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Advanced Tax Issues & More Todd Fentress, Clark Schaefer Hackett Ed Rebman, Maner Costerisan Tim Smith, Bernard Robinson & Company.

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Presentation on theme: "Advanced Tax Issues & More Todd Fentress, Clark Schaefer Hackett Ed Rebman, Maner Costerisan Tim Smith, Bernard Robinson & Company."— Presentation transcript:

1 Advanced Tax Issues & More Todd Fentress, Clark Schaefer Hackett Ed Rebman, Maner Costerisan Tim Smith, Bernard Robinson & Company

2 Topics to Discuss Tangible Property Regulations RD Handbook Changes Excess basis and avoiding loss of credits Eligible Basis Applicable Fraction Casualty Loss Non-profit set-aside

3 Tangible Property Regulations The new IRS regulations apply to all taxpayers with any tangible property including: – Materials & Supplies – Buildings – Machinery & Equipment Changes accounting for materials & supplies Changes the way taxpayers evaluate their expenditures for capitalization/expense Effective for tax years beginning on or after January 1, 2014

4 De Minimis Safe Harbor What is an AFS? – Audited Financial Statements – Financial statements provided to federal or state governmental agency Expenditures of $500 or less per item or invoice for taxpayers without applicable financial statements (AFS) & $5,000 or less with AFS Generally, taxpayer must have a written capitalization policy in place specifying the dollar threshold amount. In addition, an election must be included within each year’s income tax return Decision Tree

5 To Capitalize or Not to Capitalize?? Generally, amounts paid to improve a unit of property (U of P) must be capitalized Exceptions: – De minimis Safe Harbor (previously discussed) – Routine Maintenance Safe Harbor – Safe Harbor for Small Taxpayers Unit of Property – Building and Building Systems Improvements (R estoration, A daptation, B etterment, I mprovement Costs )

6 Unit of Property (U of P) Defined Each separate building is by definition a U of P Must look at each building system as a separate U of P as well: – HVAC – Plumbing systems – Electrical systems – Escalators – Elevators – Fire protection – Security systems – Gas distribution systems For non-building property, a U of P is determined by whether or not the property/ component can function independently – If so, then it is defined as a U of P – If not, then it is a component of a larger U of P The smaller the U of P, the more likely capitalization will be required

7 “Use It or Lose It” Rules Must “scrub” depreciation schedules in 2014 looking for the following: – Repair and maintenance items that never should have been capitalized under the new R.A.B.I. criteria Optional “scrub” of depreciation schedule in 2014 looking for the following: – Impermissible methods (class life or bonus) – Prior year PAD’s (partial asset dispositions) – Items that qualify as “Routine Maintenance” – Writing off removal costs Then calculate the 481(a) adjustment – Equals the difference between what should have been taken and what was actually taken as a deduction

8 Annual Elections Expense Elections Capitalization Elections De Minimis Safe Harbor Election ** Safe Harbor for Small Taxpayers ** Partial Asset Disposition Election to capitalize and depreciate certain materials & supplies Election to capitalize repair and maintenance costs ** Election to capitalize employee compensation or overhead as part of acquisition costs of property

9 Accounting Method Changes (Required) #184 – Application of R.A.B.I – Routine Maintenance Safe Harbor – Identify U of P’s – Expensing R&M items previously capitalized #186/187 – Adopt new materials and supplies accounting method for non-incidental (#186) and ability to expense incidental amounts (#187) #192 – Facilitative and inherently facilitative costs must be capitalized for asset purchases

10 Proposed RD Handbook Changes Chapter 4: Financial Management Current Audit Determination Threshold UnitsReporting Requirement 24+ Audit, Agreed Upon Procedures & Owner's Self Certification Agreed Upon Procedures & Owner's Self Certification Under 15Owner's Self Certification

11 Proposed RD Handbook Changes Chapter 4: Financial Management Proposed Audit Determination Threshold If > $500,000 in combined federal assistance Audit w/ Opinion on Major Program & Owner's Self Certification If < $500,000 in combined federal assistanceMINC filing & Owner’s Self Certification If an audit is required by another organizationYou must submit a copy to RD (YB not required)

12 Proposed RD Handbook Changes Chapter 4: Financial Management Current "Compliance" Testing Requirements Internal Control Testing to meet GAGAS (Yellow Book) Agreed Upon Procedures (not really compliance testing) Operating and Administrative Expenses Identities of Interest Transactions Replacement Reserve Withdrawals & Funding

13 Proposed RD Handbook Changes Chapter 4: Financial Management Proposed Compliance Testing Requirements Compliance Testing to Issue an Audit Opinion on Compliance with Program Requirements related to: Mortgage Status Replacement Reserve Return on Investment (ROI) or Return to Owner (RTO)s Equity Skimming Tenant Security Deposits Cash Receipts & Cash Disbursements Management Functions Unauthorized Change of Ownership / Acquisition of Liabilities Unauthorized Loans of Project Funds

14 Proposed RD Handbook Changes Chapter 4: Financial Management Proposed Compliance Testing Requirements Internal Control Testing to meet GAGAS (Yellow Book) Tenant File Testing at the judgment of auditor to satisfy Yellow Book & GAAS standards Compliance Testing to Issue an Audit Opinion on Compliance with Program Requirements related to: Tenant File Testing is NOT covered under the Compliance Supplement

15 Overview of Audit Guide 12/19/13 – Draft Form Released 3/28/14 – Closed for Draft Comments 9/18/14 – Final Version Released

16 Excess Basis ActualForm 8609IRS Audit Eligible Basis$10,000,000$9,500,000 Applicable Fraction 100% Qualified Basis$10,000,000 $9,000,000$9,500,000 Tax Credit Percentage 9% Annual Tax Credits $900,000 $810,000 $855,000

17 Eligible Basis or Not? Relocation costs – expensed under IRC §162 Accounting costs Developer fee Land costs verses site improvements Bond issuance costs

18 Applicable Fraction Applicable fraction is total floor space (TFS) of Low Income units over TFS of residential units. Floor space includes the entire unit including closets and balconies. Applicable fraction in first year is the applicable fraction as of the end of each month over 12.

19 Casualty Loss Understanding whether recapture of previous credits or loss of current year credits applies Also applies to Bond deals

20 Nonprofit Set Aside IRC §42(h)(5)(B) – A qualified nonprofit organization is to own an interest in the project (directly or through a partnership) and materially participate (within the meaning of IRC §469(h)) in the development and operation of the project throughout the compliance period.

21 Taking Credits without Signed 8609s? When should you receive 8609s? What to do if they are delayed? Are you sure I can claim credits without my 8609s?

22 Who Gets What When the Partnership is Liquidated? Partnership Capital Accounts Partnership Agreement Back End Calculations

23 Partnership Capital Accounts All Partners in a Partnership Have a Capital Account Safe Harbor Capital Account Maintenance Rules under IRC 704(b) All Capital Accounts Start at Zero Increased by Capital Contributions Increased by Income & Gain Allocations Decreased by Loss & Deduction Allocations Decreased by Distributions Upon Liquidation, all Capital Accounts Return to Zero

24 Partnership Agreement Partnership Profit, Loss & Cash allocations controlled by Partnership Agreement Section 3.2 (m) – Allocations of Income or Gain from Sales Section 4.2 – Net Cash from Sales and Refinancings Section 10 – Dissolution and Termination of the Partnership

25 4% Deal Liquidation Calculation

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27 9% Deal Liquidation Calculation

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29 What If the Ultimate Allocations of Cash Aren’t What You Expected? Purpose of 704 Safe Harbor Flexibility relating to allocation provisions Avoid Triggering Threshold Tax Issues Substantial Economic Effect Boardwalk Issues (is the investor a limited partner at all?)

30 What to do for Old Deals: For Existing Deals Approaching Year 15: Stay out of the Liquidation Section of the Partnership Agreement Refinance instead of Selling Negotiate the purchase of the LP interest Manage the Tax Capital accounts – Generate more tax losses/agree to special allocations of income

31 What To Do for New Deals: Negotiate Special Gross Income Allocation Provisions Negotiate Right to Purchase LP Interests Modify Liquidation Events Forced Sale Rights Pricing

32 Any Questions? Todd Fentress, CPA – Shareholder, Clark Schaefer Hackett – Tim Smith, CPA – Partner, Bernard Robinson & Company – Edward Rebman, CPA – Principal, Maner Costerisan –


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