CPA Practice Advisor

OCT 2017

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OCTOBER 2017 ■ 31 BUILDING YOUR NICHE PRACTICE Investment Trusts (REITS) IRS has issued guidance on stock distributions by REITS. The Ser- vice will treat stock distributions made by a publicly offered REIT in a transaction that that will satisfy certain requirements as a distribution of property under IRC Sections 301 and 305(b). To refresh your memory, those Code Sections state: 301 - For purposes of this sec- tion, the amount of any distribu- tion shall be the amount of money received, plus the fair market value of the other property received. 305(b) - (a) General rule Except as otherwise provided in this section, gross income does not include the amount of any distribution of the stock of a cor- poration made by such corporation to its shareholders with respect to its stock. (b) Exceptions Subsection (a) shall not apply to a distribution by a corporation of its stock, and the distribution shall be treated as a distribution of property to which section 301 applies. Basically, it is a tax-free distri- bution. The Rev. Proc. goes on to say that the REIT must make the distribution to its shareholder with respect to its stock and pursuant to the declaration of the distribution. The guidance additionally states that the value of the stock received by ANY shareholder in lieu of cash will be considered to be equal to the amount of cash for which the stock was substituted. The calculation of the number of shares to be received by a shareholder is determined based on a formula that (1) utilizes the market price of the shares; (2) is designed so that the value of the number of shares to be received in lieu of cash corresponds closely to the amount of cash to be received under the declaration; and (3) uses data from a period of no more than two weeks ending as close as is practical to the payment date. REITs were already a good thing for real estate investments. Now with Rev. Proc. 2017-45, they are even better. ■ purposes. An AFS also includes a financial statement required to be provided to a federal or state government or agency other than the IRS or the SEC. Taxpayers that have an AFS may use this safe harbor to deduct amounts paid for tangible property up to $5,000 per invoice or item. Taxpayers without an AFS can deduct amounts up to $2,500 per invoice or item. For example, a taxpayer with an AFS replaces 100 windows in a property that has 150 windows at a cost of $3,000/window. This taxpayer, applying the facts and circumstances and considering the unit of property, has replaced a significant portion (100/150 or 66%) of the windows and would generally be required to capitalize the costs. If the taxpayer elected the de minimis safe harbor, it could deduct $300,000 immediately (100 x $3,000) and not have to capitalize the costs. A written accounting policy is required for taxpayers with an AFS. The taxpayer sets the threshold, and if the taxpayer's accounting policy is less than $5,000, the amount deductible under the de minimis safe harbor is limited to the threshold set by the policy. This policy must be consistently applied for book and tax purposes and must be in place at the beginning of the taxpayer's year. (Taxpayers may want to consider a lower amount for the policy, as financial statements and reported income will take a hit). Also, taxpayers should consider the impact on financial covenants and ratios. For taxpayers without an AFS, the threshold is $2,500 and a written accounting policy is not required; however, having a written policy is advisable. The de minimis safe harbor election does not include amounts paid for inventory and land. Additionally, it does not apply to rotable, temporary, and standby emergency spare parts that the taxpayer elects to capitalize and depreciate. It also does not apply to rotable and temporary spare parts that the taxpayer accounts for under the optional method of accounting. However, de minimis amounts paid for tangible property may be subject to capitalization, if the amounts include the direct or allocable indirect costs of other property taxpayer's produced or acquired for resale. In order for taxpayers to elect the de minimis safe harbor elec- tion, they need to attach a state- ment titled "Section 1.263(a)-1(f ) de minimis safe harbor election" to the timely filed original federal tax return including extensions, for the taxable year in which the de minimis amounts are paid. The annual election is not a change in method of accounting. Therefore, taxpayers do not need to file Form 3115, Application for Change in Method of Accounting. The IRS has made it easy for taxpayers to elect. In conclusion, the de minimis safe harbor can be easily elected, simplifies recordkeeping and com- pliance and generates more current tax deductions. Many assets that were capitalized in the past can be deducted immediately. If properly planned, this election is very effec- tive for maximizing deductions. ■ Joseph Mecagni is Senior Manager, Tax & Busi- ness Services for Marcum LLP.

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