ETS Specialty Tax Update & Final Repair Overview

1. Presented by: Michael F. D’Onofrio
Engineering & Specialty Tax
Solutions
Cost Segregation
Energy Tax Incentives (179 & 45L)
Insurance Replacement Appraisals
Property Tax Appeals
New IRS Tangible Property Regs

2. Learning Objectives
Cost Segregation
Energy Tax Incentives
Abandonment/Disposition
Tangible Property Changes
Construction Tax Planning

3. ENGINEERED TAX SERVICES
National Basis
Specializes in
engineering
studies for
tax strategies
Licensed
Engineering
Firm with 16
offices across
the U.S.A
Results
Tremendous
Revenue
generated for
ETS Partners
Achievements
ETS averages
$24,500,000 in
monthly refunds
and tax benefits
for architects,
contractors and
engineering firms
involved in Public
Building designs.
Clients
Clients include
IKEA, JW
Marriott, Boeing,
Snowbird Ski
Resort, Ford,
BMW, Outback,
top 100 CPA
firms and
Architectural
firms
Partners
Energy Star,
USGBC,
NAIOP
and
ASHRAE
Approved For
Learning Units
AIA, USGBC,
NSPE

4. Presented by: Michael F. D’Onofrio
Engineering-Based
Cost Segregation

5. COST SEG AND 263(a)
Hidden Opportunities For Property Owners
• Pre-Construction Tax & Energy Planning
• Energy Audit & Efficiency Studies
• Detailed Engineering Cost Segregation
• DEIRA Insurance Replacement Appraisals
• Abandonment & Disposition
• Energy Tax Incentives (179D / 45L)

6. COST SEGREGATION
Cost Segregation Analysis will methodically
review property, plant and equipment and
properly reclassify Real Property (generally
depreciated over a period of either 27.5 year or
39 years) into Personal Property (generally
depreciated over a period of either 3, 5, 7 or 15
years).
How is this done? Yes, the IRS allows it …
• Drawings / Blueprints are reviewed and site
visits conducted to review the building as part
of a detailed Cost Segregation Analysis.
• Can also go back retroactively 5-10 years!
• Generally Requires the filing Form 3115

7. Next Generation
Cost Segregation Studies

8. COST SEGREGATION
Benefits are More than just Accelerated Depreciation
• 2014 Bonus Depreciation Extended at 50%
• Select Transportation and longer period
Production Property is eligible for 50% bonus
depreciation through 2014
• Annual Abandonment and Disposition
• Annual Repair & Maintenance updates
• Insurance Replacement Appraisal (DEIRA)
• TPR Regs - Expensing vs. Capitalization
• 179D & 45L –Energy Tax Incentives

9. TIMING ILLUSTRATION

10. WHICH PROPERTIES BENEFIT MOST?
18%
18%
18%
19%
21%
23%
24%
24%
25%
25%
25%
26%
27%
27%
27%
29%
31%
31%
32%
33%
33%
34%
34%
38%
0% 20% 40% 60% 80% 100%
M anufacturing & Processing
Airport Hangers
Distribution Centers
Industrial
Shopping Centers
Auto Service Centers
M arinas
Post Office
Office Buildings
Department Stores
Fitness Centers
Auto Dealerships
Day Care Centers
Hospitals
Warehouses
M edical/Surgical
Banks
Laboratory/Research
Nursing Homes/Assisted Living
Hotels
Leasehold Improvements
Residential Rentals
Restaurants
Resorts
Personal Property
Real Property
Property Type Percentage Reallocated

11. Presented by: Michael F. D’Onofrio
EPAct 179D & 45L
Federal & State
Energy Tax Incentives

12. 179D / EPACT OVERVIEW
• Incentivize Energy Efficient Green Building
• New Construction or Renovations
• Placed in Services Dates of:
Jan 1, 2006 – Dec 31, 2014
• Up to $1.80 per sf foot Tax Deduction
• Possible Extension Through 2016
• Benefits Private Property Owner
OR
• Designers/Contractors of Public Buildings

13. • Upgrades, Renovations and Retrofits
• Commercial and Residential (4+ stories)
• LEED Certified Buildings
• Green / Energy-Efficient Buildings
• Architects, Engineers and Contractors
(3-Yr Look-back)
• Types: Schools, Government, Office, Retail,
Hospitality, Industrial, Manufacturing,
Healthcare, Parking Garages
179D CANDIDATES

14. CALCULATION/REQUIREMENTS
Lighting HVAC Envelope Whole
Building
Deduction/SF .60 .60 .60 $1.80
2006 Notice 16 2/3% 16 2/3% 16 2/3% 50%
2008 Notice 20% 20% 10% 50%
2012 Notice 25% 15% 10% 50%
3 Methods for Meeting
179D Certification Requirements
Improvements Require Reduction in
Energy Consumption Compared to
ASHRAE 90.1-2001 Standards

15. 179D CERTIFYING PARTY
IRS Code States the Certifying Party must be:
• “Qualified Individual”
• Unrelated, Third-Part, Independent
• Professionally Licensed Individual in the
jurisdiction where the building is located.
• Must present to the taxpayer in writing the IRS
required documents and requisite qualifications.
• CPA must verify validity of BOTH the inspection
and signing parties.

16. Over $119,390 Energy Tax Deduction
Hampton Inn, Gainesville
66,328 Square Feet
CASE STUDY - HOSPITALITY

17. GHG Cost Segregation Study Proposal
Client Overview:
A group of Doctors own an older medical clinic
with multiple 754 step-ups and significant renovations
and additions in previous years. The majority of the
property is depreciated on a straight line 39-year basis.
ETS Proposal:
There are benefits available to the client for
Energy Efficient systems, Abandonment of previously
removed systems, and accelerated depreciation
through Cost Segregation with 25% estimated
reclassification, reports also comply with Tangible
Property regs for capitalization and deduction.
Initial analysis estimates immediate deductions of over
$800,000 to be carried over on Form 3115 via 481 Adj.

18. GHG Cost Segregation Results
Class - life Depreciation Method Basis % of Reclassification
5 Year 200% db $1,744,892.03 31.56%
15 Year 150% db $175,195.39 3.17%
39 Year Straight-line $3,609,449.40 65.27%
179D Results $18,849.90
Total: $5,548,386.72 100%
Total 481 Adjustment $877,220.88 X 42.5 % $372,818.87 cash
Total Engineering Fee: -$19,477.29

19. Qualifies for (per Square Foot)*
Job Number Project Name
Fully
Qualifying
Property
(>50%)
Partially Qualifying Property
Total
Total Square
Footage
Total Tax
BenefitEnvelope HVAC Lighting
ET-13070-12 Parkside Professional Village (1, 2, 3)
DNQ $0.60
DNQ(4)
- $0.60 26,479 $15,887.40
- - $0.30 $0.30 9,875 $2,962.50
% Improvement Contribution 30.72% 1.86% -
Lighting Power Density % Reduction - - 25.16%
Total: $18,849.90
179D Energy Case Study
Medical Clinic Client – 179D Results

20. Over $240,000 Energy Tax Deduction
Corporate Centre – Office Towers at Boca Village
Envelope 106,957 square feet
Lighting 220,220 square feet
HVAC 106,957 square feet
CASE STUDY - OFFICE

21. Public Buildings – Architect Benefits
Year Tax Benefit Year Tax Benefit
2010 $341,547.00 2009 $165,706.80
2011 $375,731.60 2010 $150,414.60
2012 $346,983.10 2011 $95,118.00
2012 $415,270.80
TOTAL TAX BENEFIT $1,064,261.70 TOTAL TAX BENEFIT $826,510.20
CASE STUDY - DESIGNERS

22. UPCOMING 179D CHANGES
S.3591 “Commercial Building Modernization Act”
• Proposed Changes
• Deduction from $1.00 - $4.00 per sq. ft.
• Allocation from non-profits and REIT’s
• Possible Extension to December 2016
• Will encourage efficiencies for existing
buildings
• Scales the Tax Deduction by Reduction %
• Updated Standards
• AHSRAE 90.1-2004 for 2012-2014
• ASHRAE 90.1-2007 for 2015-2016

23. ABANDONMENT
“Method of disposing of the value of an asset that
has been retrofitted for an immediate tax deduction”
Often times the existing system of a
retrofit (Lights, HVAC, Roof, etc) remains
on the 39-year schedule for deduction.
ETS increases the value of Cost Seg and
179D by incorporating Abandonment
and Partial Dispositions into their study
for an serious increased cash benefit and
reduced ROI.

24. ABANDONMENT (162)
$80,000 Lighting System
10 Years Old
60,000 square foot building
• Depreciate $2,051/yr (on 39 yr CL)
• $2,051 x 10(yr) = $20,510
• $80,000 - $20,510 = $59,490 (Abandonment)
• 60,000 x $.60 = $36,000 (179D)
Abandonment $59,490
179D $36,000
Total $95,490
($95,490 x 35% Tax Rate) $33,422 CASH Benefit

25. LEARNING OBJECTIVES
Overview of regulations
Materials & Supplies/Safe Harbors/De Minimis
Rules
Abandonment/Disposition of tangible property
Improvements: Units of Property
Betterments, Restorations, Adaptations
Capitalize or deduct – examples from the regulations

26. RECENT HISTORY OF REGS
• Temporary Regs Issued on 12/23/2011
• Effective 1/1/2012
• Revision Made 11/20/2012
• Changed to be Announced
• Effective Date of Regs Delayed to 1/1/2014
• Final & Proposed Regs Issued 9/13/2013
• Effective Date of 1/1/2014
• Further Guidance to be Finalized by Year-End
• The option for Early Adoption
The final treasury regulations expand, modify and
clarify the scope and application governing I.R.C. §§
162(a) and 263(a).

27. OVERVIEW: HIGHLIGHTS
The final Repair Regs include the following:
• IRC 168 Regs related to depreciation are proposed
• IRC 162 Regs relate to what can be expensed
• Materials and supplies (Reg. 1.162-3)
• Repairs and maintenance (Reg. 1.162-4)
• IRC 263 Regs relate to what can be capitalized
• Capital expenditures (Reg. 1.263(a)-1)
• Amounts paid for the acquisition or production of tangible property (Reg.
1.263(a)-2)
• Amounts paid for improvement of tangible property (Reg. 1.263(a)-3)
The Treasury did not finalize companion regulations governing general
asset accounts and the disposition of depreciable property under I.R.C. §
168. Instead, the Treasury issued proposed regs and indicated that the
proposed regs would be made final by the end of 2013.

28. OVERVIEW: HIGHLIGHTS
The final Repair Regs make the following
significant changes:
• A revised and simplified de minimis safe harbor
rule
• The extension of the safe harbor for routine
maintenance to buildings
• An annual election for buildings that cost $1
million or less to deduct up to $10,000 of
maintenance costs
• A new annual election to capitalize repair costs
that are capitalized on the taxpayer’s books
• The refinement of the criteria for defining
betterments and restorations

29. OVERVIEW: TIMELINE
While generally effective for tax years beginning on
or after January 1, 2014, taxpayers have the option
of applying the final Repair Regs to tax years
beginning on or after January 1, 2012.
Taxpayers can comply with the Repair Regs by:
1. Continuing to use the existing method
under the temporary regulations for
2012 and 2013 tax years,
2. Adopting the final regulations for 2012
and 2013, or
3. Adopting the final regulations for 2014.

30. All taxpayers must comply with the final
Repair Regs for the tax years beginning on
or after January 1, 2014.
At a minimum, all taxpayers need to put
procedures in place to comply with the
Repair Regs before the start of 2014. They
should also consider filing amended
returns for 2012 and 2013 to make certain
elections provided in the final Repair Regs.
OVERVIEW: TIMELINE

31. MATERIALS & SUPPLIES
Defined as tangible property used & consumed in the
taxpayer’s operations that is not inventory and:
• A unit of property with a cost of $200 or less (increased
from $100)
• Is fuel, lubricants, water or other consumable with an
expected life of 12 months or less.
• Fall within the IRS definition of materials & supplies
• Is purchased in order to maintain, repair or improve
tangible property.
• Simplify the application of the de minimis safe harbor to
materials and supplies.
The Treasury reasoned that the new $200 amount will “capture
many common supplies such as calculators and coffee makers.”

32. Routine maintenance Safe Harbor
• The final regs also allow routine maintenance on
fixed assets -- including routine building
maintenance -- to be deducted for tax purposes.
• Routine maintenance costs are recurring activities
you expect to perform to keep the property in its
ordinarily efficient operating condition.
– Examples include inspection, cleaning, testing
and replacing parts.
Routine Maintenance

33. Safe Harbor for Maintenance
Routine maintenance safe harbor
• To qualify as "routine," you must expect, at the
time the property was placed in service, to
perform the activity more than once during its
economic useful life.
• For building improvements to qualify under the
routine maintenance safe harbor, you must expect
to perform the activity more than once in 10
years.

34. REPAIR & MAINTENANCE
COSTS: ELECT TO CAPITALIZE
New Election to Capitalize Rule
The final Repair Regs allow taxpayers to
elect to opt out of expensing repair and
maintenance costs if the costs are
treated as capital expenses on the
taxpayers books and records.
This election is permanent.
It allows taxpayers to align their tax
treatment with book treatment,
eliminating book-to-tax differences.

35. De minimis Safe Harbor
De Minimis Safe Harbor for Acquisitions
• Many taxpayers prefer to use the same capitalization methods
for book and tax purposes.
• The final regs permit (ANNUAL safe harbor election) certain
taxpayers to deduct tangible property they acquire or produce, if
the total cost per item (or invoice) is $5,000 or less.
• To qualify for this safe harbor, you must:
– Prepare an "applicable financial statement." That is, a certified
audited financial statement or a financial statement filed with a state
or local government.
– Possess a written accounting procedure at the beginning of the tax
year for expensing property under a specified dollar amount.
– Expense the cost on your applicable financial statement, not just
your tax return.
• The de minimis safe harbor also applies to property with an
economic useful life of 12 months or less as long as the item
does not cost more than $5,000 per item (or per invoice).

36. De minimis Safe Harbor (cont.)
De Minimis Safe Harbor for
Acquisitions
• Many private taxpayers do not prepare "applicable
financial statements.“
• Example: They might prepare financial statements in-
house or have them compiled by a CPA.
• Taxpayers without applicable financial statements are
subject to a $500 capitalization threshold.
• However - to qualify for the lesser amount, you still
must have accounting procedures in place at the
beginning of the tax year for expensing property
below the threshold.

37. De minimis Safe Harbor
De Minimis Safe Harbor for Acquisitions
• In addition, if you elect to use this safe harbor
on your tax return, you must use the de minimis
safe harbor for all amounts paid in the taxable
year for tangible property -- including materials
and supplies -- that meet the requirements.
• You can only revoke an election to use the de
minimis safe harbor by filing an application for
change in accounting method.
• If you do not currently have a written policy for
expensing property under a specified dollar
amount, consider drafting one before year end,
if you plan to elect the de minimis safe harbor in
2014.

38. Small Business Safe Harbor
Small Business Safe Harbor
• The final regs offer a break to small businesses with
gross receipts of $10 million (or less) when it comes to
building improvements.
• For buildings that initially cost $1 million or less,
qualifying small taxpayers may elect to deduct the
lesser of $10,000 or 2 percent of the adjusted basis of
the property for repairs, maintenance, improvements
and similar activities each year.
• You may elect annually to use the safe harbor for
buildings on a building-by-building basis by including a
statement on your federal tax return.
• Amounts to which you correctly apply this safe harbor
are not treated as capitalizable building
improvements under Section 263; instead, they are
expensed under Section 162.

39. DE MINIMIS / SAFE HARBOR
RULE ANNUAL ELECTION
De Minimis / Safe Harbor rule is elected annually by
attaching a statement to a timely filed tax return
The final Repair Regs provide that:
– The de minimis rule is a safe harbor elected annually
by including a statement on the taxpayer’s timely
filed original federal tax return for the year elected.
– If elected, the de minimis safe harbor must be
applied to all amounts paid in the tax year for
tangible property that meet the requirements of the
de minimis safe harbor, including amounts paid for
materials and supplies that meet the requirements.
Functional Interdependent: all components of property that
are functionally interdependent comprise a single unit of
property. Components are functionally interdependent if the
placing in service of one component is dependent on the
placing in service of the other component (Temp. Regs. Sec.
1.263(a)-3T(e)(3)(i)).

40. Deduct vs. Capitalize
Determination is “highly factual”
• Guidance revolves around what constitutes the Unit
of Property that is being repaired or improved.
• Must analyze each cost in the context of the “Unit of
Property”
• $10,000 cost. Unit of Property = $30,000 –
Improvement
• $10,000 cost. Unit of Property = $300,000 ‐Repair
• Same cost, but facts and circumstances require a diff
erent treatment!
Smaller the Unit of Property, more likely to capitalize

41. IMPROVEMENTS
The final Repair Regs continue to require
capitalization of amounts paid to improve tangible
property. Property is improved if it results in a:
Betterment Test Does it Increase the Value?
Restoration Test Does it Increase the Life?
Adaptation Test Does it Change the Use?
“keep the property in ordinary efficient
operating condition.”
© 2013 – Engineered Tax Services

42. IMPROVEMENTS:
UNIT OF PROPERTY DEFINED
Defining the Unit of Property (“UOP”):
• Components that are functionally
interdependent. Defined as: Functional
Interdependent: all components of property that are
functionally interdependent comprise a single unit of
property. Components are functionally interdependent if the
placing in service of one component is dependent on the
placing in service of the other component (Temp. Regs. Sec.
1.263(a)-3T(e)(3)(i)).
• New regulations include specifications to plant
property, networks and buildings.
– Plant property individual UOP is now defined
as components that perform a discrete and
major function within a larger independent
UOP.

43. When Do I Capitalize
an Improvement?
Determine if Expenditure is Improvement
Betterment Restoration Adaptation
Identify Unit of Property
Buildings Plant Property Network Assets
Functional
Interdependence
If Exceptions Do Not Apply – Then Proceed
Potential Exceptions to Capitalization
Routine Maintenance
Safe Harbor
De Minimis Safe Harbor
Small Taxpayer Safe
Harbor

44. UNIT OF PROPERTY:
STRUCTURAL COMPONENTS
Building structure - this includes walls, windows, doors, concrete & roof
The nine building systems as defined by the IRS are:
1. HVAC
2. Plumbing
3. Electrical
4. Escalators
5. Elevators
6. Fire suppression and alarm
7. Security
8. Gas distribution
9. Any other systems identified in published guidance
New regulations define the UOP between lessor and lessee relationships:
For Lessor –
UOP = Portion Leased ÷ 9 building systems
For Lessee –
TIs are NOT a separate UOP from the larger unit. Rather UOP is
identified as:
Leased Space ÷ TIs ÷ 9 building systems

45. UNIT OF PROPERTY: EXAMPLE
Cost segregation studies can be used to
make these determinations easier for the taxpayer.
Without cost segregation:
• UOP = Building / 9 systems
With cost segregation:
• UOP = Building x 2 / 9 systems (i.e., lighting in 1245 & lighting in 1250)
Example 18, pg. 144. Additional rules; change in subsequent year. In Year
1, T acquired and placed in service a building and parking lot for use in its
retail operations. Under Treas. Reg. § 1.263(a)-2, T capitalized the cost of
the building and the parking lot and began depreciating the building and
the parking lot as nonresidential real property under I.R.C. § 168(e). In
Year 3, T completed a cost segregation study under which it properly
determined that the parking lot qualified as 15-year property under
section I.R.C. § 168(e). In Year 3, T changed its method of accounting for
the parking lot to use a 15-year recovery period and the 150-percent
declining balance method of depreciation. Under Treas. Reg. § 1.263(a)-
2(e)(5)(ii), beginning in Year 3, T must treat the parking lot as a unit of
property separate from the building.

46. IMPROVEMENTS:
BETTERMENTS
Clarity of the Rules Governing Betterments
The final Repair Regs reorganize and clarify the types of
activities that constitute betterments to property.
Also, the final Repair Regs no longer phrase the
betterment test in terms of amounts that “result in” a
betterment.
Rather, the final Repair Regs provide that a taxpayer must
capitalize amounts that are reasonably expected to
materially increase the productivity, efficiency, strength,
quality, or output of a unit of property or that are for a
material addition to a unit of property.
Eliminating the “results in” standard is aimed at reducing
controversy for expenditures that span more than one tax
year or when the outcome of the expenditure is uncertain
when the expenditure is incurred.

47. Betterment Examples
Retailer ‐ changes layout and appearance of stores,
reconfigures display tables and racks to provide
better exposure of merchandise, corresponding lighting,
moving one wall to accommodate reconfiguration of tables
and racks, repainting, patching holes in walls, replacing da
maged floor and ceiling tiles and power washing building e
xteriors.
• Not material increase in capacity,
productivity, efficiency, strength or
quality of the stores.
• Costs for section 1250 property do Not
result in betterments!
• However, X must capitalize
amounts for section 1245 property
in accordance with §1.263(a)‐2T(d)(1)

48. Continued Example
Same facts as example 6.
• In addition to refresh items, changes layout in
order to increase traffic and sales volume.
• Moves changing rooms and specialty departm
ents to different areas; replace conventional d
oors with automatic doors; replace carpet with
ceramic tile to delineate departments and di
rect customer traffic.
• Includes upgrades to electrical system to add vi
deo monitors. Replaces lighting with more eff
icient, brighter lighting.
• Lighting change materially increase efficiency
• Rebuild walls, ceilings, doors, flooring, and faca
des will materially increase the efficiency, pro
ductivity, and quality of X’s stores.
• X must capitalize ALL costs spent including ite
ms from ex 6

49. IMPROVEMENTS:
RESTORATION
Restorations = Capitalization with Potential Abandonment
An amount is paid to restore property if:
It is for the replacement of a component of the property
and the taxpayer recognized gain or loss on the sale or
exchange of the component or deducted a loss for the
component;
The taxpayer returns the property to its ordinary efficient
operating condition if the property has deteriorated to a
state of disrepair and is no longer functional; it results in
the rebuilding of the property to a like-new condition after
the end of its class life; or It replaces a part or a
combination of parts that comprise a major component or
substantial structural part of the unit of property.

50. Restoration Example
• Roof in factory building is comprised of structural
elements, insulation, and waterproof membrane.
• Over time, waterproof membrane began to wear and
leakage began
• X replaces roof membrane with similar
but new membrane. (so it’s not a betterment)
• Although roof membrane may effect function of
building structure, it is not, by itself, a major
component or substantial structural part of building st
ructure
• X is not required to treat the amount paid to replace th
e membrane as a restoration.
• Not a Restoration. Not a betterment. = Repair Expense

51. Restorations Example 2
NEW: Example # 16–
Office building with one HVAC System
• Comprised of 3 furnaces, 3 AC units, and duct
work throughout the building
• Furnace breaks down, replaced with a new
furnace
• The three furnaces together perform a critical
function in operation of HVAC system.
• However replacing a single furnace is not a
significant portion of this major component of
the HVAC System.
• Not a restoration of the UOP (HVAC system)

52. IMPROVEMENTS :
ADAPTATIONS
Adaptations = Capitalization with Potential Abandonment
• An amount is paid to adapt property to a new or different
use if the adaptation is not consistent with the taxpayer’s
intended ordinary use of the property at the time the
property was originally placed in service by the taxpayer.
• The number of examples demonstrates the difficulty of
determining the fine line between a deductible expense
and a capitalized item.

53. ABANDONMENT/DISPOSITION
Abandonment/disposition of property regulations are in
PROPOSED form only! The prior temporary regulations
identified the ability to abandon structural components of
buildings at the time of removal.
Proposed regulations stipulate:
Partial disposition/abandonment on timely filed return only.
This will prevent look-back on retirement of previous
demolition projects. Taxpayers who have not taken
disposition on assets in previous years may do so prior to
tax year 2014 only.
Further guidance for determining the basis of a
components for disposition:
1. A engineering-based report or study to identify basis.
2. Pro-rata allocation based on replacement costs.
3. A calculation discounting cost of replacement based
on the consumer product index.

54. CASE STUDY
Medical Equipment Manufacturer
Mis-Capitalized Expenses 2009-2012 $4,735,158
Disposition from 2009-2012 $1,076,164
Energy Certification since 2007 $339,000
Total $6,150,322

55. IMPROVEMENTS:
REMOVAL COSTS
Removal costs can be deducted in all cases IF
the taxpayer had a gain or loss on the
removal of that asset or component.
For example:
In the case of a multi-use building and
multiple tenants. One tenant moves out, and
the new one requires demolition and new TIs.
The contractor charges the building owner
demolition charges for the removal of the
existing TIs. These costs can be deducted IF
the taxpayer files a partial disposition on a
timely filed return.

57. REVIEW/RECAP

58. REVIEW/RECAP

59. STRUCTURAL COMPONENTS:
LESSEE PROPERTY
EXAMPLE FROM Regulations:
Example 4 pg. 150. Lessee property; personal
property added to leased building. T is a retailer of
consumer products. T leases a building from L,
which T intends to use as a retail sales facility.
Pursuant to the lease, L provides a construction
allowance to T, which T uses to acquire and
construct partitions for fitting rooms, counters,
and shelving. Assume that each partition, counter,
and shelving unit is a unit of property under
paragraph (e)(3) of this section. Assume that for
Federal income tax purposes T is treated as the
owner of the partitions, counters, and shelving. T’s
expenditures for the partitions, counters, and
shelving are not improvements to the leased
property under paragraph (d) of this section, but
rather constitute amounts paid to acquire or
produce separate units of personal property under
§1.263(a)-2(d)(1).

60. ETS PROCESS

61. ETS PROCESS

62. What Does This Mean?
The IRS is expected to issue guidance this year (soon) explaining
how and when to obtain automatic consents to comply with the
final Repair Regs.
In the meantime, taxpayer with fixed assets should review the
temporary and final Repair Regs and be prepared to act promptly
when guidance is issued.
In the meantime, at a minimum, taxpayers should adopt written
accounting procedures before the end of 2013 for expensing
amounts paid for property under $5,000 (for taxpayers with
applicable financial statements, $500 for others) to be able to
take advantage of the de minimis safe harbor. This is an annual
election beginning in 2014, but can also be made in 2012 and
2013 by filing amended tax returns if the taxpayer already had
written accounting procedures in place for those years.

63. Compliance Deadlines
Effective Date
• The final regulations generally apply to taxable
years beginning on or after January 1, 2014.
• However, certain provisions of the final regs
only apply to amounts paid or incurred in
taxable years beginning on or after January 1,
2014.
• You may apply the new regulations to tax
years beginning on or after January 1, 2012.
• Compliance may require you to change your
current capitalization procedures and file IRS
Form 3115.

64. Taxpayers Should Consider:
• How to put procedures in place to account for material and supply costs up to the $200
amount in 2014 given the increase from the $100 amount in the temporary Repair Regs.
• Whether to elect to capitalize and depreciate materials and supplies in 2014 given the
inclusion of emergency spare parts and whether to revoke a prior election by filing a
private letter ruling request.
• How to account for routine maintenance costs for buildings and structural components
in 2014, which were added to the routine maintenance safe harbor in the final Repair
Regs.
• Whether to elect to capitalize repair and maintenance costs rather than expensing them
to eliminate book-tax differences. This is an election that can only be made on the 2014
return; it can’t be made in 2012 or 2013 by filing amended tax returns.
• Whether to elect to apply the safe harbor for small taxpayers with buildings with an
unadjusted basis no greater than $1 million. This is an election that can be made for
2012 and 2013 by filing amended tax returns.
• Whether to elect to take losses for the costs of removing depreciable assets or
components of depreciable assets in 2014 (which requires recognition of a loss) or for
2012 and 2013 (the MACRS temporary regulations—which were replaced by proposed
regulations—also required recognition of a loss, but the regulations were optional for
2012 and 2013). A loss can be taken in 2012 or 2013 by filing amended tax returns or by
filing a Form 3115 in the first or second year succeeding the applicable year.
• How to account for expenses previously capitalized as being part of an overall plan of
improvement, which was a judicial standard eliminated by the temporary and final
Repair Regs.

65. Presented by: Michael F. D’Onofrio
For Additional Information Contact:
Michael F. D’Onofrio | Managing Director
mdonofrio@engineeredtaxservices.com
Office: 561-762-0044
www.engineeredtaxservices.com