Taking advantage of repairs and maintenance opportunities in the restaurant industry
←
→
Page content transcription
If your browser does not render page correctly, please read the page content below
Taking advantage of repairs and
maintenance opportunities in the
restaurant industry
December 17, 2013
© 2013 Baker Tilly Virchow Krause, LLP
Baker Tilly refers to Baker Tilly Virchow Krause, LLP,
an independently owned and managed member of Baker Tilly International.
1Agenda
> Changes to the capitalization standards
> Routine maintenance safe harbor
> De minimis safe harbor
> Proposed partial disposition regulations
> Final thoughts
> Questions
2Background
Timeline
2003 FedEx case
January 2004 Notice 2004-6 (Notice of Proposed Rulemaking)
August 2006 2006 Proposed Regulations
March 2008 2008 Proposed Regulations
December 2011 2011 Temporary Regulations
• Rev. Proc. 2012-19 and Rev. Proc. 2012-20- Transition Rules for Implementing Temporary Regulations (covering years 2012 and 2013)
March 2012
• LB&I Exam Stand-Down Directive (covering years 2012 and 2013)
November 2012 Notice 2012-73 (Announcement to modify Temporary Regulations effective date and other aspects of the Temporary Regulations)
December 2012 Technical amendments to the Temporary Regulations (amended effective date)
March 2013 Revised LB&I Stand-Down Directive
September 2013 2013 FINAL REGULATIONS
3Overview
> The final regulations refine and simplify some of the rules in the
2011 temporary regulations and create a number of new safe
harbors.
– Adopt a revised and simplified de minimis safe harbor
– Extend the safe harbor for routine maintenance to buildings
– Add a safe harbor for small taxpayers
– Refine several of the criteria for defining betterments and restorations to
tangible property
– Propose new partial disposition rules
4Effective date
> The final regulations (T.D. 9636) are generally effective for tax
years beginning on or after Jan. 1, 2014.
> A taxpayer may choose to apply the final regulations to taxable
years beginning on or after Jan. 1, 2012.
> A taxpayer may elect to apply the temporary regulations
(T.D. 9564) to tax years beginning on or after Jan. 1, 2012, and
before Jan. 1, 2014.
> Transition relief for 2012 and 2013 tax returns available for
certain provisions.
> Revenue procedures with accounting method procedures
expected by the end of the year.
5Capitalization standards
6Unit of property (UoP)
Buildings Non-buildings
Default rule Plant property Network assets
Single UoP
Industry-specific
Functional Discrete and
facts and
interdependence major function
circumstances
7Unit of property for buildings
Final regulations
Pre-regulation law Capitalization standards must be applied separately to:
Building structure HVAC system
Electrical system
Plumbing system
Gas distribution
Building
Fire suppression
Elevators
Escalators
Building systems Building security
8Improvement standards
Improvement
Betterment Adaptation Restoration
9Improvement standards – betterment
> Betterment
– Ameliorates a material condition or defect at acquisition or production
– Material addition or expansion
– Reasonably expected to materially increase the productivity, efficiency, strength,
quality, or output
10Examples:
Betterments; materiality
Non-material increase in efficiency Material increase in efficiency
Facts: HVAC system has 10 roof-mounted units Added new insulation in an existing building
Replaces two units Reasonably expected to reduce energy and power
costs by 50%
Increase energy efficiency by 10%
Conclusion: 10% efficiency increase is not expected to Reasonably expected to materially increase the
materially increase the productivity, efficiency, efficiency of the building structure (by 50%)
strength, quality, or output of the HVAC system
Costs will be capitalized as a betterment
11Examples:
Betterments; retail remodels
Retail building refresh;
Retail building refresh Retail building remodel
limited improvement
Purpose: Maintain appearance and Maintain appearance and New market focus
functionality functionality
Increase storage space, add
second loading dock and
overhead door
Scope: Cosmetic and layout Cosmetic and layout changes Substantial renovation of
changes building structure, electrical
Construct an addition to the
system, and plumbing system
back of the building, add a
second loading dock, and add Clean, patch holes, repaint, and
another overhead door power wash
Conclusion: Not a betterment Store refresh - not a betterment Betterment
Additions - betterment
12Improvement standards – restoration
> Restoration
– Recognition of a loss on component
– Gain/loss on sale of component
– Basis adjustment as a result of a casualty loss
– Return to former operating condition – no longer functioning
– Rebuild the property to like-new condition after class life
– CLARIFICATION: Replacement of a major component/substantial structural part
13Application of restorations to buildings
> NEW: Major component definition
– Part or combination of parts that performs discrete and critical function in the
operation of the unit of property.
– An incidental component of the unit of property, even though such component
performs a discrete and critical function in the operation of the unit of property,
generally will not, by itself, constitute a major component.
> NEW: Substantial structural part definition
– Part or combination of parts that comprises a large portion of the physical
structure of the unit of property.
14Building structure and systems
Systems System major components
Structure Building and structural components other than structural components designated in another building system
HVAC Motors, compressors, boilers, furnace, chillers, pipes, ducts, radiators
Plumbing Pipes, drains, valves, sinks, bathtubs, toilets, water, and sanitary collection equipment, exterior site utility equipment
Electrical Wiring, outlets, junction boxes, lighting fixtures and associated connectors, exterior site utility equipment
Elevators/
All elevators/escalators
escalators
Fire Sensing devices, computer controls, sprinkler heads, sprinkler mains, associated piping and plumbing, pumps, visual and auditable alarms, alarm
protection control panels, heat and smoke detection devices, fire escapes, fire doors, emergency exit lighting and signage, fire fighting equipment
For the protection of the building and its occupants: window and door locks, security cameras, recorders, monitors, motion detectors, security
Security
lighting, alarm systems, entry and access systems, related junction boxes, wiring, and conduit
Gas
Associated pipes and equipment to distribute gas from and to the property and between buildings and structures
distribution
15Examples:
Major component or
substantial structural part
Roof HVAC
Facts: Replaced roof membrane to fix leaky roof with HVAC system includes many components including one
a comparable part chiller unit
The chiller unit is replaced with a comparable unit
Conclusion: The roof, including the membrane, is part of Chiller unit performs a discrete and critical function in the
the building structure operation of the HVAC system
The replacement is not considered a significant Chiller unit is a major component
portion of the roof major component
Treatment: Expense Capitalize
16Examples:
Major component or
substantial structural part
3 of 10 RTUs replaced, 30% of electrical wiring replaced in a
cost of $15,000 building, cost of $30,000
Temporary regulations Final regulations Temporary regulations Final regulations
UoP Building Building Building Building
Building structure/
HVAC HVAC Electrical Electrical
system
Building system
replacement cost $150,000 $150,000 $300,000 $300,000
new
Major component
performing discrete N/A RTUs N/A Electrical wiring
and critical function
Cost of RTUs $15,000 Units replaced 3 Cost of wiring $30,000
Analysis = 10% = 30% = 10% 30%
Building system Building system
replacement $150,000 Total units 10 replacement $300,000
cost cost
Treatment DEDUCTIBLE DEDUCTIBLE DEDUCTIBLE DEDUCTIBLE
17Examples:
Major component or
substantial structural part
20 of 20 sinks replaced, cost of $10,000; 8 of the 20 sinks are replaced,
30 of 30 toilets replaced, cost of $30,000 cost of $4,000
Temporary regulations Final regulations Temporary regulations Final regulations
UoP Building Building Building Building
Building structure/
Plumbing Plumbing Plumbing Plumbing
system
Building system
replacement cost $200,000 $200,000 $200,000 $200,000
new
Major component
performing discrete N/A Toilets AND sinks N/A Sinks
and critical function
Cost of
$40,000 Units replaced 20 30 Cost of sinks $4,000 Units replaced 8
replacement
Analysis = 20% = 100% = 2% = 40%
Building system Building system
replacement $200,000 Total units 20 30 replacement $200,000 Total units 20
cost cost
Treatment DEDUCTIBLE CAPITALIZE DEDUCTIBLE DEDUCTIBLE
18Examples:
Major component or
substantial structural part
100 of 300 exterior windows replaced, 200 of 300 exterior windows replaced,
cost of $50,000 cost of $100,000
Temporary regulations Final regulations Temporary regulations Final regulations
UoP Building Building Building Building
Building structure/
Building structure Building structure Building structure Building structure
system
Building system
replacement cost $750,000 $750,000 $750,000 $750,000
new
Major component
performing discrete N/A Windows N/A Windows
and critical function
Cost of Cost of
$50,000 Units replaced 100 $100,000 Units replaced 200
windows windows
Analysis = 6% = 33% = 13% = 67%
Building system Building system
replacement $750,000 Total units 300 replacement $750,000 Total units 300
cost cost
Treatment DEDUCTIBLE DEDUCTIBLE DEDUCTIBLE CAPITALIZE
19Improvement standards – new or different use
> A UoP is improved if the amounts paid result in an:
– Adaptation of the UoP to a new or different use
Examples: Not a new or different use New or different use
Facts: Operating grocery store adds a sushi bar Retail drug store creates a walk-in medical clinic
Conclusion: Consistent with intended, ordinary use of building Not consistent with the intended ordinary use of the building
at the time placed in service
Treatment: Expense Capitalize
20Election to capitalize repair and maintenance costs
> NEW: May elect to treat amounts paid during the taxable year
for repair and maintenance to tangible property as amounts
paid to improve that property if the taxpayer incurs these
amounts in carrying on the taxpayer’s trade or business and if
the taxpayer treats these amounts as capital expenditures on its
books and records.
> Applies to all amounts paid for repair and maintenance to
tangible property that it treats as capital expenditures on its
books and records in that taxable year.
> Annual irrevocable election made by attaching a statement to a
timely filed original federal tax return (including extensions) for
the taxable year in which the taxpayer pays these amounts.
> Must begin to depreciate the costs of improvements when they
are placed in service.
21Routine maintenance safe harbor
23Extension of routine maintenance
safe harbor to buildings
> NEW: Extend the application of the routine maintenance safe
harbor to buildings.
> Recurring activities that a taxpayer expects to perform as a result
of the taxpayer’s use of the building to keep the building structure
or system in its ordinarily efficient operating condition.
> The taxpayer must reasonably expect to perform the activities
more than once during a 10-year period beginning at the time
the building structure or building system is placed in service.
> Note: A taxpayer’s expectation will not be deemed unreasonable
merely because it does not actually perform the maintenance a
second time during the 10-year period—as long as the taxpayer
can otherwise substantiate that its expectation was reasonable
when the property was placed in service.
> Amounts incurred for activities that do not meet the safe harbor are
subject to analysis under the general rules for improvements.
24Examples
Qualifying routine maintenance Non-qualifying routine maintenance
Facts: Reasonably expected that every 4 years Purchased a used machine and expected to
maintenance would be performed on HVAC system perform maintenance every 3 years
In Year 4, a contractor is paid to perform At the time of purchase, the machine was close to
maintenance the 3-year scheduled maintenance
Maintenance was not performed again until Year 11
Conclusion: Amounts paid for maintenance in Year 4 and The costs were incurred as a result of the prior
Year 11 are qualified owner’s use of the property and do not qualify
Treatment: Expense Capitalize
25De minimis safe harbor
26Old rule
> Ceiling limitation
– The aggregate amount deducted is less than or equal to the greater of
» 0.1 percent of gross receipts for federal income tax purposes
OR
» 2 percent of total book depreciation and amortization expense
– Removed due to many unfavorable taxpayer comments
» Administrative burden – would be required to keep detailed accounts of
amounts generally not tracked because such amounts are expensed under
financial accounting capitalization policies.
27New safe harbor
> NEW: May rely on the safe harbor to expense tangible property
under a certain dollar threshold.
> Must have a written accounting procedure in place at the
beginning of the taxable year with a specified dollar amount and
does not exceed a per invoice or per item cost.
– For taxpayers with an applicable financial statement, the dollar amount is not to
exceed $5,000 per item.
– For taxpayers without an applicable financial statement, the dollar amount is not
to exceed $500 per item.
28Applicable financial statement
> A financial statement required to be filed with the Securities and
Exchange Commission (SEC) (the 10-K or the Annual Statement
to Shareholders);
> A certified audited financial statement that is accompanied by
the report of an independent certified public accountant (or, in
the case of a foreign entity, by the report of a similarly qualified
independent professional) that is used for:
– Credit purposes;
– Reporting to shareholders, partners, or similar persons; or
– Any other substantial non-tax purpose; or
> A financial statement (other than a tax return) required to be
provided to the federal or a state government or any federal or
state agency (other than the SEC or the IRS).
29Election details
> Safe harbor is elected annually by including a statement on a
timely filed original federal return (including extensions) for the
year elected.
> Must be applied to all amounts paid in the taxable year for
tangible property that meet the requirements of the de minimis
safe harbor, including amounts paid for materials and supplies.
– Except for materials and supplies that the taxpayer elects to capitalize and
depreciate; or
– Except for where the optional method of accounting is used for rotable and
temporary spare parts.
> Election may not be revoked.
> An election may not be made by filing an application for change
in accounting method.
30Examples
Taxpayer without an AFS Taxpayer with an AFS
Facts: 10 computers purchased for $600 each, 1,250 computers purchased for $5,000 each,
$6,000 total $6.25 million total
Accounting policy expenses amounts paid for Accounting policy expenses amounts paid for
property less than $1,000 property costing $5,000 or less
Conclusion: Amount paid for the property exceeds $500 Amounts paid meet the requirements for the
per invoice de minimis safe harbor
Does not meet requirements for the de minimis
safe harbor
Treatment: Capitalize Expense
31Proposed partial disposition
regulations
33Overview
> Proposed regulations include:
– General asset accounts
– Accounting for MACRS property
– Dispositions of MACRS property
> The 2013 proposed regulations apply to tax years beginning on
or after Jan. 1, 2014.
– Taxpayers may apply the proposed regulations early to tax years beginning on or
after Jan. 1, 2012.
> The 2011 temporary regulations have not been withdrawn.
34Old rule
> Under the 2011 temporary regs, taxpayers could elect to
recognize a loss upon the disposition of an asset in a general
asset account (GAA) if there was a “qualifying disposition” – or –
not recognize the loss and continue to depreciate the asset.
> “Qualifying disposition” was defined to include the retirement of a
structural component of a building.
– This was an awkward workaround to allow component disposition.
> Taxpayer comments: This approach is too complicated, too
burdensome, sets a trap for the unwary.
35New rule
> NEW RULE: Taxpayers may take a loss on the disposition of a
structural component of a building—or a portion of a structural
component of a building—without the GAA election.
– Loss must be recognized in the tax year of the disposition.
> Also, taxpayers may forgo a loss on the disposition of a
structural component of a building—or a portion of a structural
component of a building—without the GAA election.
> This PARTIAL DISPOSITION RULE is designed to minimize
situations where multiple versions of the same asset (e.g.,
building structural component) are on the books and being
depreciated simultaneously.
36Mechanics
> Election is made by the due date (including extensions) of the
original return for the tax year of the disposition.
> Election is made by reporting the gain or loss on the timely filed
original return for the year of the disposition.
> Transition relief for 2012 and 2013 returns.
– Amended return on or before 180 days from the extended due date, or
– Application for change in accounting method for first or second succeeding tax
year.
> Election may be revoked only via request for PLR.
37Reasonable method
> Taxpayers may use any reasonable method to determine the
basis of the asset or the portion of the asset disposed of,
including but not limited to:
– Discounting the replacement cost to the original placed-in-service year using the
Consumer Price Index.
– Allocating the original cost pro rata based on a ratio of the replacement cost of
the component to the replacement cost of the entire building.
– Conducting a study to allocate the original cost of the asset to its various
components.
38Example
> Taxpayer D replaces 60 percent of the roof of a retail building.
> Assume D must capitalize the costs incurred for replacing
60 percent of the roof pursuant to §1.263(a)-3(k)(1)(vi).
> D makes the partial disposition election provided under
Reg. §1.168(i)-1(d)(2) for the 60 percent of the replaced roof.
> Thus, the retirement of 60 percent of the roof is a disposition.
> Depreciation for 60 percent of the roof ceases at the time of its
retirement (taking into account the applicable convention), and D
recognizes a loss upon this retirement.
> Further, D must capitalize the amount paid for the 60 percent of
the roof pursuant to §1.263(a)-3(k)(1)(i) and (vi) and the
replacement of 60 percent of the roof is a separate asset.
39General asset account
> The partial disposition rule also applies to assets in a GAA;
however, there is a catch:
– The proposed regulations change the definition of “qualifying disposition” from a
GAA to include only casualty events, 1031/1033 exchanges, transactions under
168(i)(7)(B).
– The disposition of a structural component of a building is no longer a qualifying
disposition under the GAA rules.
– BUT – you don’t need the GAA anymore to take component dispositions.
– NOTE: GAA elections are irrevocable and cannot be unwound.
40Final thoughts
42Impact and considerations
> Capitalization standards
– Major components and substantial structural parts
» Greater level of detail required
» Interaction with facilities required
» Physical counts of:
‒ HVAC units
‒ Light fixtures
‒ Toilets
‒ Etc.
– Annual election to capitalize repair costs
» Taxable income planning
» Ability to implement repair study changes in fixed asset system
» Avoid book/tax differences
43Impact and considerations
> Routine maintenance safe harbor for buildings
– Documentation
– Could apply to “mandatory” franchisee refreshes
» But what if not expected twice in 10 years?
– If costs do not meet safe harbor, can still analyze under
improvement rules
> De minimis safe harbor
– Do you have a written financial accounting policy in place prior to
Jan. 1, 2014?
– Do you have an AFS?
– Does your current financial accounting policy exceed the safe harbor amount?
44Impact and considerations
> Proposed partial disposition regulations
– No annual GAA election required for buildings!
– Consider only when repair costs cannot be deducted – larger benefit.
– Complexities in identifying basis of partially disposed assets.
– Timing of final regulations:
» Depends on the nature of the comments received.
» Close to final form, aiming for early 2014.
45Disclosure
The content in this presentation is a resource for Baker Tilly Virchow Krause, LLP clients
and prospective clients. Nothing contained in this presentation shall be construed as
legal advice, opinion, or as an offer to buy or sell any property or services. In conformity
with U.S. Treasury Department Circular 230, tax advice contained in this communication
and any attachments is not intended to be used, and cannot be used, for the purpose of
avoiding penalties that may be imposed under the Internal Revenue Code, nor may any
such tax advice be used to promote, market or recommend to any person any
transaction or matter that is the subject of this communication and any attachments. The
intended recipients of this communication and any attachments are not subject to any
limitation on the disclosure of the tax treatment or tax structure of any transaction or
matter that is the subject of this communication and any attachments.
47You can also read
