Charles Duncan, Director, Cost Segregation & EPAct §179D

Charles Duncan, Director, Cost Segregation & EPAct §179D

During recent weeks, the Internal Revenue Service has issued guidance to postpone certain deadlines for taxpayers in counties in Florida and Texas affected by Hurricanes Irma and Harvey. As with other federally declared disasters, these hurricanes have revived interest in the tax effects of destroyed assets and recovery efforts.

Who is Affected?

Taxpayers residing in, or with businesses in, the following counties automatically qualify for the relief.

  • Texas: Aransas, Austin, Bastrop, Bee, Brazoria, Calhoun, Chambers, Colorado, DeWitt, Fayette, Fort Bend, Galveston, Goliad, Gonzales, Hardin, Harris, Jackson, Jasper, Jefferson, Karnes, Kleberg, Lavaca, Lee, Liberty, Matagorda, Montgomery, Newton, Nueces, Orange, Polk, Refugio, Sabine, San Jacinto, San Patricio, Tyler, Victoria, Walker, Waller, and Wharton counties.
  • Florida: Alachua, Baker, Bradford, Brevard, Broward, Charlotte, Citrus, Clay, Collier, Columbia, DeSoto, Duval, Flagler, Gilchrist, Glades, Hardee, Hendry, Hernando, Highlands, Hillsborough, Indian River, Lake, Lee, Levy, Manatee, Marion, Martin, Miami-Dade, Monroe, Nassau, Okeechobee, Orange, Osceola, Palm Beach, Pasco, Pinellas, Polk, Putnam, Sarasota, Seminole, St. Johns, St. Lucie, Sumter, Suwannee, Union, and Volusia counties.

What is Affected?

The relief provided by the Service primarily relates to postponing certain time-sensitive acts. These acts include filing certain tax returns and making estimated tax payments and have been delayed until January 31, 2018.

  • Texas: For taxpayers affected by Hurricane Harvey, the acts needed to have been performed starting on August 23rd.
  • Florida: For taxpayers affected by Hurricane Irma, this time period starts on September 4th.

For more information on how to determine which taxpayers and which deadlines are affected, practitioners should consult Regulation section 301.7508A-1 and Rev. Proc. 2007-56. As relevant to taxpayers interested in cost segregation or fixed asset issues, the time sensitive acts include the deadlines for automatic accounting method changes and nonautomatic accounting method changes.

Opportunities and Risks?

Until (and unless) Congress enacts legislation providing otherwise, the normal rules for casualty losses, involuntary conversions of property, and capitalizing improvements apply.

  • 280B: The most notable rule to be aware of is section 280B which places severe limitations on expensing the demolition of buildings:

If a taxpayer demolishes at least 75% of the internal structural framework and 75% of the exterior walls of a building, it must capitalize the demolished structure and the costs of demolition to a nondepreciable land account.

Section 280B is certainly pertinent to both Florida and Texas where many buildings will fail the two part test due to the extent of the damage. Fortunately, Congress has introduced legislation that would avoid the application of section 280B and the normal capitalization rules of section 263(a) for affected taxpayers in many situations.

  • Dispositions: Even though section 280B severely limits the availability of deductions when demolishing entire buildings, tangible personal property, non-building land improvements, and partial dispositions of buildings and their structural components may still be available. To determine the amount of dispositions, taxpayers first must determine the casualty loss, that is the lesser of the property’s adjusted basis or decrease in fair market value that is unreimbursed by insurance. Under current law, this deduction will affect the capitalization of replacements. Consider the following example:

A taxpayer owns an office building. The building is damaged by a hurricane. The taxpayer either deducts a casualty loss under section 165 because of the damage or receives insurance proceeds after the accident to compensate for the loss. The taxpayer properly reduces the basis of the building by the amount of the loss or by the amount of the insurance proceeds. If the reduction in basis is less than or equal to the taxpayer’s adjusted basis in the building, amounts paid to restore the damage to the building must be treated as an improvement and must be capitalized. Note: If the amounts paid to restore the property exceed the adjusted basis of the property prior to the loss, the amount required to be capitalized may be limited.

Since casualty loss-related dispositions are a mandatory partial disposition event, taxpayers who fail to identify these partial dispositions currently may do so in the future using a method change.

  • Declaration of a federal disaster area: Without waiting for Congress, the mere declaration of a federal disaster area allows taxpayers to access an advantageous rule for claiming casualty losses.

Affected taxpayers in a federally declared disaster area may either claim disaster-related casualty losses on their federal income tax returns for the year in which the event occurred or the prior year. If electing to claim the loss on the prior year return, the taxpayer must include a statement on or with the return. The statement must include the name or a description of the disaster giving rise to the loss, the date or dates of the disaster, and the city, town, county, state, and ZIP code where the damaged or destroyed property was located at the time of the disaster. The election must be made on or before the date that is six months after the regular due date for filing your original return (without extensions) for the tax year in which the disaster actually occurred. This would generally be September or October 15th, 2018 (depending on the type of return involved).

For more than 30 years, SourceHOV | Tax has helped companies properly identify and sustain tax incentive strategies including R&D tax credits, cost segregation studies, 179D tax deductions and LIFO inventory accounting.  For more information, please call 800.806.7626 or visit www.sourcehovtax.com.

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