Advanced Tax Issues & More

Todd Fentress, Clark Schaefer HackettEd Rebman, Maner CosterisanTim Smith, Bernard Robinson & Company

Topics to Discuss

• Tangible Property Regulations• RD Handbook Changes• Excess basis and avoiding loss of credits• Eligible Basis• Applicable Fraction• Casualty Loss• Non-profit set-aside

Tangible Property Regulations

• The new IRS regulations apply to all taxpayers with any tangible property including:– Materials & Supplies– Buildings– Machinery &

Equipment

• Changes accounting for materials & supplies

• Changes the way taxpayers evaluate their expenditures for capitalization/expense

• Effective for tax years beginning on or after January 1, 2014

De Minimis Safe Harbor• What is an AFS?

– Audited Financial Statements– Financial statements

provided to federal or state governmental agency

• Expenditures of $500 or less per item or invoice for taxpayers without applicable financial statements (AFS) & $5,000 or less with AFS

• Generally, taxpayer must have a written capitalization policy in place specifying the dollar threshold amount.

• In addition, an election must be included within each year’s income tax return

DecisionTree

To Capitalize or Not to Capitalize??• Generally, amounts paid to improve a unit of

property (U of P) must be capitalized• Exceptions:

– De minimis Safe Harbor (previously discussed)– Routine Maintenance Safe Harbor– Safe Harbor for Small Taxpayers

• Unit of Property – Building and Building Systems

• Improvements (Restoration, Adaptation, Betterment, Improvement Costs)

Unit of Property (U of P) Defined• Each separate building is by

definition a U of P• Must look at each building

system as a separate U of P as well:– HVAC– Plumbing systems– Electrical systems– Escalators– Elevators– Fire protection– Security systems– Gas distribution systems

• For non-building property, a U of P is determined by whether or not the property/ component can function independently– If so, then it is defined as a U of P– If not, then it is a component of a

larger U of P

• The smaller the U of P, the more likely capitalization will be required

“Use It or Lose It” Rules• Must “scrub” depreciation schedules in 2014 looking for the following:

– Repair and maintenance items that never should have been capitalized under the new R.A.B.I. criteria

• Optional “scrub” of depreciation schedule in 2014 looking for the following:– Impermissible methods (class life or bonus)– Prior year PAD’s (partial asset dispositions)– Items that qualify as “Routine Maintenance”– Writing off removal costs

• Then calculate the 481(a) adjustment– Equals the difference between what should have been taken and what was

actually taken as a deduction

Annual ElectionsExpense Elections Capitalization Elections

• De Minimis Safe Harbor Election **

• Safe Harbor for Small Taxpayers **

• Partial Asset Disposition

• Election to capitalize and depreciate certain materials & supplies

• Election to capitalize repair and maintenance costs **

• Election to capitalize employee compensation or overhead as part of acquisition costs of property

Accounting Method Changes (Required)

• #184– Application of R.A.B.I– Routine Maintenance Safe

Harbor– Identify U of P’s– Expensing R&M items

previously capitalized

• #186/187– Adopt new materials and

supplies accounting method for non-incidental (#186) and ability to expense incidental amounts (#187)

• #192– Facilitative and inherently

facilitative costs must be capitalized for asset purchases

Proposed RD Handbook Changes• Chapter 4: Financial Management

Current Audit Determination ThresholdUnits Reporting Requirement

24+Audit, Agreed Upon Procedures & Owner's Self Certification

16 - 23Agreed Upon Procedures & Owner's Self Certification

Under 15 Owner's Self Certification

Proposed RD Handbook Changes• Chapter 4: Financial Management

Proposed Audit Determination Threshold

If > $500,000 in combined federal assistanceAudit w/ Opinion on Major Program & Owner's Self Certification

If < $500,000 in combined federal assistance MINC filing & Owner’s Self Certification

If an audit is required by another organization You must submit a copy to RD (YB not required)

Proposed RD Handbook Changes• Chapter 4: Financial Management

Current "Compliance" Testing Requirements

Internal Control Testing to meet GAGAS (Yellow Book)

Agreed Upon Procedures (not really compliance testing)

Operating and Administrative Expenses

Identities of Interest TransactionsReplacement Reserve Withdrawals & Funding

Proposed RD Handbook Changes• Chapter 4: Financial ManagementProposed Compliance Testing RequirementsCompliance Testing to Issue an Audit Opinion on Compliance with Program Requirements related to:

Mortgage StatusReplacement ReserveReturn on Investment (ROI) or Return to Owner (RTO)sEquity SkimmingTenant Security DepositsCash Receipts & Cash DisbursementsManagement FunctionsUnauthorized Change of Ownership / Acquisition of LiabilitiesUnauthorized Loans of Project Funds

Proposed RD Handbook Changes• Chapter 4: Financial Management

Proposed Compliance Testing Requirements

Internal Control Testing to meet GAGAS (Yellow Book)Tenant File Testing at the judgment of auditor to satisfy Yellow Book & GAAS standards

Compliance Testing to Issue an Audit Opinion on Compliance with Program Requirements related to:

Tenant File Testing is NOT covered under the Compliance Supplement

Overview of Audit Guide

• 12/19/13 – Draft Form Released• 3/28/14 – Closed for Draft Comments• 9/18/14 – Final Version Released

Excess Basis

Actual Form 8609 IRS Audit

Eligible Basis $10,000,000 $9,500,000

Applicable Fraction 100% 100%

Qualified Basis $10,000,000 $9,000,000 $9,500,000

Tax Credit Percentage 9% 9%

Annual Tax Credits $900,000 $810,000 $855,000

Eligible Basis or Not?

• Relocation costs – expensed under IRC §162

• Accounting costs• Developer fee • Land costs verses site improvements• Bond issuance costs

Applicable Fraction

• Applicable fraction is total floor space (TFS) of Low Income units over TFS of residential units.

• Floor space includes the entire unit including closets and balconies.

• Applicable fraction in first year is the applicable fraction as of the end of each month over 12.

Casualty Loss

• Understanding whether recapture of previous credits or loss of current year credits applies

• Also applies to Bond deals

Nonprofit Set Aside

• IRC §42(h)(5)(B)– A qualified nonprofit organization is to own

an interest in the project (directly or through a partnership) and materially participate (within the meaning of IRC §469(h)) in the development and operation of the project throughout the compliance period.

Taking Credits without Signed 8609s?

• When should you receive 8609s?• What to do if they are delayed?• Are you sure I can claim credits

without my 8609s?

Who Gets What When the Partnership is L iquidated?

Partnership Capital AccountsPartnership AgreementBack End Calculations

Partnership Capital Accounts

All Partners in a Partnership Have a Capital Account

Safe Harbor Capital Account Maintenance Rules under IRC 704(b)

• All Capital Accounts Start at Zero

• Increased by Capital Contributions

• Increased by Income & Gain Allocations

• Decreased by Loss & Deduction Allocations

• Decreased by Distributions

• Upon Liquidation, all Capital Accounts Return to Zero

Partnership Agreement

Partnership Profit, Loss & Cash allocations controlled by Partnership Agreement• Section 3.2 (m) – Allocations of Income or Gain from Sales

• Section 4.2 – Net Cash from Sales and Refinancings

• Section 10 – Dissolution and Termination of the Partnership

4% Deal Liquidation Calculation

9% Deal Liquidation Calculation

What If the Ultimate Allocations of Cash Aren’t What You Expected?

Purpose of 704 Safe Harbor

• Flexibility relating to allocation provisions

Avoid Triggering Threshold Tax Issues • Substantial Economic Effect• Boardwalk Issues (is the investor a limited partner at all?)

What to do for Old Deals:

For Existing Deals Approaching Year 15:

Stay out of the Liquidation Section of the Partnership Agreement

• Refinance instead of Selling

• Negotiate the purchase of the LP interest

Manage the Tax Capital accounts – Generate more tax losses/agree to special allocations of income

What To Do for New Deals:

Negotiate Special Gross Income Allocation Provisions

Negotiate Right to Purchase LP Interests

Modify Liquidation Events

Forced Sale Rights

Pricing

Any Questions?• Todd Fentress, CPA– Shareholder, Clark Schaefer Hackett– tfentress@cshco.com

• Tim Smith, CPA– Partner, Bernard Robinson & Company– tsmith@brccpa.com

• Edward Rebman, CPA– Principal, Maner Costerisan– erebman@manercpa.com