iTaxBlog

SourceCorp recently experienced a situation where an auto dealer was notified by the IRS that their 2008 and 2009 tax years were the subject of a routine IRS exam. The IRS also indicated it would be looking at §263A issues during the exam. After some negotiation, the IRS said it was willing to drop prior year §263A issues if the auto dealer elects the Safe Harbors as outlined in Rev. Proc. 2010-44. In addition, the IRS required the dealer to adopt the Safe Harbors via Form 3115 for the 2010 tax year by the 9/15 extended due date.

The IRS’ willingness to allow the dealer to move to Safe Harbor methods is in keeping with what IRS Motor Vehicle Specialist Terri Harris relayed late last year when the Safe Harbor guidance came out. Terri’s comments indicated that the IRS would be lenient on dealers for the 2010 and 2011 tax years, giving them time to transition to the Safe Harbors method. After that, dealers may face less forgiving IRS agents.

SourceCorp works with many auto dealers and their CPAs and has developed a seamless solution for the adoption of both safe harbors. We continue to monitor this issue closely and will post additional updates to our blog as they arise. For further information, contact me directly at chris.henderson@sourcecorptax.com.

In January 2011, the IRS issued Revenue Procedure 2011-14 that provided an alternative accounting method for claiming the EPAct 179D tax deduction for sustainable design. Rather than amending tax returns, architectural firms that had not previously taken the deduction were allowed to claim the deduction on their current year’s return using a Form 3115 along with a certification report and an allocation letter.

However, this week, IRS author of 179D guidance, Jennifer Bernardini provided clarification with regard to Form 3115. While admitting that ambiguity exists in Rev Proc 2011-14, she stated the Office of Chief Counsel, the IRS division that reviews accounting methods, was unlikely to grant any accounting method change submitted by architects that have not previously claimed the 179D deduction. She also indicated the IRS is working on guidance that would clarify the ambiguity found in Rev Proc 2011-14 but gave no timetable.

While Ms. Bernardini’s comments represent her own opinion and not those of the IRS, her comments can be interpreted as the prevailing thought at the Service. As such, SourceCorp recommends filing amended returns to claim 179D deductions associated with projects completed in prior tax years. To ensure that all 2008 projects are reviewed while still under statute, firms should gather complete blueprints and specifications as well as applicable allocation letters as quickly as possible.

SourceCorp is keeping close tabs on this issue and will communicate further updates.

Equipment Manufacturer

A manufacturer of safety and personal protective equipment had been experiencing steady increases in material costs. The company had utilized the LIFO inventory method in the 1990s, but elected off of LIFO due to the complexities associated with the method. They decided to consider LIFO again as a means to free up cash to reinvest in the business for the 2010 tax year. A no cost analysis by SourceCorp Professional Services showed the company was experiencing 4% inflation, which yielded a first year LIFO Reserve of over $4.1 million – a tax deferral of over $550,000 in year one, which the company used to expand their business. They were also able to eliminate the concerns and complexities presented with their prior LIFO method by utilizing SourceCorp’s services.

Distributor

An aluminum distributor with roughly $20 million in inventory had been on LIFO for 15 years. While their current method had produced a sizeable LIFO Reserve over the years, the company was open to considering other LIFO methods. By changing to the IPIC LIFO method, the company was able to increase their LIFO Reserve by $2.5 million above their prior method for the 2010 tax year. The audit protection received as a result of the method change proved to be an additional benefit of electing IPIC.

From Federal Tax Updates Checkpoint Newsstand May 31, 2011

Businesses that trade in machinery or equipment for which they claimed bonus depreciation under Code Sec. 168(k) may qualify for another bonus depreciation deduction on the remaining depreciable basis if they swap for like-kind property that also is eligible under Code Sec. 168(k). In effect, the business gets two bonus depreciation deductions for its expenditure on the traded-in property. What’s more, this result is explicitly OK’d by the regs.

Background. Bonus first-year depreciation deductions are available for a property if: (1) it is property to which the modified accelerated cost recovery system (MACRS) rules apply with a recovery period of 20 years or less, computer software other than computer software covered by Code Sec. 197, qualified leasehold improvement property, or certain water utility property); (2) its original use commences with the taxpayer; and (3) it is timely bought and placed in service by the taxpayer.

The bonus first-year depreciation allowance is:

• 50% of the cost of qualified property acquired and placed in service after Dec. 31, 2007, and before Sept. 9, 2010;
• 100% of the cost of qualified property acquired and placed in service after Sept. 8, 2010 and before Jan. 1, 2012 (before Jan. 1, 2013 for certain longer-lived and transportation property); and
• 50% of the cost of qualified property acquired and placed in service after Dec. 31, 2011 and before Jan. 1, 2013 (after Dec. 31, 2012 and before Jan. 1, 2014 for certain longer-lived and transportation property). (Code Sec. 168(k)(2), Code Sec. 168(k)(5))

Note that 50% bonus depreciation also applied for certain qualified property acquired after May 5, 2003 and before Jan. 1, 2005, and 30% bonus depreciation applied for certain qualified property acquired after Sept. 10, 2001, and before May 6, 2003.

MACRS property may be acquired (1) in exchange for MACRS property in a Code Sec. 1031 like-kind property exchange, or (2) to replace involuntarily converted MACRS property in a Code Sec. 1033 involuntary conversion. (Reg. § 1.168(i)-6(c)(1)) The replacement property is for depreciation purposes divided into the depreciable exchanged basis (i.e., remaining basis of the relinquished property carried over to the replacement property), and the depreciable excess basis (i.e., additional consideration to acquire the replacement property). Where the properties share the same recovery class and depreciation method, the depreciable exchanged basis is written off over what’s left of the relinquished property’s recovery period; and the depreciable excess basis is in effect treated as a separate property with a recovery period that begins anew. (Reg. § 1.168(i)-6(c)(3)(ii))

Double helping on bonus depreciation. When otherwise eligible MACRS property or computer software is acquired via a Code Sec. 1031 like-kind exchange or as a result of a Code Sec. 1033 involuntary conversion, both the carryover basis and the excess basis, if any, of the acquired property are eligible for bonus depreciation. (Reg. § 1.168(k)-1(f)(5)(iii)(A)) What’s more, it doesn’t matter if bonus depreciation was claimed on the old property. (Reg. § 1.168(k)-1(f)(5)(vi), Ex. 3)

RIA illustration: In January of 2010, ABX Corp. bought a new refrigerator truck (5-year MACRS property) for $100,000 and placed it in service that year. In 2011, ABX acquires another new, higher-capacity refrigerator truck in exchange for the truck bought in 2010 by trading in that truck and paying $50,000 cash. ABX uses the optional rate tables to compute depreciation and is subject to the half-year convention in 2010 and 2011.

For 2010, ABX claimed 50% bonus first-year depreciation for the truck bought and placed in service that year. As a result, its 2010 depreciation deduction for the truck was $50,000 of bonus depreciation (.50 × $100,000) plus $10,000 of regular first-year depreciation allowance (.20 recovery year one table percentage for 5-year property × [$100,000 − $50,000 bonus depreciation]), for a total of $60,000.

For 2011, ABX claims an $8,000 depreciation deduction (.32 recovery year two table percentage for 5-year property × [$100,000 − $50,000 bonus depreciation] × 6/12 [half-year convention applies]) for the relinquished truck.

ABX may claim a 100% bonus first-year depreciation deduction for the $32,000 remaining depreciable basis of the relinquished truck, i.e., the depreciable exchanged basis ($100,000 cost − $60,000 − $8,000). ABX also may claim a 100% bonus first-year depreciation deduction for the $50,000 in cash that it pays to acquire the upgraded refrigerator truck.

RIA observation: In essence, for bonus depreciation purposes, the regs treat a taxpayer like ABX as if it had sold the old truck for its remaining depreciable basis and then used the proceeds, along with additional cash, to purchase a new one.

RIA caution: This won’t work if the older-model truck was acquired in January of this year and the newer model in December. Under Reg. § 1.168(k)-1(f)(5)(iii)(B), bonus depreciation isn’t allowable for the exchanged (or involuntarily converted) MACRS property if the exchanged (or involuntarily converted property) is placed in service and disposed of in a like-kind exchange or involuntary conversion in the same tax year.

While most people cringe at the thought of inflation, companies using the LIFO method of inventory valuation will be pleased to know that inflation is back. We’re finally starting to see good levels of inflation in many industries. For example:

• In the last year, Petroleum, lubricating oils, and greases, along with kerosene, jet fuels, and gasoline have experienced significant amounts of inflation.

• Copper, nickel ores and nonferrous metal ores are experiencing 31%-41% inflation so far in 2011.

Other industries experiencing inflation are:
• Recyclable Materials – Inflation was very high in 2010, and is still at 20% – 30% in 2011
• Animal and Pet Food manufacturing – Dog and cat food, along with other animal feeds are on the rise and currently at about 12% inflation.
• Yarn, thread, and fabrics – These have been consistently rising since early 2010, and inflation in 2011 is currently showing as much as 13% inflation.
• Grocery Items — Grocery items have been consistently on the rise for the last year and are currently experiencing 15% plus inflation.
• Paint and painting supplies and Wallpaper – Inflation has been on the rise and is about 7%.
• Cigarettes – Inflation averaged 6% in 2010, and is showing 8% in 2011.

While the word inflation generally has a bad connotation, in today’s economy inflation is a positive sign of growth. I’ll be making additional posts in the coming weeks outlining specific case studies of how inflation benefits many companies.

The U.S. Green Building Council – Central Ohio Chapter and the Construction Specifications Institute Columbus Chapter announce the first annual joint trade show and educational event to be held April 18, 2011 at COSI Columbus.

DesignColumbus2011 is an opportunity to learn about and engage in the transformation of the Central Ohio built environment to be more healthy, prosperous, and sustainable. With 16 educational seminars and a two-floor trade show, the event will highlight current and future development of technologies for all leaders in Central Ohio responsible for creating building and communities that promote economic growth and sustain the health and vitality of all life. SourceCorp’s Bob McPherson and Jeanne Briggs will lead an educational seminar on the EPAct 179D tax deduction.

This full day of continuing education and informational displays is organized to attract hundreds of professionals involved in the building industry. Attendees and participants are representatives of the entire project team, including architects, designers, engineers, owners, developers, government officials, municipal planners, facility managers, contractors, construction managers, construction specifiers, manufacturers, product representatives, and others.

For all attendees, the continuing education component includes opportunities for AIA and GBCI/ USGBC continuing education units (CEUs). These CEU opportunities are of tremendous value to AIA and LEED Accredited Professionals interested in maintaining their credentials in an ever more competitive marketplace.

WHERE: COSI, Center of Science and Industry 333 West Broad Street Columbus, OH 43215
WHEN: Monday, April 18, 2011 from 10:30 AM – 6:00 PM (ET)
INDUSTRY: Building Design and Construction

REGISTRATION:
Attendees: http://designcolumbus2011.eventbrite.com
Sponsors: http://designcolumbus2011sponsorship.eventbrite.com

Architectural firms in charge of the design of public schools, government and municipal buildings are eligible to claim the EPAct §179D tax deduction for sustainable design. This deduction was part of the Energy Policy Act of 2005 and was intended as an incentive for architects to incorporate energy-efficient building components in their designs. Until recently, firms were limited by a three-year rolling statute to claim the deduction on amended tax returns.

However, in January 2011, the IRS issued Revenue Procedure 2011-14 that provided an alternative accounting method. Rather than amending tax returns, architectural firms that have not previously taken the deduction may go back as far as 2006 and claim the deduction on their current year’s return using a Form 3115. A certification report and allocation letter must be filed with the Form 3115.

In most cases, claiming the §179D deduction on a Form 3115 is the preferred method. However, if a firm has already claimed the deduction on amended returns, their accounting method is established and should remain the same. For more information on the EPAct §179D tax deduction, please contact me at chris.henderson@sourcecorptax.com.

If you plan to expand your business, 2011 is a great time to invest in new equipment or building assets and benefit from newly expanded tax incentives. In his state of the union speech, President Obama highlighted the recently passed Tax Relief, Unemployment Insurance Reauthorization, and Job Creation Act of 2010 signed into law December 17, 2010. As he said “Thanks to the tax cuts we passed, Americans’ paychecks are a little bigger today. Every business can write off the full cost of new investments they make this year.”

For businesses with projects that qualify for tax incentives such as cost segregation, the benefits for 2011 will be substantial. A taxpayer must meet specific requirements to utilize this tax deduction. Qualifying property generally includes: depreciable property with a recovery period of 20 years or less; water utility property; computer software; and qualified leasehold improvements. A cost segregation analysis is a method of identifying the maximum amount of qualifying property (property with a recovery period of 20 years or less) and separating those costs from the real property assets associated with a new building or expansion project.

Also, included in the tax relief act is a two-year extension of the 50 percent, first-year additional bonus depreciation allowance which applies to qualifying property acquired by a taxpayer from January 1, 2008 through December 31, 2012, and placed in service before January 1, 2013. The bonus depreciation rate increases from 50 percent to 100 percent in the case of qualifying property acquired after September 8, 2010, but before January 1, 2012, and placed in service before January 1, 2012.

To learn more about a no-cost estimate for a cost segregation analysis, please contact me at Bob.McPherson@sourcecorptax.com.

Companies on LIFO should explore the IPIC LIFO method as a way to potentially increase their LIFO benefit for 2010. There are some key dates related to this type of method change. Once a company has completed their 2010 LIFO calculation, an IPIC LIFO estimate should be performed to determine the tax benefit of moving to the IPIC LIFO method. SourceCorp can prepare this estimate at no cost– the estimate phase typically takes 7 to 10 business days.

If a company does decide to make a method change and elect the IPIC LIFO method, the company has until the extended due date of the tax return to make the change. An IPIC LIFO implementation generally takes four weeks to complete. This means that if a 12/31/10 year-end company plans on filing a timely tax return on March 15, 2011, SourceCorp should begin the estimate phase by mid-January.

Should a LIFO taxpayer decide to evaluate the IPIC method after the return is filed on March 15, there is still time to make a method change for the 2010 year-end. Because a taxpayer has until the extended due date to make the method change, an amended tax return can be filed as late as 9/15/2011. This applies only to taxpayers already using a form of LIFO that included a LIFO adjustment when filing the annual financial statements for the 2010 year end.

To learn more about a no-cost analysis of the IPIC LIFO method, please contact me at Chandry.Jimenez@sourcecorptax.com.

Taxpayers on LIFO are likely familiar with the conformity requirement, which states that companies using the LIFO method for tax purposes must also use the LIFO method for financial reporting purposes. Because of this, some LIFO taxpayers are hesitant to maximize their LIFO reserve due to concerns that doing so may cause covenant issues with their banks or other lenders. Where LIFO is concerned, the more tax savings generated from the LIFO method results in the appearance of lower profits from a financial reporting standpoint.

What LIFO taxpayers may not be aware of is the fact that the conformity requirement does not demand taxpayers utilize the same LIFO method for book and tax purposes. This exception allows companies on LIFO the opportunity to utilize a more beneficial LIFO method for tax purposes while using a different LIFO method for book purposes. Generally, the IPIC (Inventory Price Index Computation) LIFO method is the most advantageous LIFO method for tax purposes.

Unlike traditional LIFO methods, IPIC measures inflation based on published indexes that are tracked and maintained by the Bureau of Labor Statistics (BLS). In most cases, the published indexes result in higher inflation than companies experience internally. Any company interested in maximizing their LIFO reserve for tax purposes, while minimizing the LIFO impact for book purposes, should explore converting to the IPIC LIFO method. SourceCorp Professional Services can perform a no-cost analysis to determine the potential tax savings of moving to the IPIC method.