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Confusing tax law changes may lead to missed deductions

As business owners prepare their files and paperwork for tax season, one particular tax law change may lead to substantial missed opportunities for taxpayers in Maryland.

Imagine you’re the landlord of a commercial office building, which you’ve owned for 10 years. A new tenant asks that you pay $195,000 to remodel 25 percent of the existing office space. To entice the tenant, you agree. Under old tax law, you had to write off the improvements over the next 39 years, resulting in approximately $5,000 of annual deductions with a tax savings of $2,000 per year, assuming a 40 percent tax rate. Now, under the new rules, you can expense the entire $195,000 in the first year, resulting in a tax savings of $78,000! CPAs and business owners alike call a tax savings of $76,000 – REAL MONEY!

And there’s more. These changes also give taxpayers a chance to review old asset classification and potentially receive more deductions this year. Under the old tax law, these assets were being written off over their tax lives, in some cases, many years. Now however, taxpayers get a “redo” where they can take a second glance at those older assets to see if they now qualify for a deduction.

We’ve entered the “tax” candy store.

But it’s not all good news. The scary reality for taxpayers is that many tax professionals have not focused enough time on evaluating the implications of the new law. This could be that the information available is more than 2,000 pages and many professionals don’t have the resources to dedicate to this complicated topic. So here’s what you need to know.

Effective for 2014, the IRS issued new Tangible Property Regulations, known as TPRs, which will require both taxpayers and CPAs to take a very close look at how they are categorizing and reporting certain items as either deductible expenses or as depreciable assets. Defined as “business assets that have an economic life of more than one year and held for the purposes of generating income,” depreciable assets may include items such as business equipment, materials, supplies and in some cases, even items commonly thought of as repairs and maintenance.

In the past, the IRS rules with regard to asset/expense classification were informal, but many CPAs had a solid grasp on how to properly categorize these types of expenses. The ultimate result typically ended in more tax deductions and helping their clients keep more money.

Now, these new TPRs are changing everything.

Simply put, the previous rules were vague and poorly defined and there was little formal guidance for tax professionals to follow. Over time, CPAs became very capable at predicting the IRS’ stance and enforcement of these rules and were able to easily navigate them. Then for 2014, the IRS decided that in order to make things more clearly defined, major changes were in order. As is the way with tax law changes, an effort to make things easier to understand inevitably made everything far less clear. These recent changes are no exception.

So what does a business owner need to know? First, make sure your tax professional understands these changes and recognizes their significance. If they seem to think the new TPRs are either not important or irrelevant, it might necessitate a second opinion. Next, thoroughly review your books and records to determine the applicability of the new law. If relevant, the numerous method changes and form filings required for the 2014 tax year will require extra time to be spent on tax preparation. Lastly, while many tax professionals view these regulations as a burden that must be addressed during an already busy time of year, this is actually a terrific opportunity to look at previous years and, potentially, save thousands of dollars when filing your returns this year.

That’s only if you and your accountant know and understand the latest rules. As business owners prepare for tax season, make sure you and your CPA professional are following and applying the new letter of the law.

Your bank account will thank you.

Steven G. Albert (CPA, Director) has 40 years experience as a leading tax professional in the Baltimore region and is Glass Jacobson’s director of tax services.

Matthew Bralove (CPA, MST) is a senior tax manager with Glass Jacobson and a tax professional with more than a decade of experience in the classification of depreciable property.