On-Demand: Tax and Accounting Update and Year-End Work Planning for Real Estate Companies
- Dec 1, 2022
Join EisnerAmper to hear our professionals discuss tax and accounting matters the real estate industry needs to know before year-end.
Alan Gubernick: Good afternoon, everybody, and happy December. Welcome to our year-end 2022 real estate planning webinar. It's great to be here with our star-studded lineup from EisnerAmper that's going to show you on the depth and breadth of our real estate activities.
We have Michele Rosenman speaking on year-end planning and the always-popular 163(j) election, and she's out of the Long Island office. We have Bill Ryan speaking on the new lease standards that are coming up at the end of this year. He's out of our Metropark office.We have Ralph Estel speaking out of the Philadelphia office on Section 179D, which is always a fun topic, and Twinkal Shah, out of the Metropark office, is going to talk to you about our EisnerAmper outsource department and how we help companies manage their day-to-day operations. So I'm looking forward to all our folks speaking to you today and helping you with year-end planning. So without further ado, I will introduce you to Michele, and Michele, take us out.
Michele Rosenman:All right. Thank you very much, Alan. Good afternoon, everyone. I'm a tax director in the Real Estate Group here at EisnerAmper. Today, I'm going to be discussing some general year-end planning opportunities for real estate companies that are available for 2022. With the year-end right around the corner, taxpayers should review their overall tax situation and look for any potential planning opportunities. Over the past few years, with the passing of the Tax Cuts and Jobs Act, as well as numerous other legislation in response to the COVID pandemic, many changes and opportunities have arisen.
So far in 2022, there's been limited tax legislation, and with control of Congress split after the midterm elections, we don't see any additional major legislation currently in the pipeline. However, there are still many planning considerations to take into account based on current law, and it's important that you discuss these opportunities with your tax advisor. All right. Sorry.
So here are some planning items that I'm going to be discussing in this presentation. Though we don't currently anticipate that tax rates will go up next year, it's always a good idea to review your 2022 income against what you project your 2023 income to be. If you think that your income in 2022 will be higher than 2023 or that your 2022 tax rate will be higher than 2023, then you may benefit from deferring income into 2023 and accelerating deductions into 2022.
Now, there are several ways that this can be done, depending on your method of accounting. If you're a cash basis method taxpayer, you make expenses prior to year-end so that income may be deferred to 2023 and deductions accelerated to 2022. If you're an accrual method taxpayer, you can defer income by postponing the delivery of goods or services until January of 2023. Okay. Oops, sorry.
All right. Now, on this slide, I've included some gain deferral techniques, installment sales, 1031 like-kind exchange, qualified opportunity fund, and the Delaware statutory trust. While it may be late in the year to be able to execute these techniques, we feel it's important to at least mention them. We try to have discussions with our clients throughout the year regarding their business, especially when it comes to any major transactions such as sales of property. It's important that you discuss any potential transactions with your tax advisor before completing the transaction so that proper tax planning can be done in advance.
All right. Now, let's discuss some business deductions that should also be reviewed each year. So the qualified business income deduction, I think, by now, this is a pretty well-known deduction. The qualified business deduction provides a deduction of 20% of qualified business income subject to certain limitations. We do a lot of work with our clients in this area in December. We look at the various factors to see if we can increase the QBI deduction. For example, you could consider increasing your QBI deduction by increasing wages or accelerating the purchase of capital assets.
However, these moves can have other business consequences, so it's important to have a discussion with your tax advisor to carefully review your options and get the most optimal results. One important thing to note about the QBI is that it's set to expire after 2025, absent any congressional action. Another item that we review with our clients every year relates to purchase of equipment. We try to help our clients maximize their depreciation deductions in the most advantageous way possible.
Taxpayers purchasing equipment can make a 179 election. This will allow them to immediately expense otherwise depreciable business property, including computer software and qualified real property. Another great benefit of 179 is that certain improvements to nonresidential real property that may not be eligible for bonus are eligible for 179.
So, bonus depreciation. For property acquired after September 27 of 2017 and placed in service during 2022, a taxpayer can deduct 100% of the cost of qualified property in 2022. This deduction is going to be phased out at a rate of 20% per year after January 1, 2023. And after 2026, it will be completely phased out, absent any additional legislation. As a result of this, timing is very important. If you can get assets placed in service during 2022 rather than 2023, the difference in bonus depreciation is 100% versus 80%. Another important note is that bonus depreciation applies to new as well as used property. So taxpayers planning to acquire business should consider whether structuring the acquisition as an asset acquisition rather than a stock acquisition would be advantageous.
And another big area that clients approach us about relates to whether they could expense or capitalize property purchases. The IRS issued final tangible property regulations in 2013, which created a framework to help investors and tax professionals determine which of their expenses are deductible and which must be capitalized. The repair regs are quite complex, but a major element of these regulations was the establishment of three safe harbors which are intended to simplify the determination of whether an expense must be deducted or capitalized. If a repair cost fits the criteria of one of these three safe harbors, then you can deduct, rather than capitalize, the cost.
All right. Another very important area in the real estate world is the cost segregation study. In general, when you purchase or construct a building, the construction cost or purchase price would generally be depreciated over 27 and a half or 39 years, depending on whether it's residential or nonresidential property. A cost segregation study can identify property-related costs that can be depreciated over a shorter amount of time, typically five, seven, or 15 years. This allows a taxpayer to accelerate depreciation deductions and reduce their current income tax obligations, and this may also allow the taxpayer to take bonus depreciation.
Just keep in mind, there are some disadvantages to the study that should be considered. For example, when short-life assets found in the cost segregation study are sold, they may be subject to depreciation recapture at the taxpayer's ordinary rate rather than the capital gains rate. All right. Gifting. Owners of closely held businesses may want to consider gifting an interest in the business. Business owners can take advantage of valuation discounts, such as marketability and minority discounts. For 2022, the annual gift tax exclusion is 16,000 per donee. That's going to go to 17,000 per donee in 2023. The 2022 lifetime exclusion is 12.06 million, and that's going to go up to 12.92 million in 2023.
Okay. Now, it's very important that you keep in mind which states you're going to be filing in, because various states do not always follow the federal tax treatment. For instance, many states decouple from bonus depreciation, the Tax Cuts and Jobs Act's provisions, and the qualified opportunity fund deferral. All right. And here's another big one, the pass-through entity tax. So the Tax Cuts and Jobs Act limited the amount of state and local income taxes that could be taken on individual tax returns to 10,000.
Since then, many states have been exploring pass-through entity tax workarounds in response to this. Initially, we weren't sure if the IRS would challenge these workarounds, but in November of 2020, the IRS gave guidance to allow state tax deductions at the pass-through entity level and basically opened the floodgates to more states enacting these pass-through entity taxes. Pass-through entity taxes permit the pass-through entity to pay the state tax at the entity level, and as the 10,000 SALT cap applies to individuals, the pass-through entity taxes are taken as a partnership or S corporation deduction, which then flows through to the partners without limitation.
The partners, members, or shareholders of the pass-through entity that has paid this tax will either receive a credit against their state individual income tax liability or they'll get to deduct their distributive share of income from their adjusted gross income in determining their state income tax liability. The laws governing these entity-level tax elections vary significantly from state to state, so you really have to review them carefully. For instance, not all states will allow a resident to take a credit for taxes paid to a nonresident state's pass-through entity tax.
All right. All right. Let's discuss some updates to 163(j) now. The Tax Cuts and Jobs Act of 2017 revised Section 163(j) to limit the deductibility of business interest expense for years beginning in 2018. This limitation is based on a percentage of adjusted taxable income. Generally, the deduction is limited to 30% of the entity's EBITDA through 2021, but in 2022, this will change to EBIT. So the add-back of depreciation and amortization for the baseline of determining the interest deduction limitation will no longer be allowed. This change in 2022 will trigger a huge amount of non-deductible interest expense for many taxpayers.
When this law was written in 2017, we saw this provision for 2022, and we thought it would've been amended by now because it really seems very illogical. Unfortunately, this has not been changed. This is a critical issue for 2022 and you should be working with your tax advisors to plan for it. Now, there are some outs. The Section 163(j) limitation applies to all business interest payments for taxpayers with gross receipts in excess of 27 million. The limitation does not apply to taxpayers who qualify as a small business and taxpayers who make a real property trade or business election.
In order to qualify as a small business, a taxpayer must satisfy a gross receipts test and not be a tax shelter. This determination is complicated and it must be made annually. It's best to discuss this with your tax advisor on an annual basis. The real property trade or business election is irrevocable once it's made. It requires the use of the alternative depreciation system or ADS for certain assets which has longer depreciation periods than under the regular depreciation rules. Additionally, affected assets are not eligible for a bonus depreciation deduction.
If you previously evaluated the real property trade or business election but decided not to opt out, you should reevaluate the election in light of these changes. Most of our multifamily real estate clients have already made this election since the ADS depreciation on residential property is 30 years, which is really not much longer than 27 and a half years when you think about it. And in addition, residential property, not qualified. For our commercial real estate clients, the election needs to be carefully evaluated. The ADS depreciation for nonresidential real property is 40 years versus 39 years for regular depreciation, but the bonus depreciation is not available under ADS. Careful analysis really needs to be done to see whether the removal of the interest expense limitation yields a greater deduction than the lesser amount of depreciation available each year.
Oops. Sorry, I went too far. All right. Now I'm going to discuss Section 174. So effective January 1 of 2022, a provision of the Tax Cuts and Jobs Act came into effect that created a significant change to the treatment of research and experimental expenditures under Section 174. Historically, businesses had the option of deducting Section 174 expenses in the year incurred or capitalizing and amortizing the cost over five years. But now, with this new TCJA provision, you don't have this option anymore.
Now, Section 174 expenses associated with research conducted in the US has to be capitalized and amortized over a five-year period. Expenses associated with research outside the US must be capitalized and amortized over a 15-year period. All right. That's it for me. I want to thank everybody for taking the time. Now, I'm going to move it over to Bill Ryan, who's going to discuss the overview of the new lease standards.
William Ryan:Thanks, Michele. My name's Bill Ryan. I'm a partner in the Private Client Services Group at EisnerAmper. I primarily work with clients in the construction and real estate industries. And today, I'll be talking about the new lease standard. Just to set the groundwork a little bit, this really does not apply to anyone unless you're using a GAAP basis financial statement. So if you're not following generally accepted accounting principles, so if you're using income tax basis or another method of accounting, this really won't apply to you, which is a good thing, because this is complicated and time-consuming to adopt and will have a significant impact on your financial statements.
The overall concept came out back in 2016. The Financial Accounting Standards Board came out with ASU 2016-02 or it's more commonly known as ASC 842 or the new leasing standard. It first became effective for public companies back in 2019, and after several years of delays, it's now effective for privately held companies beginning on January 1st, 2022. So you should expect to have this on your financial statements for the current year. What's going to happen is, leases, which used to be more of an off-balance-sheet item, it'll only be a disclosure. You never saw any sort of liability for your future lease payments. Those payments now need to be present-valued and put onto your balance sheet. You'll have a corresponding asset that would be roughly similar to what the liability would be equal to.
This will have a significant impact on your financial statements. You will have a significant asset, a significant liability. You should be discussing this with your bankers because this could affect financial covenants and could also get you out of compliance. So your bank should be aware of this concept, but you absolutely should do some preliminary work to see how this will impact you before the year ends. As I mentioned before, it's a complex standard. There's different ways to adopt. There's evaluations of the leases that are required. It's time-consuming. There are special programs available, software programs available, that will do the calculations for you, or you could engage a firm like EisnerAmper to assist with the accounting.
We've broken down some of the treatments between the balance sheet, the income statement, and the cash flow. But really, all of your leases would be classified into three main categories. Finance leases, which is going to be generally equipment-type leases, these are similar to capital leases that used to exist prior to this standard. Now, if you recall, under capital leases, there was very clear guidelines about what would make a capital lease. Under the finance lease criteria, it's more general and conceptual. So one of the following would have to be met in order for the lease to be treated as a finance lease, a bargain purchase option or transfer of ownership at the end of the lease, the lease term would have to make up a major portion of the asset's life, or the present value of the lease payments would need to be a substantial part of the value of the asset.
When doing these calculations, you would first determine the total lease payments, gather the information, and then use a present value factor that could be either an incremental borrowing rate or a similar interest rate that you determine to come up with the present value number, and then from there, you would record a non-current asset, and your liability would have both a current and non-current portion, very similar to having debt. Then for the P&L treatment or the income statement, that asset under a finance lease is amortized, similar to a fixed asset, so you'd have amortization expense on your books and then you'd have a small piece of interest expense.
The operating leases are really anything that doesn't qualify as a finance lease. This would apply to most real estate leases, because it's unlikely that ownership would transfer at the end of a real estate lease or that a significant portion of the real estate's life would be used up during that portion of a lease term. Similar to the finance lease, you would come up with a present value factor. You would calculate the present value of the future lease payments. Again, you would have an asset recorded and a corresponding liability with both a current and a non-current portion. The major difference is, as the payments are made, the liability is decreased, and as the asset is reduced, you would treat that as rent expense.
Last, you have short-term leases, and these are leases that have a period of 12 months or less at commencement. These short-term leases are not subject to the standard, so you can just avoid these altogether, or you can make an election if you'd like to include these in part of the calculations. They can be included in different lease calculations. Now, you do have access to all these slides. Here's kind of a visual presentation of the decision process of, should it be treated as a finance lease or an operating lease?
As I mentioned before, adopting the standard is time-consuming. First, you need to identify all of your leases, and this is everything from office leases, copiers, postage machines, vehicles, equipment. There really is a surprising amount of leases in a business once you start to get down to the level of looking for copier leases and postage machines, all the way through vehicles and equipment, and even the office lease. Each of those leases needs to be evaluated. So you would look at the lease terms, go through the criteria, determine whether it's a finance, operating, or short-term lease. You would then select a transition method in the first year of adoption.
There's two main choices, the comparative method, where you would retroactively adjust prior comparative periods in your financial statements. So you would look at those leases back at each of their inceptions and go back and restate those prior years, or you can use the effective method, where you would account for those leases under the standard beginning January 1st of 2022 and just use it going forward. In our experience, we've seen the effective method being used most frequently.
As part of that adoption, there are some practical expedients. This allows you to make elections about the treatment of certain lease costs. You can combine certain lease costs when you do the evaluation of finance versus operating. You can opt out of certain items being included for your lease. You can also use hindsight for leases that have been in place, where you can look back to see what your election would've been at the beginning of the lease, and then do that retroactively.
The next step in the process. After you've identified your leases and you've gone through the evaluation process and then you've also gone through practical expedients, then it's the initial measurement. As I mentioned before, you do need to come up with a present value factor. You'll be looking at the total payments remaining on the lease, calculating the present value, and then the corresponding liability. In subsequent years, as the lease is paid down, you would have a P&L effect, so you'll have either amortization expense and interest expense for your finance lease or you'd have lease expense on your operating leases.
And in our experience, if you have more than even just a handful of leases, I'd say, if you have more than three to five, it's really not effective or efficient to use Excel. I think a software program or engaging someone on the outside to help you with the calculations and with the adoption is probably the most efficient way to handle this.
After you've done all of your calculations, you will have significantly more disclosures in your footnotes this year. So, traditionally, your lease disclosure really just had future minimum payments and maybe if there were some unusual terms with the lease of extensions or something else like that, but now you'll have increased both qualitative and quantitative disclosures. You'll be disclosing the net present value factors used, any sort of residual amounts, if there are subleases, any significant assumptions or judgments made, in addition to the future maturities. You would also disclose any policy elections or practical expedients that you had used.
As far as ways around this, as I mentioned in the beginning, if you're not using GAAP, then this doesn't apply to you, but if you do have a GAAP statement, you really can't get out of this. This is a required standard. It's been delayed for a few years, but it is effective for 2022. Today is December 1st, so the time is really now for you to resolve this. It's really best for you to begin the calculations and look to see what the impact will be on your financial statements. Talk to your accountant, talk to your banker, and just be ready before the year ends. Now, for our next segment, I'd like to introduce Ralph Estel.
Ralph Estel:All right. Thank you, Bill. My name is Ralph Estel. I am a senior manager in Private Client Services, and I'm here to talk about the 179D deduction. So the 179D deduction was initially in a temporary provision that came about in 2005 that was supposed to incentivize business owners to make energy-efficient improvements to their commercial property, and it was subsequently extended a number of times and eventually made permanent.
Initially, it focused on HVAC systems, building envelope, and interior lighting. Now, in all those extensions, they never actually changed any of the core provisions of the 179D deduction. That was until President Biden came out with the Inflation Reduction Act. Now, the Inflation Reduction Act changes don't take effect until 1/1/23. So let's talk about the old 179D that is still in effect until 12/31. Initially, it was a deduction of up to $1.80 per square foot if you met a 50% energy improvement compared to a similar building under the ASHRAE standards. And the ASHRAE standards was the American Society of Heating, Refrigeration and Air-Conditioning Engineers.
There was also a provision for a partial deduction if you only met one of those three criteria, the interior lighting or the HVAC or the building envelope, and the percents in the slide are how much that improvement had to be to qualify for that. If you only met one or two of the areas, you got 60 cents per area. Now, it was a deduction that was once in a lifetime, so you only got one bite at the apple and that was it, as long as you're over your ownership period.
Now, let's talk about the Inflation Reduction Act changes. It increased that maximum deduction up to $5 a square foot. There is a big asterisk there though. You would now have to meet a prevailing wage and apprenticeship requirement in order to get that maximum deduction. So it is unlikely that this provision will actually be beneficial unless you're required to use a prevailing wage, either require these union contractors or there's some sort of government agency involved that's requiring that, because if you do not meet that prevailing wage requirement, your deduction is only a dollar a square foot.
And I also want to point out, there's now an apprenticeship requirement, which is unique, and basically what they're saying is, in '23, 12 and a half percent of the trade hours spent on your project have to be at the apprenticeship level, and in '24, that percentage goes up to 15%. Now, the IRS actually just came out last week with a lot of the provisions on how do you prove that you met the prevailing wage or apprenticeship requirement. They're relying very heavily on good faith efforts, but you're still probably going to have to get certified payrolls from the contractor and the subcontractor to make sure that you're meeting this requirement.
They still have a partial deduction. However, it's no longer meeting one of those three criteria. It's now, as long as you meet a 25% energy improvement compared to the ASHRAE standards, you can get up to half of the max deduction. And for every percent you increase that, your deduction also increases. Now, what is very unique in the change to the 179D is they came up with this alternative deduction election for energy retrofit projects, and that's the terminology used in the code. And basically, this just eliminated the once-in-a-lifetime deduction.
Now, as long as you've owned the property for five years, you can make a retrofit project. And as long as you can prove that the building is now using 25% less energy than what it was before, you can qualify for this deduction, and that can be done every three years. There are some administrative issues with that, because currently, most commentators are saying, "How do you prove that 25% reduction?" It's going to be taking two years of utility bills before the retrofit is done and one year of utility bills after the retrofit and comparing them.
The problem with that is, if I have to wait a year to prove that I can qualify for a deduction, I've probably already filed the return. So you may have to file amended returns and make some sort of administrative adjustment for it. Now, the 179D is a tool in the toolbox. However, there are some downsides to it. One is, any deduction under 179D has to be recaptured at ordinary rates if the property is subsequently sold at a gain. You need to have an engineering study that is certified by the IRS, by an engineering firm that is certified by the IRS, to qualify for deduction, and the additional prevailing wage and apprenticeship requirements can be a substantial cost. So it's unlikely to be of benefit unless you have to use union wages.
Another credit that was changed was the 45L credit. And initially, this credit was only available for residential developments three stories or less. It now can be available for residential developments of all stories depending on certain criteria. Their credit was $2,000. They increased it to 2,500 or $5,000 depending on the criteria that you used. The criteria was 2006 International Energy Conservation Code. And what is unique here is, when you're building a home or an apartment building in '21 or '22, it was very easy to meet that code because that code's 15 years old.
Now they changed it to the ENERGY STAR requirement or Zero Energy requirement, which are substantially harder to meet, and the credit also changed. For the ENERGY STAR, you get up to 2,500, and the Zero Energy Ready, you get 5,000. The prevailing wage requirement was also added to this for multifamily developers, and you now must start the tax credit process before the development begins, which is going to be very challenging, because you need to know you're going to qualify for this before you even break ground. In the past, it was only after... It was only when the project was done that you were filing for the IECC credits. All right. And that is 179D and 45L. I will pass it on to Twinkal.
Twinkal Shah: Thanks, Ralph. Hi, everyone. My name is Twinkal Shah, and I am a senior manager in the Real Estate Outsourcing Group. Today, I'd like to tell you a little bit about our group and the services we provide and some suggestions and tips and tricks to improve year-end closing. Our group was established approximately two years ago and currently has over 20 clients. We have 15 team members onshore and 13 offshore. Monthly accounting and financial reporting tasks can be challenging and complex for owners and operators of real estate companies. Most real estate companies tend to be small in size with approximately five or less employees in the accounting department.
Many real estate companies outsource their accounting departments to streamline their accounting processes and improve efficiencies and costs, which allows them to focus on their core business strategies. Outsourcing creates a scalable solution for each client based on their needs. We are part of a larger network of auditors, tax professionals, and other groups specializing in real estate, which allows us access to resources beyond the reach of most of our clients.
The monthly recurring services provided by the Real Estate Outsourcing Group all help prepare for year-end close processing, services such as, but not limited to, performing month-end bank reconciliations, maintaining balance sheet schedules such as fixed assets and prepaid schedules, accounts payable and expense processing, and recording day-to-day transactions for the general ledger, as well as delivering month-end financial reporting packages to owners, investors, and lenders. It is important to ensure controls are followed and accounting-related issues are thoroughly researched and resolved in a timely manner.
Utilizing cloud-based technology and automation that is designed to be intuitive and easy is key. Connecting the accounting software system to different types of related workflow systems can help data to be automatically transferred instead of manually entered. By using automation, it allows you to focus on reviewing that day-to-day information is properly flowing, approved, and is accurately recorded and reconciled. This helps the client make well-informed decisions.
As we all know, year-end is quickly approaching and can be a very hectic and stressful time of year. Let's review a few tips and suggestions to help ease the process. One of the essential components to success during this process is communication. It's very important to understand your reporting requirements and deadlines, including your loan and operating agreements. If you are required to have an audit performed, be proactive and connect with your auditors early in the process. We like to meet with the auditors to plan. Having... that will be needed for testing purposes and obtain a list of expected documents and schedules. This can also be done by keeping a list of what you've provided in prior years and making sure that it's completed and ready to go for the current year.
Create a closing checklist. The checklist should include all tasks that need to be completed, all required reports and the respective deadlines, which will help ensure that all necessary accounts are reconciled and all required adjustments are posted. The closing checklist should be specific to each team and properties' needs and should be reviewed regularly by the team for any necessary modifications. The checklist should then be used during the review process to ensure completeness.
Another added efficiency is completing tests prior to year-end. Some of the tasks that can be addressed prior is reviewing the general ledger for any reclassifications throughout the year. Reaching out to vendors as a gentle reminder to submit all open invoices before year-end, ensuring that we account for expenses incurred during the year but not yet invoiced or paid. Prepare interim bank reconciliations to ensure any outstanding items are posted and researched timely.
Leveraging automation and technology is one of the most effective strategies to reduce the time required for a year-end's close. For example, utilizing technology to input invoices into the accounting system, such as AvidXchange, Nexus, and Yardi Full Service, can save significant time. Another key automation is connecting the bank feeds directly to the accounting system, which enable automated clearing of checks and deposits for bank reconciliation processing. Planning and scheduling is an integral part of the year-end process. It's important to stay organized and in sync with your team. Daily and weekly connections and team meetings help the process continue to move forward. Scheduling staff appropriately is an essential part of meeting the deadlines and obtaining a quality work product.
As part of the planning process, it's important to understand the client's needs. Are there any local or state filings that need to be completed? Are there any tax needs that should be considered? For instance, are there any specific reporting requirements if a property is in a qualified opportunity zone? One process that can proactively be addressed is the 1099 preparations. The accounts payable team can ensure that the W-9s are collected in real time and continue to review them monthly or quarterly to follow up on any missing information. This can avoid any delays and surprises during the time of filing.
Assuring all transactions are booked prior to year-end is an important factor. Many owners are buying and selling properties throughout the year. Some key factors to focus on. Please make sure your accountants are aware of these transactions. This goes back to the communication factor. Accounting should be in contact with all divisions and management. You should understand the purchase price, sales price, and refinance conditions. Obtain the final, signed agreement as well as support for the actual cash transactions from or to the bank accounts. Is this transaction performed within a 1031 exchange? Have you considered a cost segregation study?
Make sure you obtain the settlement statement timely so that the transaction can be recorded in real time. Consult with your tax team and ensure these entries are posted accurately and efficiently. Work closely with your accountants, such as tax preparers or auditors, and make sure you obtain all of the necessary K-1s from the tax preparers and reconcile them against the capital accounts. Ensure that all additional items are recorded and reviewed, such as adjusting entries, depreciation and amortization entries, and make sure that the management fees are calculated and booked correctly.
Another simple task that can save time is rolling forward year-end account reconciliation schedules in advance. Pre-populating dates and information can make the close process much quicker. Obtaining any supporting documents in advance, such as operating agreements, lease agreements, payroll documents, are all big time-savers. In closing, one of the most important parts of a successful year-end close is prepare, prepare, prepare. Year-end coincides with normal daily transactions and activities for both the client and the firm. Over-preparing is the way to go.
These are just a few of the processes we recommend to help accurately and efficiently perform year-end close. I would like to thank you for your time today. Please feel free to reach out to me with any questions. Thank you. Back to Astrid.
Astrid Garcia:Thank you, Twinkal. Alan, I believe that you want to answer some questions that we've received from the audience. Alan, you're muted. Sorry. Twinkal, do you want to take one of the questions that we've received from the audience?
Astrid Garcia Yes. Yes. We could hear you now.
Twinkal Shah:Okay. Sorry. Let me go through some of the questions. Hold on one second.
William Ryan:I can jump in. One of the questions relates to leases. So the question came in. The individual has an office lease that expires 11 months from now with a related ownership entity, and the question is, "Can we still just record as in the past as rent expense only?" So it depends. Since it is a related party, you should have a expectation of what you think you're going to do with the lease. So you should consider, if you're planning to extend the lease, how long do you think you're going to extend it for? Do you think just for one year or for multiple years? And that should factor into your calculation of, does this lease need to be treated under the new rules under the new lease standard?
You could try to play around and say, "Every year, it's going to be a short-term lease," but really, you should do it the right way and put the full consideration in if you should be treating this as a lease under the new leasing rules. And then I think there's also a follow-up, said, "Yes, plan to renew the lease year to year. How would one determine the lease duration under this circumstance?" So similar to what I was saying before, if you do plan to renew it, come up with a reasonable estimate of many years you want or calculations to determine the treatment of this lease under the new rules.
Ralph Estel:All right. It looks like I have a couple questions here.
William Ryan:Oh, go ahead, Ralph.
Ralph Estel:So one of the questions, "If we completed a cost segregation study for new properties bought in '22, can we also benefit from a 179D tax deduction?" So in order to qualify for the 179D tax deduction, you actually have to do something. So if you just bought the property and that was all you did, you wouldn't qualify for the 179D deduction. You have to have some sort of improvement that you're doing, either from ground up or some sort of retrofit.
So in theory, if you do a cost segregation study, when you first do buy the property, you get all that bonus depreciation and then you can subsequently have a 179D deduction. That is possible. You do have to work with an engineering firm in order to make sure you qualify. I will say, for 179D deductions going forward, meeting that prevailing wage requirement is going to be challenging. And it looks like she updated her question. "It's a brand-new building." All right.
So you build a building. You met the requirements for 179D, the ASHRAE standards improvement by 50%. Potentially... But you got to understand, you only get to deduct it once. So if you are having a lot of this end up as bonus depreciation, a lot of this other stuff, that's going to be a better result than the 179D deduction, but you'd have to work with the engineering firm that's doing the cost segregation. They should also do the 179D to make sure you can maximize that benefit. But it is going to be, you're going to have to work them both at the same time, and then you only get one deduction. So if you spend 100 grand on whatever this improvement is, you're either going to get it through bonus depreciation on the cost seg potentially or the 179D deduction. You're not going to be able to deduct them in both spots. Right?
So there is potential there, but again, your specific circumstances are going to dictate what's going to happen. All right? And there was something else about the 45L I think I saw here. All right. "So for 45L, I did not know that three stories was the max height for the building to qualify. Please confirm." So it is the max height and it kind of... And this is why 179D and 45L are talked about in the same spot. So in 179D, the property had to be over three stories or four stories and greater for residential buildings, and then 45L was their energy-efficient credit that they were giving for the smaller buildings. So it is up to three stories, at least through 12/31/22. It does look like there's ways to get around that starting in '23, but three stories was the max through '22, and then it looks like all the questions for me.
Michele Rosenman:I see a question on the 179 that I can answer. I guess it says, "Take 179, there should be a profit before 179 or after." So with 179 deductions, there is a business income limitation. So if you elect 179 and the expense would bring your business income to a loss, that portion you can't take. You actually just carry it over to future years. And then there's something, "Is that called BAIT?" Well, BAIT is actually New Jersey's pass-through entity tax. Other states have different names. Let's see, what else?
William Ryan:Michele, for the pass-through entity tax, is it all the same or each of the states have slightly different rules for BAIT versus PTET?
Michele Rosenman:Yeah. They have different rules as to how much you could take. If you overpay, do you get a refund at the state level, or can your partner get a refund? All of the rules are different and that's why you really have to look at state to state, and also look at how they coincide with each other. Right? If you're filing in multiple states, you have to really see, will the other state allow you the same deduction? Do you have to add it back? It's really all across the board.
William Ryan:That's good to know. And then the election time is different for all the states too, so sometimes you need to make the election by certain dates.
Michele Rosenman:Yeah. Like New York, if you didn't make the election for 2022, you're done. You were supposed to make it March 15. They extended till September. So that's it. Some states allow you to make it with the state's due date for the return, and so it would be after the year that it's in effect, but unfortunately, even that's different across the board, so you really have to look.
Transcribed by Rev.com
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