Monthly Archives: May 2017

Tangible Property Regulations Present Tax Savings Opportunities for Hotel, Restaurant, and Food Distribution Owners

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In 2014, the IRS issued guidance, which over the last several years has made a significant impact on how hotel, restaurant, and food distribution owners capitalize and depreciate assets placed into service. Effective for tax years beginning January 1, 2014, the tangible property regulations regulate the treatment of normal repairs and maintenance versus an improvement to an asset. The regulations also clarify whether fixed asset additions must be capitalized or expensed immediately.

Wondering how this applies to your business, and if you need to make changes to take advantage of potential savings? Find out below.

What must be implemented?

All taxpayers that have depreciable fixed assets must have a capitalization policy that determines the threshold under which a fixed asset or an improvement to a unit of property is to be capitalized and depreciated. Under the new regulations, the IRS will allow a business without audited financial statements to have a “safe harbor” threshold of $2,500 per unit of property and $5,000 per unit of property for business owners with audited financial statements. While taxpayers are allowed to use higher capitalization thresholds, the taxpayer must be able to justify using a threshold above the allowed safe harbor amount in the event of an audit.

What is considered an “improvement to a unit of property”?

Business owners must make the distinction between routine maintenance and an improvement to a specific asset or unit of property. Improvements to a unit of property that must be capitalized and depreciated over its useful life are defined as betterments, a restoration to an original state, or an adaptation to a new use. Examples of a unit of property can include the building, HVAC system, and electrical system. Common improvements for hotel and restaurant owners could include expanding the hotel building or a restaurant conducting renovations to the inside of the building space used for restaurant operations.

What is considered routine maintenance?

Routine maintenance may be written off if the action will be completed more than once over a ten-year period. This could include hotel owners putting down new asphalt in the hotel’s parking lot every five years or restaurant owners replacing the floor titles of their restaurant every few years.

Can you deduct materials and supplies?

Under the regulations, there is a set de minimis of $200 or a useful life of 12 months or less that can be expensed immediately upon purchase. This allows hotel, restaurant, and food distribution owners to immediately expense items such as bed linens, glassware, tablecloth linens, utensils, and manufacturing supplies.

What are the opportunities under the regulations?

The regulations require great diligence in both year-end tax planning and tax return preparation, but do allow for substantial tax savings techniques for hotel, restaurant, and food distribution owners. Accelerated deductions of asset additions could be obtained under the tangible property regulations. If a unit of property such as a HVAC system or electrical system is placed in service and it replaces an old system, the business owner may be able to write off the old HVAC or electrical system that was replaced.

Each year, business owners should review their fixed asset purchases to determine if there are any additions that can be directly expensed or if there are any prior fixed assets additions that can be disposed of. Please reach out to us if you have any questions or would like more information on the tangible property regulations and the impact it can have for a restaurant, hotel, food distributor, or company that services the hospitality industry.

Aronson LLC is available for consultation on tax and business management topics. Please contact Aaron M. Boker, CPA at 240.364.2582 or for more information.

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FAFSA Data Breach Impacts Nearly 100,000 Taxpayers

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Another government agency falls short in protecting personal data. A recent data breach to the Department of Education website’s Free Application for Federal Student Aid (FAFSA), has compromised the personal information of approximately 100,000 taxpayers. Parents and students had an option to use the IRS Data Retrieval Tool (DRT), which provided access to their income information from prior year tax returns and automatically filled in the applicable information on the FAFSA application.

Identity thieves used the personal information of individuals that they had obtained from outside the tax system to begin the FAFSA application process. The thieves further used the DRT to access adjusted gross income and other personal information to file fraudulent tax returns with the IRS. Currently, it’s estimated that up to 8,000 fraudulent returns were filed, processed, and completed. Furthermore, approximately $30 million in refunds were issued before the IRS shut down the tool in March.

The online FAFSA application remains available and operational; however, the DRT functionality will remain suspended for the 2016-17 and 2017-18 FAFSA application forms. The DRT should be available for the 2018-19 FAFSA application when the form launches on October 1, 2017. Taxpayers that have not completed the process of finalizing their FAFSA applications (2016-17 and 2017-18) must manually enter their 2015 tax information by obtaining copies of their 2015 tax returns or requesting IRS tax transcripts.

The IRS is currently working to identify the exact number of taxpayers affected by the FAFSA breach. As the IRS identifies those taxpayers with compromised personal information, it is flagging and locking down their accounts to provide an additional layer of protection against any fraudulent activity. Additionally, the IRS plans to notify any affected taxpayers by mail about possible identity theft concerns.

For more information or questions, please contact Anatoli Pilchtchikov at 301.231.6200.

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Virginia Targets Out-of-State Retailers Using Fulfillment Centers

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Paul Zee-Cheng was a contributing author to this post.

Effective July 1, 2017, Virginia will require out-of-state retailers to collect Virginia sales tax if they maintain inventory in Virginia. This change, which is estimated to increase annual revenue by $21 million, will mainly impact retailers that rely on third parties to store inventory. For example, many online retailers selling their goods on Amazon also take advantage of Amazon’s fulfillment services. Amazon currently operates three fulfillment centers in Virginia, and recently announced plans to open a fourth to facilitate sales of larger customer items such as big-screen televisions, kayaks, and patio furniture.

Amazon fulfillment centers are just one example of a third party logistics provider available to retailers. Through a simple Internet search, one can find that many more have facilities in Virginia. Out-of-state, online retailers often rely on ‘fulfillment centers’ to take care of the logistics of getting their products to customers more efficiently. The use of these services allows retailers to avoid maintaining offices, employees, business locations, or warehouses in Virginia.

Before the enactment Bill No. 962 on April 5, 2017, retailers were shielded from the obligation to Virginia to collect sales tax if their only presence in the Commonwealth was inventory maintained in a third party fulfillment center. This was made clear in a 2015 ruling where the Department of Taxation concluded that Virginia law did list the maintenance of inventory in Virginia as one of the activities that triggered a sales tax collection obligation. The ruling further reasoned that the performance of such activity by a fulfillment center did not result in the retailer having an agent or representative in the Commonwealth. With the enactment of the new legislation, taxpayers can no longer rely on the Department’s ruling.

Retailers using a third party fulfillment center should take action now, and review their inventory activity within Virginia. If a third party fulfillment center uses a Virginia warehouse without informing the taxpayer, then a retailer may have a sales tax obligation and not even be aware of it. Luckily, retailers who rely on Amazon are able to generate their own reports to track down inventory storage locations.

If you have questions about your company’s sales and use tax compliance, please contact your Aronson tax advisor or Michael L. Colavito, Jr. at 301.231.6200.

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