ELECTIONS FOR 1st YEAR REAL ESTATE PROJECTS
When preparing the initial tax return here are the elections for 1st year real estate projects to consider.
1. Accrual of real estate taxes IRC 461(c) with the election included the following information as required by 1.461-1(c)(3)(i)
2. Start up expenses IRC 195(b)
3. IRC 709 Amortization of Organizational Expenditures.
4. De Minimis Safe Harbor Election 1.263(a)-1(f)
For the average taxpayer the amount of an item than can be expensed rather than capitalized is $2,500 1.263(a)-1(ii)(D).
An average taxpayer here is one who does not have audited financial statements.
If you use the de minimis safe harbor, do you have to capitalize all expenses that exceed the $2,500?
No. Amounts paid for the acquisition or production of tangible property that exceed the safe harbor limitations aren’t subject to the de minimis safe harbor election. Therefore, the safe harbor doesn’t require you to capitalize all amounts paid for tangible property in excess of the applicable limitation. If an amount doesn’t qualify under the de minimis safe harbor, you should treat the amount under the normal rules that apply, i.e., currently deductible if paid for incidental materials and supplies or for repair and maintenance. This treatment is proper regardless of whether the amount exceeds the applicable de minimis safe harbor limitation. The de minimis safe harbor is simply an administrative convenience that generally allows you to elect to deduct small-dollar expenditures for the acquisition or production of property that otherwise must be capitalized under the general rules.
5. Amounts paid to improve tangible property – Election to Capitalize Repair and Maintenance Costs. 1.263(a)-3(n)
A taxpayer may elect to treat amounts paid during the taxable year for repair and maintenance (as defined under § 1.162-4) to tangible property as amounts paid to improve that property under this section and as an asset subject to the allowance for depreciation if the taxpayer incurs these amounts in carrying on the taxpayer’s trade or business and if the taxpayer treats these amounts as capital expenditures on its books and records regularly used in computing income (“books and records”)
6. Adoption of the method of accounting recurring time exception for accrual basis tax payer. 1.461-5(d)(1)
The election to adopt the as part of the method of accounting for the first taxable year in which that type of item is incurred.
Generally an accrual taxpayer can take a deduction in the taxable year in which all the event has occurred.
A. All events test,
All events have occurred that determine the fact of there being a liability.
The liability can be determined reasonably accurately.
B. Economic performance has occurred.
The Exception is to meeting B. – the economic performance
is granted IF
1. The economic performance does finally occur within 8 and ½ months of the year end.
2. The liability is recurring in nature.
And
The amount of the liability is not material
OR
The accrual in the present tax period is a
“better match” with the related income for the
present period than when economic performance
actually occurs.
SUBSEQUENT YEAR ELECTIONS NEEDED TO BE MADE EACH YEAR
1. De Minimis Safe Harbor Election 1.263(a)-1(f)(5)
A taxpayer makes the election by attaching a statement to the taxpayer’s timely filed original Federal tax return (including extensions) for the taxable year in which these amounts are paid. Sections 301.9100-1 through 301.9100-3 of this chapter provide the rules governing extensions of the time to make regulatory elections. The statement must be titled “Section 1.263(a)-1(f) de minimissafe harbor election” and include the taxpayer’s name, address, taxpayer identification number, and a statement that the taxpayer is making the de minimissafe harbor election under § 1.263(a)-1(f).
2. Election to capitalize repair and maintenance costs – 1.263(a)-3(n)
n(2)Time and manner of election. A taxpayer makes this election under this paragraph (n) by attaching a statement to the taxpayer’s timely filed original Federal tax return (including extensions) for the taxable year in which the taxpayer pays amounts described under paragraph (n)(1) of this paragraph. Sections 301.9100-1 through 301.9100-3 of this chapter provide the rules governing extensions of the time to make regulatory elections. The statement must be titled “Section 1.263(a)-3(n) Election” and include the taxpayer’s name, address, taxpayeridentification number, and a statement that the taxpayer is making the election to capitalize repair and maintenance costs under § 1.263(a)-3(n).
3. Amounts paid to improve tangible property -. 1.263(a)-3
(h)Safe harbor for small taxpayers –
(1)In general. A qualifying taxpayer (as defined in paragraph (h)(3) of this section) may elect to not apply paragraph (d) or paragraph (f) of this section to an eligible building property (as defined in paragraph (h)(4) of this section) if the total amount paid during the taxable year for repairs, maintenance, improvements, and similar activities performed on the eligible buildingproperty does not exceed the lesser of –
(i) 2 percent of the unadjusted basis (as defined under paragraph (h)(5) of this section) of the eligible building property; or
(ii) $10,000.
So if the item is lessor than 2% of the building basis or 10,000 the taxpayer can expenses under the Safe Harbor.
For example if you have a rental property with a unadjusted basis of 400,000 then 2% would be 8,000 and that would be your cut off to aggregate amount that could be expensed.
Time and manner of election. A taxpayer makes the election described in paragraph (h)(1) of this section by attaching a statement to the taxpayer’s timely filed original Federal tax return (including extensions) for the taxable year in which amounts are paid for repairs, maintenance, improvements, and similar activities performed on the eligible buildingproperty providing that such amounts qualify under the safe harbor provided in paragraph (h)(1) of this section.
SAFE HARBORS
1. For those of you who have a retail establishment or a restaurant and are wondering if your remodeling cost should be capitalized or expensed. The IRS offers a SAFE HARBOR of taking all of the costs of remodeling and allocating 75% to repairs and 25% to Capital improvement. Rev. Proc. 2015-56.
The incredible part is that you have to have an audited financial statement. However the audit fee could be well worth the cost to be able to write of 75% of the remodeling costs.