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In This Edition
Could a Cost Segregation Study Save Your Company Taxes?
It May Not Be Too Late: Look-Back Studies
Administration's 2017 Tax Reform Outline
Watch Out for IRD Issues When Inheriting Money
Viatical Settlements: A Funding Mechanism for Medical Costs
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Could a Cost Segregation Study Save Your Company Taxes?
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If your business has acquired, constructed or substantially improved a building recently, consider a cost segregation study. One of these studies can enable you to identify building costs that are properly allocable to tangible personal property rather than real property. And this may allow you to accelerate depreciation deductions, reduce taxes and boost cash flow.
Overlooked Opportunities
IRS rules generally allow you to depreciate commercial buildings over 39 years (27½ years for residential properties). Often, businesses will depreciate structural components (such as walls, windows, HVAC systems, elevators, plumbing and wiring) along with the building.
Personal property, such as equipment, machinery, furniture and fixtures, is eligible for accelerated depreciation, usually over five or seven years. And land improvements - fences, outdoor lighting and parking lots, for example - are depreciable over 15 years.
Too often, companies allocate all or most of a building's acquisition or construction costs to real property, overlooking opportunities to allocate costs to shorter-lived personal property or land improvements. Items that appear to be part of a building may in fact be personal property. Examples include:
- Removable wall and floor coverings,
- Detachable partitions,
- Awnings and canopies,
- Window treatments,
- Signage, and
- Decorative lighting.
In addition, certain items that otherwise would be treated as real property may qualify as personal property if they serve more of a business function than a structural purpose. Examples include reinforced flooring to support heavy manufacturing equipment, electrical or plumbing installations, and dedicated cooling systems for server rooms.
A Study in Action
Let's say you acquired a nonresidential commercial building for $5 million on January 1. If the entire purchase price is allocated to 39-year real property, you're entitled to claim $123,050 (2.461% of $5 million) in depreciation deductions the first year.
A cost segregation study may reveal that you can allocate $1 million in costs to five-year property eligible for accelerated depreciation. Reallocating the purchase price increases your first-year depreciation deductions to $298,440 ($4 million × 2.461%, plus $1 million × 20%).
Impact of Tax Law Changes
Bear in mind that tax law changes may occur this year that could significantly affect current depreciation and expensing rules. This in turn could alter the outcome and importance of a cost segregation study. Contact our firm for the latest details.
On the other hand, any forthcoming tax law changes likely won't affect your ability to claim deductions you may have missed in previous tax years.
Worthy Effort
As you might suspect, a cost segregation study will entail some effort in analyzing your building's structural components and making your case to the IRS. But you'll likely find it a worthy effort.
 Contact: Matt Eckelberg, CPA
[email protected]
715.384.1995
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| It May Not Be Too Late: Look-Back Studies |
If your business invested in depreciable buildings or improvements in previous years, it may not be too late to take advantage of a cost segregation study. A "look-back" cost segregation study allows you to claim missed deductions in qualifying previous tax years.
To claim these tax benefits, we can help you file Form 3115, "Application for Change in Accounting Method," with the IRS and claim a one-time "catch-up" deduction on your current year's return. There will be no need to amend previous years' returns.
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Administration's 2017 Tax Reform Outline
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President Trump has unveiled a tax reform outline -the "2017 Tax Reform for Economic Growth and American Jobs." The outline calls for dramatic tax cuts and simplification: lower individual tax rates under a three-bracket structure, doubling the standard deduction, and more than halving the corporate tax rate; along with changing the tax treatment of pass-throughs, expanding child and dependent incentives, and more. Both the alternative minimum tax and the federal estate tax would be eliminated. The White House proposal does not include spending and tax incentives for infrastructure; nor a controversial "border tax." According to White House officials, the President's proposals set out broad principles with specifics to be hammered-out in coming weeks. This Briefing presents a high-level overview of the President's proposals.
 Contact:
Jeff Dvorachek, CPA
920.684.7128
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Watch Out for IRD Issues When Inheriting Money
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Once a relatively obscure concept, income in respect of a decedent (IRD) can create a surprisingly high tax bill for those who inherit certain types of property, such as IRAs or other retirement plans. Fortunately, there are ways to minimize or even eliminate the IRD tax bite.
How It Works
Most inherited property is free from income taxes, but IRD assets are an exception. IRD is income a person was entitled to but hadn't yet received at the time of his or her death. It includes:
- Distributions from tax-deferred retirement accounts, such as 401(k)s and IRAs,
- Deferred compensation benefits and stock option plans,
- Unpaid bonuses, fees and commissions, and
- Uncollected salaries, wages, and vacation and sick pay.
IRD isn't reported on the deceased's final income tax return, but it's included in his or her taxable estate, which may generate estate tax liability if the deceased's estate exceeds the $5.49 million (for 2017) estate tax exemption, less any gift tax exemption used during life. (Be aware that President Trump and congressional Republicans have proposed an estate tax repeal. It hasn't been passed as of this writing, but check back with us for the latest information.)
Then it's taxed, potentially a second time, as income to the beneficiaries who receive it. This income retains the character it would have had in the deceased's hands. So, for example, income the deceased would have reported as long-term capital gains is taxed to the beneficiary as long-term capital gains.
What Can Be Done
When IRD generates estate tax liability, the combination of estate and income taxes can devour an inheritance. The tax code alleviates this double taxation by allowing beneficiaries to claim an itemized deduction for estate taxes attributable to amounts reported as IRD. (The deduction isn't subject to the 2% floor for miscellaneous itemized deductions.)
The estate tax attributable to IRD is equal to the difference between the actual estate tax paid by the estate and the estate tax that would have been payable if the IRD's net value had been excluded from the estate.
Suppose, for instance, that you're the beneficiary of an estate that includes a taxable IRA. If the estate tax is $150,000 with the retirement account and $100,000 without, the estate tax attributable to the IRD income is $50,000. But be careful, because any deductions in respect of a decedent must also be included when calculating the estate tax impact.
When multiple IRD assets and multiple beneficiaries are involved, complex calculations are necessary to properly allocate the income and deductions. Similarly, when a beneficiary receives IRD over a period of years - IRA distributions, for example - the deduction must be prorated based on the amounts distributed each year.
We Can Help
If you inherit property that could be considered IRD, please consult our firm for assistance in managing the tax consequences. With proper planning, you can keep the cost to a minimum.
 Contact:
Corwin Osterloh, CPA
507.453.5960
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| Viatical Settlements: A Funding Mechanism for Medical Costs |
Someone who's terminally or chronically ill may lack the funds to cover significant medical costs. Although insurance policies have historically been held for the death benefits, it may be possible to sell a policy to a viatical settlement provider. This way, the individual can secure much-needed and generally tax-free cash while still alive.
Buyers and Sellers
Viatication allows a terminally ill person to sell an existing life insurance policy to an investor for more than its cash surrender value but less than its net death benefit. The buyer continues to pay the premiums and receives the life insurance proceeds upon the death of the insured. Many companies currently either buy the policies themselves or serve as brokers to match buyers and sellers for a fee.
In identifying a potential seller, many viatical companies limit their selection to terminally ill individuals with a certain remaining life expectancy (for example, 24 months or less). This is because the company wants to minimize its risk that the individual will outlive his or her life expectancy, resulting in a lower return from the purchase of the life insurance policy for the company.
Factors to Consider
To determine whether it would be advantageous to sell a policy, the insured should consider factors such as:
- His or her cash needs,
- The discount in the value of the death benefit,
- The possibility that payments will disqualify him or her for Medicaid benefits, and
- Access to the payments by his or her creditors.
(Regarding the last point, the cash value while it remains in a life insurance contract may not be subject to the claims of creditors.)
Tax Consequences
Amounts received under a life insurance contract on the life of terminally ill (or within limits, chronically ill) individuals are excluded from gross income for federal income tax purposes. A similar exclusion applies to the sale or assignment of any portion of a death benefit to a viatical settlement provider if the insured is chronically or terminally ill and the payments in question are funded by and diminish the life insurance policy's death benefit.
However, the exclusion doesn't apply if the accelerated death benefits are paid to someone other than the insured individual and the recipient has a business or financial relationship with the insured.
Rules and Issues
Viatication is a complex and sensitive topic. Let us help you navigate the applicable rules and issues.
 Contact: Greg Kenworthy, CPA
[email protected]
608.793.3141
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