Repair Regs Still Offer Opportunity for 2014 Tax Filing Season– June 05, 2015 by Adam Hill

Our Real Estate Roundtable yesterday held at Embassy Suites in Beachwood, Ohio, focused on the complex Repair and Maintenance Regulations that went into effect in January 2014. Lisa Loychik of Cohen & Company kicked off the event by taking a deep dive into the regulations noting key areas, such as determining what a Unit of Property (UOP) is, addressing RABI rules, replacing IRC Section 110 language in leases with more favorable terms, and opportunities related to tenant improvements. She also looked at real-world examples our firm encountered during the 2014 tax season, such as how to apply the regulations to multi-tenant buildings. A panel of experts, including Lisa, Kim Palmer of Cohen & Company, Kevin Murphy of Walter & Haverfield LLP and Craig Miller of Cost Segregation Services, Inc. spent the remainder of the seminar discussing a variety of scenarios on how to apply the regulations.

Overall, the main theme that emerged was opportunity. The 2014 tax filing season is the only year to take advantage of certain deductions, applied retrospectively, related to the new regulations, and the routine maintenance provisions and "rule of 1" have led to significant favorable 481a adjustments (immediate write-off of deductions).

Below are a few of the other opportunities and recommendations our panelists highlighted:

  • Any business with assets on the books should consider filing Form 3115 (Change in Accounting Method) to take advantage of the opportunities that may exist and to provide audit protection from the IRS, even if there is no change. (Note:Any business with assets or income over $10 million must file Form 3115 to adopt the new method changes or this could be a red flag to the IRS).
  • It’s critical to understand what constitutes a UOP (read about the nine building systems in our Taxonomics article) to understand if you have a capitalization or expense, and then analyze the expenditure against the UOP to determine if the expenditure results in a betterment, restoration or adaption.
  • Ensure leases do not include IRC Section 110 language so as to avoid mandatory capitalizations. There is planning that can be done to specifically address this risk/opportunity.
  • Rev Proc 2015-20 Taxpayer Relief for Small Taxpayers, allowing qualifying small businesses to forego filing Form 3115, actually may do more of a disservice to affected businesses. There may be a great opportunity in filing the form anyway. (Read Lisa Loychik’s blog on the topic.)
  • Take advantage of the routine maintenance safe harbor, especially for retail restaurants, high turnover properties, etc. making improvements related to areas such as landscaping, painting, parking lot sealcoating, sprinkler head maintenance, etc. These types of routine maintenance should not be capitalized; in fact, you could be sitting on tens or hundreds of thousands of dollars of immediate write-off deductions only available through the 2014 filing season.
  • Analyze every large expenditure you have and bring your team of advisors (accountants and lawyers, particularly on the leasing side) in early to make sure you maximize all opportunities.

Practitioners continue to grapple with the intent of the IRS in its application of the new regulations. Until we receive further clarification, the facts and examples currently presented leave us with a favorable set of rules for repairs and maintenance — for those who take advantage before the September filing extension deadline!

Contact Adam if you would like a copy of Cohen & Company’s Client Guide to the Repair Regulations for further information or if you’ve already filed your 2014 tax returns and think you may have missed an opportunity.

Cohen & Company is not rendering legal, accounting or other professional advice. Any action taken based on information in this publication should be taken only after a detailed review of the specific facts and circumstances.