations One of the biggest changes in the regulations involves how building renovation/alteration costs are treated. If you previously filed for a change in accounting method to conform to the former rules - for example, treating a complete building as the unit of property - you may need to change your accounting method again. Taxpayers, particularly those who renovate their property frequently, such as hotel, apartment and retail store owners, need to understand how the IRS rule modifications can affect expenditures incurred when property is remodeled or repaired - or they risk missing out on valuable tax benefit opportunities. The guidelines state that lessees must consider their leased space as a separate unit of property. How to take advantage of the new regulations The temporary regulations generally are effective for amounts paid or incurred in taxable years beginning on or after Jan. |
Thursday 3 May 2012
Capturing tax benefits in repair/maintenance rules
