Act Now to Minimize the Corporate Gain on Real Estate

Brent R. Robbs, Tax Associate

Since the advent of LLCs and S Corporations, tax consultants generally have advised clients to keep their real estate holdings outside of C Corporations because of the potentially devastating tax ramifications of a future sale.  Unfortunately, for a variety of reasons, taxpayers find themselves in this position more often than you would think.  The good news is the current economy provides a unique opportunity to minimize the tax impact of removing real estate from C Corporations. 

There are two primary ways to remove real estate from a C Corporation and maintain control of the property: 

1. Distribute the real estate as a dividend, or
2. Sell the real estate to a related party 

Distributing real estate as a dividend is rarely a viable method because the transaction doesn’t provide cash to the C Corporation to cover the tax generated by the distribution.  One instance where this strategy can work is when the C Corporation has net operating losses or capital losses to offset the gain at the corporate level. 

A better method is a sale of the real estate to a related party.  Unlike a distribution, the corporation will receive cash which can be used to cover the tax generated by the sale.  Furthermore, the shareholders are not subject to tax since there is no dividend distribution.  In a down market, this option keeps the tax bill associated with the sale manageable, moves future appreciation of the property outside the corporation and maintains the taxpayer’s control of the property. 

A third, less obvious, solution is for the corporation to make an election to be taxed as an S Corporation.  This option removes a layer of tax from the ultimate sale of real estate, but only after the statutory built in gain holding period. 

As is the case with any real estate transaction, there are a multitude of tax and legal ramifications to consider.  Because every taxpayer’s situation is different, it is imperative that you review off of the options with your tax advisor before proceeding.

McGuire Sponsel – Peco Foods v. Commissioner, What does it Mean for Cost Segregation?

Peco Food, Inc. & Subsidiaries. v. Commissioner of Internal Revenue, is a recent court case that has raised several questions within the real estate and construction industries.  Questions such as, “Does this mean we can’t do a cost segregation study on purchases?” and “How will this affect the industry”.   The issue at hand is whether Peco may modify, for purposes of performing a cost segregation study, the purchase price allocations which it agreed to in connection with its acquisition of certain assets at two poultry processing plants.   McGuire Sponsel, a specialty tax group that works with CPA firms feels this issue is important and could affect many taxpayers this year. Due to this, McGuire Sponsel is hosting a webinar to discuss the issue on Friday, February 3 at 11 a.m. EST. Click here to register.

Construction Companies Look to Marketing to Bolster Growth

Jane M. Groeteka, Tax Associate

The beginning of a new year means it’s time to be executing those New Year’s resolutions.  When most people think of New Year’s resolutions, they think of their personal resolutions such as getting fit and eating healthy.  Have you ever considered expanding resolutions to include shaping up your business?  The Certified Financial Management Association (CFMA) annual survey can be a good resource for developing resolutions that relate to the real estate and construction industries. 

The CFMA recently published its 2011 Construction Industry Annual Financial Survey that includes the results of the hot topic survey, “Solutions from a Tough Economy – Best Practices for Moving Forward.”  The results identify the measures that worked best over the past three years to reduce costs and boost revenues for the respondents.  Implementing one or more of these measures could get you started on the right path for your business’ resolutions.  

The top five strategies that more than 50% of the respondents implemented are:

• Enhance or establish website or web presence.
• Increase efficiencies by using new technologies or automating existing systems.
• Partner with minority or woman-owned firms.
• Increase marketing/advertising expenditures.
• Add new product/service offerings. 

If you are interested in finding out more about the Certified Financial Management Association or the annual survey, visit their website at www.cfma.org. 

If you have any questions or are seeking assistance in planning solutions for your business, contact our Real Estate and Construction Services Group.

Spend a Little, Save a Lot with Ameren’s Business Energy Efficiency Incentive Program

Jane Groeteka, Tax Associate 

What’s better than lowering your utility bills by making the most of energy efficient products in your business?  Getting paid to implement the changes!  This is exactly what Ameren is looking to do for its customers. 

Ameren Missouri launched a new Business Energy Efficiency Incentive Program effective January 3, 2012 – May 31, 2012 that provides incentives for the purchase and installation of energy efficient equipment.  This program offers both standard and custom incentives when retrofitting lighting, HVAC, and refrigeration for businesses. 

The incentives range from $150 to $15,000 depending on the existing and updated energy equipment purchased and installed.  There are many opportunities to qualify for these rebates, but a pre-approval from Ameren is required for both the standard and custom incentive rebates before the equipment can be purchased.  Take the proactive approach if you are considering going green because applying for these rebates can result in additional dollars saved. 

Other Business and Residential Energy Initiatives offered through Ameren are available for both Illinois and Missouri taxpayers.  Check out Ameren’s overview of the rebate program at http://www.actonenergy.com/state-selection?rq=/. 

Please also keep in mind that this program will be phased out once the limited energy savings goal has been reached, so act fast!

FASB Issues Revised Proposal for Revenue Recognition

Lesley Larsen, CPA, Audit Senior

The Financial Accounting Standards Boards (FASB) and the International Accounting Standards Board (IASB) have been working together on a joint project on revenue recognition.  The boards issued an original exposure draft of the new proposed standards in June 2010 that was met with much resistance.  In an article by the Journal of Accountancy, the AICPA’s Financial Reporting Executive Committee was quoted to say in their comment letter to the boards, “We agree with the theoretical merit of many of the concepts included in the proposed standard.  We also believe; however, that certain principles…may be neither practical nor operational for preparers and auditors to apply without undue costs.”  With this, in addition to over 1,000 comment letters received on the original exposure draft, the boards ultimately decided to modify the original proposal.  A revised exposure draft was reissued on November 14, 2011 and is open for public comment until March 13, 2012. 

The revised proposal contains the same core principle as the original proposal: that an entity would recognize revenue from contracts with customers when it transfers promised goods or services to the customer. The amount of revenue recognized would be the amount of consideration promised by the customer in exchange for the transferred goods or services.  However, the boards did refine the original proposal by:

1. Adding guidance on how to determine when a good or service is transferred over time
2. Simplify the proposal on warranties
3. Simplify how a transaction price is determined
4. Modify the scope of the onerous test to apply to long-term services
5. Add a practical method for recognizing costs in obtaining a contract (of one year or less) as an expense
6. Provide exemptions from some disclosures for non-public companies who use US GAAP  

For more information on the revised proposal on revenue recognition visit the FASB website.

Lessors of Investment Property to be Excluded from New Lease Accounting Rules

Lesley Larsen, CPA, Audit Senior

When the Financial Accounting Standards Board (FASB) and the International Accounting Standards Board (IASB) first released their exposure draft on the proposed new lease accounting standards there was such a backlash from anyone affected by the standards that they decided to revise their proposal and reissue the exposure draft in the first half of 2012.  Part of the new revisions consists of who is included in the scope of the proposed standard.  At their last meeting on October 19-20, 2011, the FASB and the IASB tentatively decided to exclude a lessor’s (or landlord’s) lease of investment property from the scope of the new proposed lease accounting rules.  Lessors of investment property would continue to recognize leases under the current standards. 

While The Real Estate Roundtable feels the new exemption will help ease some of the concerns lessors of investment property may have about the new proposed standards, it does nothing for the concerns surrounding the lessees (or tenants) of the investment property.  

To understand more about the exemption and what issues face lessees of investment property please read the article by the CoStar Group, Landlords Exempted from Proposed Lease Accounting Rules. 

Please stay tuned to AMD Gray Matter for updates on the new proposed standards.

Architects – you may have some “green” coming your way

Going green is an incredibly hot topic in every industry. However, most people are not aware that going green can actually save your company money. Check out my recent post for a refresher on the basics of the 179D tax deduction by clicking here.

I’d like to highlight one very important nuance of the §179D deduction that applies specifically to architects and design build contactors who perform work for government owned buildings. 

Background: §179D is a section of the IRS code specifically related to green property. It allows taxpayers to accelerate the deductibility of costs incurred to make qualifying energy-efficient improvements to commercial buildings.  If they qualify for the deduction, taxpayers can immediately deduct costs that would ordinarily be depreciated over as many as 39 years. To qualify, energy-efficient improvements must reduce total annual energy costs with respect to the interior lighting systems, HVAC and hot water systems by 50%. Partial deductions are allowable if energy efficiency improves by less than fifty percent. 

When Architects Benefit: There is an exception for property owned by a Federal, State, or local government.  Because the owner of the building doesn’t benefit from extra tax deductions they may allocate the §179D deduction to the person primarily responsible for designing the property.  The designer is allowed a deduction during the tax year in which the property is placed in service. The maximum amount of the §179D deduction allocable is $1.80 per square foot. Partial deductions are also available. 

If more than one designer is responsible for designing the qualifying property, the owner of the government building will: 

1. Determine which designer is primarily responsible and allocate the full deduction to that designer, or
2. At the owner’s discretion, allocate the deduction among several designers. 

Application: Before a designer can claim the §179D deduction, a written allocation of the deduction must be obtained from the government building’s owner. The designer is not required to attach the written allocation to their tax return, but instead must retain the letter for their files.  The owner of the government building is required to reduce their basis in the building by the amount of all §179D deductions allocated to third parties. On a project with multiple designers, make sure to apply early because multiple vendors can qualify for the deduction.  Keep in mind that this nuance only applies to government owned buildings. 

Architects and design build contractors who work extensively on government projects should work closely with their accountants to ensure their ability to benefit from the above mentioned tax deductions.  To find out more contact us or attend our upcoming seminar.

Wondering if Your Building Improvements Qualify for a 179D Tax Deduction?

In past posts, we’ve discussed the three main categories of building improvements that may qualify for a 179D tax deduction: Building envelope, HVAC, and lighting. 

Click here to see that post.

Deductions of $0.60 per square foot are available for each category. The maximum deduction, $1.80 per square foot, can be achieved by reducing overall energy costs of a building by 50%. We tend to consider lighting to be the ‘low hanging fruit’ with respect to 179D deductions, but if you’re replacing your HVAC unit you should know there are 12 specific types of upgrades that almost always qualify for an upfront deduction. Your business may be eligible for significant tax savings if your project fits one of the following descriptions: 

1. Geothermal (ground source heat pumps)
2. Thermal Storage
3. High-efficiency VRF units in apartments, dorms and hotels
4. Centralized HVAC in apartments, dorms and hotels
5. Energy recovery ventilation
6. Demand control ventilation
7. Chillers in buildings of less than 150,000 square feet
8. Direct fired heaters in warehouse, industrial and other spaces with no air conditioning
9. VAV devices in buildings of less than 75,000 square feet
10. Chilled Beam Ceilings
11. Magnetic bearing chillers
12. Gas fired chillers combined with electric chillers to peak shave 

More questions? Contact us for more information on this topic or to get information on our upcoming seminar, click here.

Holding Out on the 3% Withholding Repeal for Government Contractors

In 2006, President George W. Bush passed the controversial 3% withholding requirement on payments due to vendors providing services to the federal, state, and local government entities.  The 3% withholding applies to payments of $10,000 or more made after December 31, 2012, and in order to comply with the 3% withholding requirements, the payor would have to file Federal Form 945 and provide the payee with a Form 1099-MISC by January 31, 2013.  If not repealed, this may create cash flow dilemmas for companies that do business with government entities. 

On October 27, 2011, the House of Representatives passed H.R. 674 by an overwhelming vote of 405-16, which would repeal the controversial 3% withholding requirement.  However, the repeal came to a screeching halt when it reached the Senate.  To read more on the potential repeal of the 3% withholding requirement, follow this link: 

http://www.businessweek.com/news/2011-11-03/reid-plans-to-rewrite-contractor-repeal-to-punish-tax-cheats.html

FASB/IASB to Re-expose Lease Accounting Proposal

Lesley Larsen, CPA, Audit Senior

The Financial Accounting Standards Board (FASB) and the International Accounting Standards Board (IASB) announced they will re-expose the revised proposal on lease accounting.  The boards have made substantial changes to the original exposure draft released in August 2010 after receiving extensive feedback on the lease proposal.  The boards plan to finish their deliberations during the third quarter of this year and re-expose the revised proposal soon after.

Leslie F Seidman, Chairman of the FASB, said: “During our discussions of the extensive comments we received on the exposure draft, the boards have reaffirmed the major change to lease accounting, which is to report lease obligations and the related right-to-use on the balance sheet.  However, the boards decided to make many other changes to address the comments made by stakeholders. The boards decided that, while we still have other matters to discuss, stakeholders would appreciate the opportunity to comment on the revised package of conclusions.” 

Tentative decisions reached at the meetings on July 20 and 21 included changes in reporting by lessors.  The original exposure draft offered two types of reporting for lessors, the performance obligation approach and the derecognition approach.  The boards tentatively decided lessors should use one type of accounting approach, the “receivable and residual” approach.  It was also tentatively decided that leases of investment property measured at fair value and short-term leases (less than 12 months) would be excluded from the “receivable and residual” accounting approach.

The proposed accounting approach would allow lessors to recognize revenue at the beginning of the contract if it is reasonable that the lease will be profitable, otherwise revenue would be recognized over the lease term. 

Stay tuned to Gray Matter for updates on the lease project when the proposal is re-exposed later this year.

For more information on the status of the project, please read the following:       

FASB Press Release

FASB Technical Plan and Project Updates