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video In the third webinar in our insurance hot topics series, Baker Tilly’s accounting and tax professionals address recently issued or pending U.S. GAAP and statutory accounting guidance that will impact insurance companies, followed by a discussion on tax legislation in the next Congress, recent tax developments affecting insurers and tax planning for year-end under the CARES Act. Part one:  U.S. GAAP and Statutory accounting update  Identifies issued U.S. GAAP and statutory accounting guidance that may have an impact on insurance industry companies Evaluates pending U.S. GAAP and statutory accounting guidance that may have an impact on insurance industry companies Discusses the basics of the new guidance and how it may impact your company Part two:  Federal tax update  Evaluates  how the composition of Congress might affect the tax policies of the Biden administration Reviews updates on IRS discount factors for 2020, life insurance reserves and net operating loss provisions Assesses tax planning under the CARES Act to maximize your company’s tax benefit

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Insurance hot topics virtual series: Accounting, tax and statutory update

Authored by Kathleen Meade On July 29, 2020, the IRS and Treasury Department released proposed regulations to implement the small business taxpayer simplified accounting method provisions enacted under the Tax Cuts and Jobs Act (TCJA) for tax years beginning after Dec. 31, 2017. The proposed regulations clarify the gross receipts test requirements and provide guidance for implementing the small business taxpayer simplified method provisions. However, positions taken on the treatment of syndicates and the inventory accounting exception are likely to be less favorably received and may create additional uncertainty, complexity and administrative burden for affected taxpayers. Although these regulations are not yet effective, taxpayers may rely on them for taxable years beginning after Dec. 31, 2017, provided they consistently implement all the applicable rules for each adopted provision. Background  The TCJA favorably amended certain small business taxpayer methods of accounting to increase the gross receipts test threshold to $25 million, index it for inflation and eliminate the requirement that the test be met for all prior tax years. These changes enable more taxpayers to use the cash method of accounting and can exempt them from the often costly and onerous uniform capitalization (UNICAP) requirements, comply with the percentage-of-completion method (PCM) rules and accounting for inventories. However, under the TCJA small business taxpayer provisions, tax shelters (including syndicates) remain ineligible for the small business taxpayer simplified methods regardless of their gross receipts levels. For purposes of this rule, a syndicate is defined as a partnership or other entity (other than a C corporation) which allocates more than 35% of the entity’s losses for the taxable year to limited partners or limited entrepreneurs.  UNICAP exception The proposed regulations, which are generally taxpayer favorable, remove the now obsolete small reseller exemption and replace it with the UNICAP small business taxpayer exception enacted under the TCJA.  The 2017 tax reform increased the gross receipts threshold to $25 million from $10 million and extended the UNICAP exception to producers as well as resellers. However, unlike the small reseller definition that generally included only receipts from sales of goods and services, the small business taxpayer test includes income from other sources such as interest, dividends, rents and royalties. This has implications for other simplifying conventions under the UNICAP rules. For example, the addition of receipts from other sources may cause a taxpayer to exceed the threshold and require an accounting method change. There are also special rules for farm trades or businesses. Cash method of accounting The proposed rules reflect amendments made by the TCJA to the gross receipts test for taxable years beginning after Dec. 31, 2017. As noted, the TCJA increased and indexed the gross receipts test threshold but left other cash method provisions unchanged, such as the short year and aggregation rules and the exclusion of tax shelters from using the cash method. Unfortunately, the proposed rules also contain unfavorable provisions that may significantly limit use of the cash method in certain circumstances. Syndicates  Consistent with pre-TCJA rules, syndicates are classified as tax shelters ineligible to use the cash method. Syndicate status will only apply for a year in which the entity has a loss and not in a year the entity is profitable and meets the gross receipts test. Thus, a syndicate’s eligibility for the small business taxpayer methods may change yearly and, further, may not be determinable until after year-end, which can significantly complicate tax planning and delay tax reporting for these entities.  Syndicates, or tax shelters, are defined much more broadly than one would anticipate. A “tax shelter” for this purpose is an entity, other than a C corporation, if more than 35% of the losses during the taxable year are allocated to limited partners or limited entrepreneurs. A “limited entrepreneur” is a person who has an interest in an entity (other than a limited partnership interest) and who does not actively participate in the management of the entity. The proposed regulations may actually increase the likelihood of an entity becoming a syndicate because the section 163(j) business interest limitation does not apply to small business taxpayers. Although intended to simplify the process of determining an entity’s syndicate status, this rule may also create a trap for the unwary if the entity is profitable after taking into account the interest limitation, but has a loss and is a syndicate under the 35% loss rule because the interest deduction is not limited for this purpose.  Affected entities may need to evaluate the trade-offs of implementing strategies to avoid a tax loss (e.g., election to opt out of bonus) versus losing eligibility for the favorable small business taxpayer simplified methods of accounting. To allow adequate time for planning, the proposed regulations provide an election that permits a taxpayer to apply the 35% loss rule by electing to use the allocated taxable income or loss of the immediately preceding taxable year, rather than the current-year amounts.  Taxpayers should carefully consider whether the election is beneficial because it applies for all purposes for which status as a tax shelter is relevant (e.g., section 163(j) interest deduction limitation) and is irrevocable unless the taxpayer obtains IRS permission.  In summary, the proposed rules related to syndicates are generally unfavorable and have implications beyond the small business taxpayer simplified methods (e.g., section 163(j) small business taxpayer provisions). Additionally, entities that move in and out of syndicate status may be prevented from making frequent changes back to the cash method in years they cease to be a syndicate. Consequently, entities treated as syndicates may derive limited or no benefit from the favorable small taxpayer provisions if the proposed rules are finalized in their current form. The Treasury Department and the IRS continue to study the definition of a tax shelter, which may indicate that changes to these rules could be forthcoming. Inventory exception The TCJA provided welcome simplification by permitting eligible small business taxpayers to either treat inventory as non-incidental materials and supplies or, alternatively, to follow the inventory method of accounting used in its applicable financial statements (AFS) or, if the taxpayer does not have an AFS, in the books and records prepared in accordance with the taxpayer's accounting procedures. The proposed regulations provide guidance for implementing this inventory accounting exception for small business taxpayers. However, several proposed provisions limit book/tax conformity, potentially resulting in added complexity and administrative burden and undermining the legislative intent to simplify inventory accounting for small business taxpayers.  For example, the proposed regulations allow small business taxpayers to treat non-incidental materials and supplies as “used or consumed” in the later of the year the taxpayer provides the item to the customer or the year the items are paid for (cash method) or incurred (accrual method). The regulations also permit taxpayers to use most inventory accounting methods to identify these non-incidental materials and supplies, with the exception of the last in, first out (LIFO) and lower of cost or market (LCM) valuation methods. Finally, guidance is provided on the definition of AFS, the types and amounts of costs that can be recovered for tax purposes, and when such costs may be taken into account. Some of the additional requirements and restrictions are surprising and contrary to the simplification purpose expressed by the Treasury Department and the IRS. If finalized in their current form, these provisions could require significant taxpayer resources to analyze and reconcile differences between book and tax inventory and accounting records, which may effectively reduce or eliminate the benefit of using the small business simplified inventory method for many. Long-term contract exceptions The proposed regulations incorporate amendments made by the TCJA that modify the small construction contract PCM exception and homebuilder UNICAP exemption to increase the gross receipts threshold and revise the PCM lookback rules to reflect the repeal of corporate alternative minimum tax (AMT) and the enactment of base erosion and anti-abuse tax (BEAT). Notably, the modified lookback rules apply to both small and large taxpayers. Additionally, the proposed rules clarify when and how a taxpayer adopts a method of accounting for a long-term contract and provide guidance for determining the classification of long-term contracts when a taxpayer becomes a small business taxpayer or ceases to qualify as a small business taxpayer.  Accounting method changes   The proposed regulations provide no method change procedures and generally direct taxpayers to use existing guidance to implement changes to and from the small business taxpayer simplified methods.  In August 2018, the IRS issued procedures for eligible small business taxpayers to obtain automatic IRS consent to change to the small business taxpayer simplified methods, generally effective for tax years beginning after Dec. 31, 2017.  Under these procedures, the rule prohibiting the filing of an automatic method change if the same item was changed within the past five tax years (including the year of change) is temporarily waived for changes filed for a taxpayer’s first, second or third taxable year ending on or after Dec. 31, 2017. Thereafter, a taxpayer requesting a change within the five-year waiting period is required to apply under the more onerous and costly advance consent procedures. Although the TCJA favorably modified the gross receipts test so taxpayers could requalify for the small business taxpayer simplified methods, the proposed rules unfortunately appear to limit a taxpayer’s ability to make such changes on a frequent basis.  -- The information provided here is of a general nature and is not intended to address the specific circumstances of any individual or entity. In specific circumstances, the services of a professional should be sought. Tax information, if any, contained in this communication was not intended or written to be used by any person for the purpose of avoiding penalties, nor should such information be construed as an opinion upon which any person may rely.  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.

The IRS and Treasury Department released proposed regulations to implement the small business taxpayer simplified accounting method provisions enacted under the Tax Cuts and Jobs Act (TCJA)

Small Business

Coronavirus Resource Center

Small and family business coronavirus resources

Proposed regulations issued to implement TCJA small business taxpayer simplified accounting methods

Authored by Colin Walsh and Michael Wronsky The opportunity zone (OZ) space is among the innumerable sectors of the economy adversely impacted by COVID-19. From reservations on the part of potential investors due to liquidity considerations, to questions about the viability of going concern on the project side, uncertainty abounds. In an effort to alleviate some of these concerns, in June, the IRS continued its efforts to provide taxpayers with coronavirus-related compliance relief via OZ-focused Notice 2020-39, which relaxed many of the program’s timing requirements. Pandemic aside, additional compliance questions remain unanswered after 544 pages of comprehensive final regulations were released in December 2019. This article serves as a reminder of the relief provided by Notice 2020-39 as well as an overview of the remaining gray areas as they have emerged in practice. Lastly, we provide a brief comparison of what could be next for the OZ provisions, based on details on the respective candidates’ tax platforms that have been released ahead of the forthcoming presidential election.  Notice 2020-39 The IRS provided investors and qualified opportunity funds (QOFs) extensions to comply with many rules that require time-sensitive actions to take advantage of the OZ tax benefits. For a more detailed discussion of Notice 2020-39, please see our previous tax alert, but in summary, the provided relief automatically: Allows taxpayers until Dec. 31, 2020, to invest eligible gain in exchange for a QOF investment if their 180-day investment period otherwise would have ended on or after April 1, 2020, and before Dec. 31, 2020. Deems a QOF’s failure to meet the requisite 90% asset test standard to be due to a reasonable cause and, consequently, no penalties will be due if the QOF’s: (1) last day of the first six-month period of its taxable year or (2) the last day of its taxable year falls between April 1, 2020, and Dec. 31, 2020.  “Stops the clock” on any 30-month substantial improvement period being utilized by a QOF or qualified opportunity zone business (QOZB) to qualify its property as QOZB property (QOZBP) from April 1, 2020, through Dec. 31, 2020. For example, if as of April 1, 2020, a QOZB was two months into its 30-month period over which it plans to renovate a building, the third month would not start until Jan. 1, 2021.  In addition to the automatic relief, the notice also confirms that the national emergency declaration issued by the president in reaction to COVID-19 triggers the availability of the federal disaster relief included in the OZ regulations. Specifically, a QOZB will have more time to acquire or construct property, or start a business within an OZ pursuant to a working capital safe harbor (WCSH).  QOZBs generally can apply up to two consecutive 31-month WCSH periods to carry out a written plan for the aforementioned purposes, but the OZ regulations allow for “not more than an additional 24 months” in light of a federally declared disaster. It is unclear based on the wording of the regulations and the notice whether the additional 24 months is automatic or if QOZBs must demonstrate they need the extra time based on facts and circumstances. However, informal commentary by IRS officials suggests the latter is true. We therefore strongly recommend that QOZBs utilizing this relief provision be diligent and thorough in maintaining documentation to support its need to do so, should it be questioned or challenged upon IRS examination. Unanswered OZ compliance questions QOF decertification process Despite the welcome relief provided by Notice 2020-39, the scope of the economic crisis surely has caused investor groups and project managers to question whether staying the course of their OZ plans is economically feasible. When the decision is reached to dissolve a QOF, the regulations prescribe a voluntary decertification process whereby a QOF withdraws its status as such and, as a consequence, its investors are deemed to have inclusion events and must recognize their deferred gains.  However, the regulations delegate designing the decertification process to the IRS and, to date, no guidance or forms have been released on the matter. We do know that under the regulations, decertification will not be effective until the month that follows the month specified by the QOF, which cannot be any earlier than the month the QOF applies for decertification. As such, to the extent decertification is planned for 2021, fund managers must take care to maintain the 90% asset standard through the month subsequent to the designated decertification month to avoid penalties.  What is reasonable cause? As discussed, a QOF that fails to hold 90% of its assets in QOZBP will be charged potentially steep penalties, unless it can demonstrate that the failure was due to reasonable cause. Despite being lobbied by taxpayers and practitioners to detail what constitutes reasonable cause for this purpose, the Treasury Department declined to do so when finalizing the OZ regulations. As a result, once Notice 2020-39’s automatic relief period ends on Dec. 31, 2020, taxpayers who run afoul of this requirement will have to determine whether their facts and circumstances present an adequate defense to penalty assessment.  The preamble to the final OZ regulations do provide a hint in pointing to Section 20.1 of the Internal Revenue Manual (IRM) as the standard for determining whether reasonable cause has been established with respect to the 90% asset test. The IRM in general outlines that reasonable cause requires the taxpayer to have exercised “ordinary business care and prudence,” and their failure to comply with the law at issue was due to circumstances beyond their control. Potential instances as outlined by the IRM may include the death, serious illness or unavoidable absence of the person with the sole authority to direct the QOF’s actions; fire, casualty, natural disaster or other disturbance; an inability to obtain records; reliance on erroneous advice. It is critical to note that these are merely examples and may not on their own rise to the level of reasonable cause.  Zero divided by zero still undefined  To determine whether the 90% asset standard has been met, a QOF must divide the total QOZBP over its total assets. If the quotient is greater than or equal to 0.9, no penalty is due; if less, the QOF must self-assess a balance due. As part of this exercise, a QOF can exclude from both the numerator and the denominator contributions of capital it received no longer than six months before the testing date, so long as those contributions were continuously held in cash, cash equivalents or debt instruments with terms of 18 months or less. For QOFs whose only assets are these excludable contributions, this presents a mathematical quandary as it must report zero for its QOZBP over zero for its total assets — a result that is undefined. This is a common fact pattern in a QOF’s initial year, e.g., investors contribute cash to the QOF just a few days before Dec. 31, and the QOF still holds this cash on Dec. 31. The QOF should not be assessed any penalties in this scenario, as the ability to exclude recently contributed capital is clearly available so that fund managers have adequate time to deploy the funds to acquire “good” QOZBP. However, as a matter of compliance, it is unclear whether the quotient should be reported as one or zero. If the former, no further calculation is necessary (greater than 0.9); if the latter, a calculation would be required, but the result would be zero as the QOF has no balance of “bad” assets to assess a penalty on. Informal commentary from the IRS promotes the former approach; however, we are hopeful the form instructions will be updated in due course to reflect this. For the time being, we recommend that QOFs with the “zero divided by zero issue” check the yes box on line 14 of the Form 8996 to avoid confusion with the IRS. Challenges for existing property owners In spring 2020, Treasury issued technical corrections to the final OZ regulations. The final OZ regulations contained an example in which an individual realized gain from the sale of real property to a QOF and then invested that gain in the buyer QOF. The final OZ regulations disallowed the individual’s investment under the step transaction and circular cash flows doctrines. The property acquired by the QOF was also deemed a “bad asset” because it was acquired from a related party. For OZ purposes, “related party” is defined as more than a 20% ownership interest.  Prior to the issuance of the technical corrections, many practitioners believed that existing OZ landowners could sell land to a QOF and then subsequently acquire a less than 20% ownership interest in that QOF. The technical corrections established that the step transaction and circular cash flow doctrine will be applied even if the existing property owner acquires a less than 20% ownership interest in the QOF. What remains unclear is whether an existing OZ property owner can use unrelated gains to acquire an interest in a QOF. For instance, assume an individual both sells real property to a QOF and sells stock to an unrelated third party. Can that investor use the gains from the sale of the stock to acquire an interest in the QOF? This issue remains gray. Existing OZ property owners should exercise caution and consult with tax advisors before proceeding with such a scenario.  OZs post-presidential election The potential for significant tax legislation in 2021, of course, not only hinges upon the outcome of the presidential election, but also the results in both chambers of Congress. That said, it should be noted the available information surrounding the tax platforms of both the Trump and Biden campaigns include mentions of changes to OZs.  Few details have been offered by the Trump campaign, though “expanding opportunity zones” is among them. It is unclear what this would entail, but it stands to reason (and the president’s advisors have alluded to) it would mean additions to the existing 8,766 OZs designated by Treasury.  The Biden campaign’s platform echoes long-standing bipartisan calls to add reporting requirements to the program rules and corresponding reviews by Treasury to ensure that the program is achieving its intended benefit of aiding low-income communities. Additional incentives would be created to encourage partnerships between OZ project management and local not-for-profits and community leadership, to promote coordination such that the benefits to the local economies and job creation are optimized. We encourage you to reach out to your Baker Tilly tax advisor regarding how any of the above may affect your tax situation.  -- The information provided here is of a general nature and is not intended to address the specific circumstances of any individual or entity. In specific circumstances, the services of a professional should be sought. Tax information, if any, contained in this communication was not intended or written to be used by any person for the purpose of avoiding penalties, nor should such information be construed as an opinion upon which any person may rely.  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.

This article serves as a reminder of the relief provided by Notice 2020-39 as well as an overview of the remaining opportunity zone gray areas that have emerged.

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Opportunity Zones

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Real estate coronavirus resources

Opportunity zones – reminder of COVID-19 relief and remaining areas of uncertainty

Authored by Michelle Hobbs Since the spring, taxpayers across the country have turned kitchens, living rooms, bedrooms or other rooms of their homes into temporary offices. With so many people currently working from home and the likelihood that this could continue for the foreseeable future, a reasonable question becomes whether a home office deduction is now available. This article will address the requirements to take this deduction on a tax return. Business use of home In general, certain taxpayers can deduct business expenses related to their personal residence for space used exclusively and regularly in connection with a trade or business. Self-employed taxpayers or individual partners in partnerships can qualify. Employees working from a home office are no longer eligible to take a home office deduction. This itemized deduction was suspended from 2018 through 2025 to help “pay for” the doubling of the standard deduction under the Tax Cuts and Jobs Act (TCJA). Eligibility for a home office deduction is created if the space is exclusively used (and is the principal location) to meet with patients, clients or customers in the normal course of business, or is where management or administrative functions (such as billing, maintaining books and records, ordering supplies, scheduling appointments, etc.) are performed. Occasional duties conducted at other locations, including hotels and customer sites, will not necessarily preclude the taxpayer from qualifying for a home office deduction. There are special rules for daycare providers not discussed in this article. Once it is determined the taxpayer can take a home office deduction, certain expenses of the home are divided between personal and business use. Personal expenses cannot be used in this computation. Costs directly associated with the trade or business, such as painting or repairs of the business space, would be deductible in full as a home office expense. Indirect expenses, including homeowners insurance, rent (if the taxpayer does not own the home) and utilities, are allocated to the home office using the percentage of the home being used for business (typically determined through a square-footage allocation). The same percentage of mortgage interest and real estate taxes would be deducted as part of the home office deduction instead of an itemized deduction on Schedule A. Homeowners can also depreciate (accounting for the wear and tear of the structure but not the land) the business portion of their home. Permanent improvements made to the home office can be depreciated as well. However, depreciation of the home office has to be recaptured as ordinary income once the home is sold. In other words, the cumulative amount of depreciation deducted is not eligible for the primary residence sale exclusion.  The home office deduction is limited (using a formula) if total business expenses are less than the gross income. Any carryover can be deducted the following year subject to the same limitation. In addition, special rules exist when taxpayers operate more than one business in the home or have more than one place of business. Simplified method In an effort to reduce the recordkeeping burden on taxpayers, the IRS introduced the simplified method to determine the home office deduction amount. Instead of tracking separate expenditures of the home as described above, merely multiply $5 by the allowable square footage of the business portion of the home (using the smaller of 300 square feet or the actual space). The deduction cannot exceed the net income (receipts less nonhome-related expenses) from the business use of the home. Using this method means taxpayers do not need to adjust the amount of mortgage interest or real estate tax reported on Schedule A when itemizing deductions. The home office space is also not depreciated under the simplified method (meaning no recapture is necessary upon subsequent sale).  Taxpayers can alternate between using actual expenses or the simplified method from one tax year to the next. However, any carryover of actual expenses cannot be used in a tax year when the simplified method is used to compute the home office deduction.  IRS resources In addition to your Baker Tilly tax advisor, the IRS website has several resources available to assist taxpayers in taking advantage of the home office deduction. Form 8829, Expenses for Business Use of Your Home, with its instructions, along with Publication 587, Business Use of Your Home, and FAQs - Simplified Method for Home Office Deduction can all be used to help determine eligibility and calculation. -- The information provided here is of a general nature and is not intended to address the specific circumstances of any individual or entity. In specific circumstances, the services of a professional should be sought. Tax information, if any, contained in this communication was not intended or written to be used by any person for the purpose of avoiding penalties, nor should such information be construed as an opinion upon which any person may rely.  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.

This article will address the requirements to take the home office deduction on a tax return.

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Home office deduction

As we write our annual tax-planning letter, we are constantly reminded that this is no ordinary year. The fall continues to be dominated by a highly partisan election, a second wave of COVID-19, an economy struggling to recover from the worldwide pandemic and a wildly fluctuating stock market. Adding to this mix of uncertainty is the ever-changing tax landscape. 2020 has seen not only continued guidance relating to the Tax Cuts and Jobs Act (TCJA), but also the passage of the Coronavirus Aid, Relief, and Economic Security (CARES) Act. The CARES Act contains numerous revisions to the TCJA, which in some cases require taxpayers to redo returns two years after the fact. The CARES Act also introduced the PPP loan program, the rules for which were written hastily and leave several important questions still unanswered.  All of this created a perfect storm for taxpayers — businesses and individuals alike. Besides continuing economic uncertainty, tax rates could be in play depending on the election results. The prospect for increasing rates could hinge on control of the Senate, especially if the Democrats win the White House. While a change in control of the House of Representatives is not anticipated, if Republicans retain their majority in the Senate, it is unlikely any meaningful rate changes would be enacted. In addition, the economic downturn, coupled with trillions of dollars of enacted stimulus legislation, has created a federal deficit exceeding $3 trillion annually. At the end of June (the close of the government’s third quarter), the deficit represented 13.1% of GDP, a level not seen since World War II. To reduce this amount, anticipate either higher tax rates or a combination of spending cuts and restrictions on deductions. In terms of limiting deductions, remember the business interest limitation using 30% of adjusted taxable income is temporarily increased to 50% through 2020 (returning to 30% in 2021). Furthermore, 100% bonus depreciation is set to expire for assets placed in service after Dec. 31, 2022. Congress may choose to limit other deductions in attempts to raise revenue. While many are facing difficult times, business does not stand still. Solid financial and tax planning is needed now more than ever. With our year-end letter, we have always urged readers to not only do their annual tax planning, but to use this period to conduct a full financial review of their portfolios and estate planning as well. This year, such a financial review is not just recommended, it is critical. In the coming weeks and months, managing cash and minimizing current taxes is even more important as the economy recovers. The CARES Act presents some one-time opportunities for taxpayers to reduce taxes and obtain refunds from prior years. For example, while the TCJA had repealed the net operating loss (NOL) carryback rules, the CARES Act reinstated them for 2018, 2019 and 2020 losses. If you have a taxable loss in 2020, careful analysis is needed to maximize the tax benefit of such loss since a 2020 loss can be carried back five years. However, losses incurred in 2021 will no longer be eligible for any carryback. As a result, this represents your last chance to recover tax payments made in 2015 through 2019. If you need cash currently, look into filing an NOL carryback return as soon as possible after year-end to expedite your refund. In addition to these NOL changes, our 2020 year-end tax-planning letter focuses on tax topics with the above economic and political backdrop in mind. We examine multiple pieces of CARES Act and TCJA guidance (including Paycheck Protection Program debt forgiveness, the employee retention credit and payroll tax deferral), analyze pass-through loss and cancellation of indebtedness strategies, summarize tax capital reporting, define the home office deduction as well as review a myriad of international and state and local tax changes.  As always, your Baker Tilly advisor is ready to assist you in meeting your financial and tax objectives. Contact an advisor 
Visit the sections below for more information about the most pressing year-end tax issues: Business interest limitation rules (section 163(j)) – Where do we stand? Will refunds from losses become a lifeline for struggling businesses? Loan modifications: Take care of them so they don't take care of you Lease modifications: Beware of potential tax ramifications Tax issues created by PPP loan forgiveness Limited liability companies in a loss environment Carried interests in 2020 and beyond Final 2020 bonus depreciation regulations Partnership tax capital – 2020 reporting requirements loom Employee benefits and executive compensation update Proposed regulations issued to implement TCJA small business taxpayer simplified accounting methods Home office deduction Opportunity zones – reminder of COVID-19 relief and remaining areas of uncertainty Residency rules and state trust taxation – Beware the traps Time running out for year-end estate planning State and local tax update U.S. international tax update Conclusion We will continue to keep you informed of the latest developments by sending updates to assist you with planning throughout the remainder of the year. See our 2020 Tax Planning Guide  for additional ways to help you reduce your taxable income by taking advantage of every tax break to which you are entitled.  Take a look back on our 2019 year-end tax letter. 
The information provided here is of a general nature and is not intended to address the specific circumstances of any individual or entity. In specific circumstances, the services of a professional should be sought. Tax information, if any, contained in this communication was not intended or written to be used by any person for the purpose of avoiding penalties, nor should such information be construed as an opinion upon which any person may rely.  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.

Baker Tilly’s 2020 year-end tax focuses on tax topics with the above economic and political backdrop in mind. Our professionals look at international, federal, state-and-local and compensation tax issues among other areas.

Private Wealth

Lease Accounting Readiness (ASC 842)

2020 year-end tax letter

Authored by Kathleen Meade In September, the IRS released eagerly awaited proposed regulations on revenue recognition for tax purposes. It also issued procedures for implementing accounting method changes to comply with these new provisions. Although the regulations are not effective until finalized, taxpayers may rely on the proposed regulations for taxable years beginning after Dec. 31, 2017, provided they consistently apply all the appropriate rules. Proposed rules related to specified credit card fees (late fees, cash advance fees and interchange fees) may be relied on for tax years beginning after Dec. 31, 2018. Background: The Tax Cuts and Jobs Act (TCJA) revises the revenue-recognition timing rules for accrual-basis taxpayers with an applicable financial statement (AFS). Under tax reform, revenue is generally recognized upon the earlier of when the “all-events” test is met or when the taxpayer includes such income in its AFS. The TCJA also codified the one-year deferral method of accounting for advance payments. Under this method, accrual-basis taxpayers are generally permitted to defer recognizing certain advance payments until the tax year following the tax year of receipt provided the amount is also deferred for financial statement purposes. The TCJA repealed the so-called “two-year deferral method” used for certain inventory and long-term contract payments. The imposition of the AFS conformity requirement and repeal of the two-year deferral method may accelerate revenue significantly, particularly following the adoption of the new financial revenue recognition standards. Between the tax and AFS conformity rules, revenue will typically be accelerated for many common items such as long-term contracts, licenses, contingent amounts and advance payments. The proposed regulations: Issued in two parts, the proposed regulations clarify and expand on the changes made by the TCJA. One set of rules addresses revenue recognition timing, which, in addition to the new AFS conformity provision, requires the transaction price for multiple element contracts to be allocated to the respective performance obligations using the AFS allocation method. The other set of rules primarily relates to the timing of advance payments. Highlighted below are some of the key provisions and implications of the proposed regulations:  Application of the “realization” rule: The proposed regulations under section 451(b) provide that the AFS conformity rule will not apply to accelerate income that is “contingent on the occurrence or nonoccurrence of a future event.” However, the proposed regulations include an unfavorable “presumption” that amounts are not contingent if they are included in the AFS. The taxpayer may “rebut” the presumption if it can establish “to the satisfaction of the Commissioner” that the amount is in fact contingent on the occurrence or non-occurrence of a future event (e.g., pursuant to a written agreement). The proposed regulations provide two helpful examples similar to those contained in the Blue Book to assist taxpayers in determining whether they have met the burden of proof to rebut the presumption and establish that the amount is “contingent.” The IRS requests comments regarding the presumption and various other aspects related to contingent consideration, indicating that further guidance in this area may be forthcoming. Comments are due by Nov. 8, 2019.
Definition of “special” methods exempt from the AFS conformity rule: Items accounted for using a “special method of accounting” are not subject to section 451(b). A special method of accounting is a method permitted or required under current tax law pursuant to which income is recognized in a taxable year other than the taxable year in which the all-events test is met. The proposed regulations provide an expanded and non-exclusive list of such special methods, including the following: Methods provided in sections 453 through 460 (which include the installment method and long-term contracts) Methods of accounting for hedging transactions under section 1.446-4 Methods of accounting for certain rental payments under section 467  Mark-to-market method under section 475  Original issue discount (OID) methods of accounting (except for specified fees, including certain credit card fees, not treated as OID in the AFS) The broad definition and non-exclusive list of special methods are welcome developments, particularly with respect to the limitation on the scope of OID income subject to the new section 451 provisions.  PCM book conformity not permitted: Comment letter requests for a book conformity “safe harbor” to reduce the complexity and book/tax disparities resulting from implementing the new revenue recognition book and tax standards for percentage-of-completion (PCM) contracts were not adopted in the section 451(b) proposed regulations. However, the preamble requests comments on this topic indicating the IRS may reconsider its position on this issue.  Cost offsets and reductions not permitted: As anticipated, neither set of proposed regulations adopts comment letter suggestions to allow accelerated revenue amounts be offset by related expenses, cost of goods sold and reductions such as allowances, adjustments, rebates, chargebacks, refunds and rewards. Conversely, such offsets are permitted for financial reporting purposes under the new financial revenue recognition standards. The inability to make similar adjustments for tax purposes is expected to affect significantly and adversely many taxpayers required to accelerate substantial amounts of gross revenue under the new revenue recognition timing rules. Consequently, the requests for comments contained in the preamble to the proposed regulations are likely to generate a substantial response from affected taxpayers and their advisors, and signify that the IRS may be open to suggestions on this matter.  Expanded list of advance payments eligible for the deferral method: As expected, the proposed regulations favorably increased the list of eligible advance payments from the two enumerated under section 451(c) (goods and services) to include nine additional items, consistent with Rev. Proc. 2004-34 and subsequently issued guidance. Notably, the proposed regulations authorize the IRS to designate additional qualifying items, signifying that the list of eligible payments may be amplified in the future.  Taxpayers without an AFS eligible to use the deferral method: While section 451(c) limited eligibility for the deferral method to taxpayers with an AFS, the proposed regulations follow Rev. Proc. 2004-34 and extend this favorable method to taxpayers without an AFS. Consistent with the treatment under Rev. Proc. 2004-34, an advance payment received by a non-AFS taxpayer is recognized in the year of receipt to the extent earned, and the balance is recognized in the following tax year.  Longer deferral period for “specified goods”: The proposed regulations under section 451(c) adopt comment letter proposals from the aerospace industry to exclude certain payments for “specified goods” from the definition of advance payments subject to the maximum one-year deferral period. This exclusion applies to upfront payments received at least two years prior to the contracted delivery date for goods that the taxpayer does not have on hand to fulfill the contract in the year payment is received, and all revenue from the sale of the goods is recognized in the taxpayer’s AFS in the year of delivery. The numerous comment requests raised in the preamble indicate the IRS may consider further guidance and/or additional exclusions benefitting other industries or types of payments.  Rev. Proc. 2019-37 automatic accounting method change procedures: The new section 451 provisions are methods of accounting which typically require IRS consent (Form 3115) to implement. Rev. Proc. 2019-37 provides procedures to obtain automatic consent to comply with new sections 451(b) and (c) and the proposed regulations. The procedures are generally effective for tax years beginning after Dec. 31, 2017, modify existing automatic change procedures, and are subject to certain scope limitations. Notably, the new procedures: (1) add a new change to implement the proposed regulations; (2) permit certain changes to be made on a cutoff basis or with a section 481(a) adjustment; (3) temporarily provide audit protection for taxpayers with an AFS that are under exam; and (4) allow certain small taxpayers to use streamlined procedures for a limited period to implement the new rules.  Bottom line is taxpayers with AFS should review their current accounting methods for compliance and look to proactively change methods, if possible, in order to help manage their tax position. View more insights in the 2019 year-end tax planning letter >  Download the 2019 year-end tax planning letter > -- The information provided here is of a general nature and is not intended to address the specific circumstances of any individual or entity. In specific circumstances, the services of a professional should be sought. Tax information, if any, contained in this communication was not intended or written to be used by any person for the purpose of avoiding penalties, nor should such information be construed as an opinion upon which any person may rely. 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.

The IRS finally released proposed regulations for section 451 and procedures for how to comply with them. Even though they aren’t final, taxpayers should see if they will need to change their accounting method to be compliant.

2019 year-end tax letter: revenue recognition rules finally arrive

The Tax Cuts and Jobs Act (the Act) favorably amended certain tax provisions applicable to eligible small business taxpayers to, among other things, increase the “small taxpayer” gross receipts threshold to $25 million. This change enables more taxpayers to use the cash method of accounting and can exempt them from the often costly and onerous requirements of capitalizing costs under section 263A, complying with the section 460 percentage of completion (PCM) rules and accounting for inventories under section 471. On Aug. 3, 2018, the IRS issued Rev. Proc. 2018-40, which permits eligible small business taxpayers to obtain automatic IRS consent to implement the small taxpayer provisions under the Act, generally effective for tax years beginning after Dec. 31, 2017. Key provisions of the four new accounting method changes are highlighted below. New automatic method changes for small business taxpayers Section 15.18 – Change to overall cash method: This change applies to a small business taxpayer (defined as a taxpayer that has average annual gross receipts for the three prior taxable years of no more than $25 million) that wants to change its overall method of accounting from an overall accrual method of accounting to the overall cash method of accounting for a trade or business. Note that receipts are adjusted for inflation and, as under prior law, are determined on an aggregate basis for affiliated groups. Taxpayers that are members of affiliated groups should carefully analyze their ownership structures and gross receipts levels to ensure the small taxpayer eligibility threshold is not exceeded. Ineligible taxpayers: Taxpayers precluded from making this change to the overall cash method include: tax shelters described in section 448(d)(3) taxpayers otherwise prohibited from using the overall cash method or required under the Code or regulations to use another method of accounting (e.g., sections 475 and 1272) certain banks farmers Note, however, that banks and farmers may be eligible to automatically change to the overall cash/hybrid method or the overall cash method, respectively, under other sections of Rev. Proc. 2018-31. See sections 15.12 (banks) and 15.13 (farmers). Section 12.16 - Exception from capitalizing section 263A costs: This change applies to a small business taxpayer, described above, that capitalizes costs under section 263A (UNICAP) and wants to change to a method of accounting that no longer capitalizes these costs. Note that the change to discontinue capitalizing UNICAP costs also applies to producers and to self-constructed assets described in section 263A(i). Conversely, this change does not apply to section 460 home construction contracts, which nonetheless may be eligible for the UNICAP exemption method change in new section 19.01, discussed below. Section 22.19 - Exception from accounting for inventories under section 471: This change applies to a small business taxpayer, described above, that wants to change its section 471 method of accounting for inventory to either: treat inventory as non-incidental materials and supplies under Treas. Reg. section 1.162-3 or; conform to the taxpayer’s method of accounting used in its applicable financial statements (AFS) or, if the taxpayer does not have an AFS, in the books and records prepared in accordance with the taxpayer’s accounting procedures No ruling protection: IRS consent granted under this new procedure does not include a ruling that the new method of accounting is permissible. Thus, a change made under this section may be challenged on exam and taxpayers should therefore be prepared to support their new method(s) of accounting with the appropriate legal authority. _Note: _The exception from accounting for inventories under section 471 does not mean that inventory can simply be expensed or otherwise not accounted for as an asset unless it is incidental. Nor can it be expensed under the cash method of accounting. Section 19.01 - Certain long-term contracts exempt from PCM and section 263A: This change applies to a small business taxpayer, described above, that wants to either: change its method of accounting for exempt long-term construction contracts from PCM or stop capitalizing section 263A costs for section 460 home construction contracts Cutoff method required: Unlike the other small business taxpayer changes discussed above that are implemented with a section 481(a) adjustment, the changes under this section are affected on a cutoff basis (i.e., only for eligible long-term construction contracts entered into after Dec. 31, 2017, in taxable years ending after Dec. 31, 2017). Conversely, exempt long-term contracts entered into prior to that time continue to be accounted for using the taxpayer’s former method of accounting. Changes requiring IRS consent: The procedures also clarify when IRS consent (i.e., Form 3115) is required to make the change(s) under this section. Specifically, the procedures provide that only a taxpayer that meets the above described gross receipts test, previously adopted PCM for exempt long-term construction contracts, and wants to change to another permissible exempt contract method of accounting is required to request IRS consent to change its method of accounting for long-term contracts under the new procedures. Likewise, a taxpayer who meets the gross receipts test and enters into a home construction contract that it expects to complete within two years requires consent to change its method of accounting to discontinue capitalizing section 263A costs only if the taxpayer has previously applied section 263A to home construction contracts that are exempt from UNICAP and wants to discontinue capitalizing section 263A costs for those contracts. Conversely, the procedures are inapplicable in the first taxable year that the taxpayer fails the gross receipts test, in which case it must use the PCM to account for nonresidential long-term construction contracts entered into in that year, but must continue to use its exempt contract method of accounting for its existing exempt long-term construction contracts. Similarly, in the taxable year that a taxpayer first meets the gross receipts test, the taxpayer can use a permissible exempt contract method of accounting for long-term construction contracts entered into in that year that it expects to complete within two years. See Rev. Rul. 92-28. Reduced compliance burden: Rev. Proc. 2018-40 includes several favorable provisions intended to provide flexibility and to simplify and reduce the compliance burden of implementing tax changes related to the new small business taxpayer provisions, including the following: Reduced filing requirements: Certain lines of Form 3115 are not required to be completed. A single Form 3115 may be filed for multiple changes requested under the new procedures provided the taxpayer enters the designated automatic accounting method change numbers for the changes on the appropriate line of Form 3115. “Same change” eligibility rule temporarily inapplicable: The rule prohibiting the filing of an automatic method change if the same item was changed within the past five tax years (including the year of change) is waived for changes filed for a taxpayer’s first, second or third taxable year ending on or after Dec. 31, 2017. Existing section 481(a) adjustments: Taxpayers with section 481(a) adjustments from prior related accounting method changes (e.g., taxpayer filing change from accrual to cash method that has a positive section 481(a) adjustment from a previous change from cash to accrual method) may choose to either account for the prior adjustment separately from the new section 481(a) adjustment or, alternatively, may combine or net the prior adjustment with the new section481(a) adjustment(s) provided they indicate the choice to combine/net adjustments in the Form 3115 disclosure statements for line 26. Limited time to convert a non-automatic Form 3115: Taxpayers that filed a non-automatic Form 3115 requesting change(s) covered in the new procedures prior to Aug. 3, 2018, that is still pending with the IRS as of that date, may re-file the application as an automatic change, provided they:
otherwise meet the automatic change eligibility rules,
notify the IRS before the later of Sept. 2, 2018, or the issuance date of a ruling letter granting or denying consent for the change (if any), and
file the automatic Form 3115, along with a copy of the national office letter sent acknowledging the taxpayer’s request to convert, by the earlier of 30 days after the date of the national office’s letter acknowledging the conversion request or the due date of the duplicate copy of Form 3115. For related insights and in-depth analysis, see our Tax Reform Resource Center. For more information on these topics, or to learn how Baker Tilly tax specialists can help, contact our team.

Dental Practices

Advantage

New procedures on small business taxpayer accounting methods

Authored by Kathleen Meade Notice 2018-35 (April 30, 2018) provides transitional guidance relating to the treatment of advance payments under Rev. Proc. 2004-34, which was modified by Pub. L. No. 115-97 (the Act) enacted on Dec. 22, 2017. The Treasury Department and the IRS expect to issue future guidance regarding the treatment of advance payments to implement the new provisions. However, until such guidance is issued, taxpayers receiving advance payments, including those without applicable financial statements, may continue to rely on Rev. Proc. 2004-34. Background Rev. Proc. 2004-34 provides a deferral method of accounting for the treatment of advance payments for goods, services and other items. Under the deferral method, an advance payment is included in gross income for the taxable year of receipt to the extent recognized in revenue in a taxpayer’s applicable financial statement for that taxable year or earned (for taxpayers without an applicable financial statement) in that taxable year, and the remaining amount of the advance payment is included in the next succeeding taxable year after the taxable year in which the payment is received. New section 451(c), effective generally for taxable years beginning after Dec. 31, 2017, contains a deferral method rule similar to Rev. Proc. 2004-34, except that it applies only to taxpayers that have an AFS or “such other financial statement as the Secretary may specify,” and defines eligible advance payments to include only goods, services “or such other items as may be identified by the Secretary,” rather than the nine advance payment categories described in section 4.01(3) of Rev. Proc. 2004-34. Transitional guidance As noted, while the Treasury and IRS expect to issue guidance to implement the changes made to advance payments by the Act, taxpayers may continue to rely on Rev. Proc. 2004-34 for the treatment of advance payments until such guidance becomes effective. Although the IRS will not challenge a taxpayer’s use of Rev. Proc. 2004-34 during the transition period, it will continue to verify on examination that taxpayers are properly applying Rev. Proc. 2004-34. In addition, section 16.07 of Rev. Proc. 2017-30 will be modified to provide a waiver of the eligibility rule in section 5.01(1)(f) of Rev. Proc. 2015-13 to enable taxpayers to make an automatic change to an advance payments method of accounting permitted under Rev. Proc. 2004-34 even if they made an accounting method change for this same item within the past five tax years. In addition, the Notice contains a request for comments to be submitted by May 14, 2018, regarding suggestions for future guidance under section 451(b) and (c), particularly with regard to whether: taxpayers without an applicable financial statement may continue to use the deferral method provided in Rev. Proc. 2004-34 clarity is needed for the definition of an applicable financial statement under section 451(b)(3) the definition of applicable financial statement under section 451(b) and (c) should be the same as the definition in section 4.06 of Rev. Proc. 2004-34 other items in addition to those listed in section 4.01(3) of Rev. Proc. 2004-34 should be included in the definition of an advance payment certain payments other than those listed in section 4.02 of Rev. Proc. 2004-34 should be excluded from the definition of an advance payment any new procedural rules for changing a method of accounting for advance payments would be appropriate and helpful procedures expanding the rules of section 451(c) to apply to additional taxpayers and types of income are needed For more information on this topic, or to learn how Baker Tilly tax specialists can help, contact our team. The information provided here is of a general nature and is not intended to address the specific circumstances of any individual or entity. In specific circumstances, the services of a professional should be sought. Tax information, if any, contained in this communication was not intended or written to be used by any person for the purpose of avoiding penalties, nor should such information be construed as an opinion upon which any person may rely.  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.

Construction

Agribusiness

Life Sciences

IRS provides transitional guidance on advance payments

Webinar video This webinar, led by Baker Tilly’s methods and credits professionals, highlights the impact of various accounting method and credit provisions included in the final tax reform legislation. The presentation provides a summary of the new provisions along with an overview of a variety of considerations and tax planning opportunities. Topics for discussion include: Bonus depreciation Applicable recovery periods for real property Expansion of section 179 expensing Small business accounting method reform and simplification Taxable year of inclusion Amortization of R&D costs Presenter Kathleen Meade, CPA
Firm Director
Methods and Credits For more information on this topic, or to learn how Baker Tilly tax specialists can help, contact our team. The information provided here is of a general nature and is not intended to address the specific circumstances of any individual or entity. In specific circumstances, the services of a professional should be sought. Tax information, if any, contained in this communication was not intended or written to be used by any person for the purpose of avoiding penalties, nor should such information be construed as an opinion upon which any person may rely.  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.

Cost Segregation

Incentives Advisory 

Tax reform webinar series: accounting methods and tax credits

Our client’s need Our client is a leading designer, marketer, and distributor of high-quality fashion eyewear in North America and, consequently, maintains a significant investment in inventory that is subject to the uniform capitalization (UNICAP) rules under section 263A. In general, the UNICAP rules require taxpayers to capitalize additional costs to inventory such as inventory purchasing, storage/handling, and an allocable portion of inventory related to general and administrative (G&A) expenses. The client’s UNICAP calculation had not been reviewed or updated in several years and, due to growth in the inventory levels and the materiality of the UNICAP adjustment, the tax engagement team recommended Baker Tilly’s national accounting methods group specialists review the UNICAP calculations to determine whether the methodology was tax compliant and optimal. Baker Tilly solution Through a detailed review of the client’s business operations and inventory accounting procedures and calculations, the Baker Tilly accounting methods specialists identified opportunities to accelerate inventory deductions for non-capitalizable costs and by electing alternative allocation and capitalization methods. After presenting our findings and recommendations to the client, an accounting method change application (Form 3115) was filed to implement the proposed UNICAP methodology. Results achieved As a result of the accounting method change, our client reduced the amount of capitalized inventory costs by approximately 30 percent. Moreover, this benefit is expected to increase over time commensurate with anticipated growth in inventory and sales levels. Thus, the client will continue to benefit from the new UNICAP methodology prospectively and can employ the tax savings realized from the method change to finance further expansion of its operations. We also provided our client with the custom documentation and templates necessary to maintain and sustain the new methodology in future years. The information provided here is of a general nature and is not intended to address the specific circumstances of any individual or entity. In specific circumstances, the services of a professional should be sought. Tax information, if any, contained in this communication was not intended or written to be used by any person for the purpose of avoiding penalties, nor should such information be construed as an opinion upon which any person may rely. 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.

Accounting method change cuts inventory costs 30 percent

Our client’s need Our client owns and operates more than 80 quick serve restaurants, including Taco Bell and Pizza Hut locations, across the United States. Many of their restaurants recently completed minor renovations to keep the stores cosmetically fresh and attractive for customers and consistent with the current brand requirements. Because of the extensive amount of capital expenditures incurred, we recommended that the Baker Tilly national fixed asset planning team review the tax depreciation schedules. Baker Tilly planning ideas Through the review of the tax depreciation schedules, the Baker Tilly team identified both currently deductible repairs and maintenance costs as well as accelerated depreciation reclassification as areas of opportunity. After thoroughly reviewing supporting cost and scope documentation, and discussions with the client’s real estate department, we implemented the new repairs and maintenance regulations and reclassified qualifying property to the shorter restaurant property recovery period through changes of accounting methods. Results achieved As a result of our fixed asset review, our client received $7 million in additional tax deductions and saved more than $2 million in tax dollars, including a retroactive catch-up adjustment for prior years. We also provided our client with a customized matrix that helps identify what qualifies as a repair and maintenance cost versus a capitalized asset on a prospective basis. Our client will continue to benefit from repairs and maintenance regulations in the future now that they have been adopted. For more information on this topic, or to learn how Baker Tilly retail specialists can help, contact our team. The information provided here is of a general nature and is not intended to address the specific circumstances of any individual or entity. In specific circumstances, the services of a professional should be sought. Tax information, if any, contained in this communication was not intended or written to be used by any person for the purpose of avoiding penalties, nor should such information be construed as an opinion upon which any person may rely.  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.

Restaurants & Franchises

Eighty-store franchisee group saves millions in tax dollars

Our client's need A national rental real estate developer appropriately capitalized the costs associated with their project, at the beginning of production period, under Sec. 263A rules regarding the capitalization and inclusion in inventory costs of certain expenses. Like many real estate developers though, recent economic conditions caused the developer’s project to become stagnant and production ceased.  Though production ceased, the costs associated with the project, such as property taxes, insurance, and interest on the loans, still became due.  Baker Tilly solution As a response to the ongoing costs, Baker Tilly’s specialized real estate tax team filed a Form 3115, Application for Change in Accounting Method, requesting permission to change our client's method of accounting for its interest capitalization. Under Reg. Section 1.263A-12(g)(1), there are special tax rules that relate to the capitalization of interest. According to the regulations, if a project's production period for the designated property ceases for at least 120 consecutive days, a taxpayer may suspend the capitalization of interest for that project. Instead, the taxpayer may expense the associated interest costs until production activities resume. Results achieved The IRS approved the change in accounting method and the developer was able to benefit from a current year deduction of roughly $2.3 million. This approach can be utilized again for any delayed projects that the interest costs associated with it continues to be capitalized. For more information on this topic, or to learn how Baker Tilly real estate specialists can help, contact our team. The information provided here is of a general nature and is not intended to address the specific circumstances of any individual or entity. In specific circumstances, the services of a professional should be sought. Tax information, if any, contained in this communication was not intended or written to be used by any person for the purpose of avoiding penalties, nor should such information be construed as an opinion upon which any person may rely.  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.

Change in accounting method nets rental real estate developer $2.3 million tax deduction on stagnant property

Our accounting methods professionals specialize in identifying, substantiating and documenting federal accounting method changes. By ascertaining and employing the most favorable methods of accounting, we can accelerate deductions and defer revenues to significantly increase a company’s cash flow.

A thorough review and an accounting method change recommendation by Baker Tilly helped our client reduce its inventory UNICAP adjustment by one third with the potential for further savings.

Quick serve restaurant client saves millions in tax dollars.

If a project's production period for the property ceases for at least 120 consecutive days, a taxpayer may suspend the capitalization of interest for that project. Baker Tilly helped a client expense the associated interest costs until production activities resume.

Regardless of a company’s financial and operating status, tax planning can provide a variety of strategies to help companies preserve, acquire or maximize cash. Implementing an accounting methods change is one such strategy.

We help not only existing businesses establish beneficial tax accounting methods, but also startup, acquired and reorganized companies adopt efficient methods as they begin anew.

Income
ASC 606 revenue recognition tax implementations
Tax reform revenue recognition and small business simplification amendments 
Advance payments (gift cards, memberships, subscriptions, goods, services)
Long-term contracts

Deductions
Self-insured medical IBNR
Accrued bonuses
Accrued professional fees
Software development costs
Prepaid expenses
Bad debt expenses
Sales incentives, rebates, allowances
Depreciation
Inventory UNICAP, reserves/write-downs
Section 467 rental expenses

Baker Tilly’s accounting methods team identifies and implements the most favorable federal methods of accounting for our clients.

Baker Tilly’s tax team contributes to clients’ success by accelerating tax deductions, increasing tax credits, reducing cash taxes and mitigating risks.

Baker Tilly offers specialized federal tax compliance and planning expertise to help businesses optimize value while minimizing their tax burden.

IRS examination and appeals representation • IRS installment agreements and offers in compromise • Requests for penalty relief • Private letter ruling requests • IRS voluntary disclosures – offshore and domestic • Criminal tax and white collar investigations • Litigation support and expert witness testimony • AML/BSA regulatory compliance

Baker Tilly's tax advocacy and controversy team understands what you need to do to lower your risk of audit, but also knows how to help you if you are faced with a federal or state examination.

Baker Tilly's research and development credit professionals can help you find R&D activities in areas you may not have thought qualify.

Accounting Methods

Insurance hot topics virtual series: Accounting, tax and statutory update

Proposed regulations issued to implement TCJA small business taxpayer simplified accounting methods

Opportunity zones – reminder of COVID-19 relief and remaining areas of uncertainty

Home office deduction

2020 year-end tax letter

2019 year-end tax letter: revenue recognition rules finally arrive

New procedures on small business taxpayer accounting methods

IRS provides transitional guidance on advance payments

Tax reform webinar series: accounting methods and tax credits

Accounting method change cuts inventory costs 30 percent

Eighty-store franchisee group saves millions in tax dollars

Change in accounting method nets rental real estate developer $2.3 million tax deduction on stagnant property

Tax

Federal Tax

Tax Advocacy & Controversy Services

Research & Development Credits

Our accounting methods professionals specialize in identifying, substantiating and documenting federal accounting method changes. By ascertaining and employing the most favorable methods of accounting, we can accelerate deductions and defer revenues to significantly increase a company’s cash flow.

Accounting method change cuts inventory costs 30 percent

Eighty-store franchisee group saves millions in tax dollars

Change in accounting method nets rental real estate developer $2.3 million tax deduction on stagnant property

Our accounting method services:

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