Discussion:Architect/engineering fees deductibility
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Ipconsulting (talk|edits) said: | 19 September 2006 |
| Are architect/engineering fees incurred in new building construction deductible? Some people told me that they are considered soft cost, therefore deductible. But some told me it is covered under sec 263, which should be capitalized as part of the building costs???? | |
| 19 September 2006 | |
| If the engineering costs are preconstruction; I have taken them as part of the building costs. The engineering fees after ground breaking I have taken as costs. Never had an issue with reporting it this way, but there could be other ideas around as well :) | |
Taxstudent (talk|edits) said: | 20 September 2006 |
| If the architect/engineering fees are incurred because of or directly benefit the construction, they would be capitalizable. "Soft costs" are generally not deductible. The applicable Code section is 263A. | |
| 20 September 2006 | |
| I don't think IP that these would be considered "soft costs" anyway. Soft costs are typically costs that cannot be adequately charged to a specific job....indirect costs are more the way I think they should be deducted after groundbreaking. The student is correct; "soft costs" are not real costs and therefore are not deductible.. | |
| 20 September 2006 | |
| Sandy, I don't think it is correct to say that soft costs are not real costs. I wondered if "soft costs" was defined anywhere and found the following definitions:
http://www.appa.org/Research/SAM/projectsoftcostindex.cfm "Soft costs include such items as architecture, design, engineering, permits, inspections, consultants, environmental studies, and regulatory demands needing approval before construction begins." http://www.uchicago.edu/docs/i-house-committee/ihouse-rehab-050800.html "Soft costs are basically those costs that, although necessary, are not part of the physical structure of the building." These costs would definitely be capitalizable as part of the cost of building the building and depreciable over the life of the building. | |
| 22 September 2006 | |
| Touche'....I should have clarified but did not. Some "soft costs" not including construction soft costs are not real costs...such as costs associated with time and billing that are not really costs passed on to consumers....
Yes, all the above are actual costs, paid for which makes them actual costs and hence should be capitalized or expensed. I still (for construction clients) capitalize any of these costs prior to groundbreaking, but as the job progesses and on the wip reports, I expense the portions that come in after the building is partially completed...such as fees for interior design, additional site work, etc. that was due to owners change orders... | |
| 22 September 2006 | |
| Hi all engineering costs to build should be capitalized just cause you didnt get caught doesnt make it deductible. bye | |
| 22 September 2006 | |
| But what about other costs? Yes, engineering is capitalized...no doubt that this is part of the inital site plan and work in order to build...but when an interior designer or an architect does an amendment due to a "change order", could this not then be deductible? It was not an initial cost of the building...wonder how this should be treated in the future.... | |
Death&Taxes (talk|edits) said: | 22 September 2006 |
| I hope I don't sound cynical, Sandy, but architects would then design a practical shell, or e.g., a six story open space office building and let the end users make all sorts of modifications resulting in change orders. Maybe I am being a bit too extreme, but the idea is open to abuse. | |
| 22 September 2006 | |
| Not cynical at all...never feel that people are meaning to sound anything but helpful and THIS is very helpful :)
You have a very valid point here...so the change orders costs as capitalized costs then are just increasing the basis and then can be deducted when the sale takes place....timing difference but one in which I will make sure to change....love those "change orders", no? hehe | |
| 28 December 2007 | |
| LLC incurs architect fees in anticipation of acquiring land and building. The project is derailed. The land will be sold at a loss. I believe that the land generates a capital loss, since it is not 1231 property, but that the architect fees, previously capitalized in anticipation of the construction, are now an ordinary deduction. Right?
Thanks for any confirmation or direction.... | |
| 28 December 2007 | |
| Jessica, this is totally off the top of my head, but I suspect the character of the loss on the architectural fees depends on what the character of the building would have been if it had been completed. IOW, if the client is in the business of purchasing land, constructing and selling buildings, it would have been Sec. 1231 property and the loss would be ordinary if it is a net Sec. 1231 loss -- or it might even be inventory and ordinary for that reason. On the other hand, if the building would have been a capital asset in the client's hands, I think it's a capital loss.
No research, just thinking out loud. | |
| 28 December 2007 | |
| Hi Katie, Thank you for your thoughts. Perhaps I will have to look into this, which I was hoping not to have to do because I am racing against the 12/31 deadline for year-end planning, and I loathe researching under these deadlines...which is also why I have not responded properly with a very heartfelt thank you on the other matter. Thank you for your help (again). | |
| 29 December 2007 | |
| Jessica, I came across this cite using my CCH Essentials. Carter-Colton Cigar Co., 9 TC 219, CCH Dec. 15,972 (Acq.). I did not look up this case. This cite was a footnote to a sentence stating that the loss from the sale of empty land that was purchased for the purposes of erecting a warehouse was considered an ordinary loss after the building plans were abandoned. Also, keep in mind this case involves a corporation and not a partnership. | |
| 29 December 2007 | |
| Hey Paul, thanks for the lead. Last night I finished this client for now....in AMT either way, safe from underpayment penalties based upon prior year's liability. I will do the research in 2008 and post a conclusion in case anyone else ever has this issue.
One more client to go....I'm going to survive year-end planning after all. Happy New Years! | |
| 29 December 2007 | |
| Wow Jessica! One more client and you still have 2 weeks to go until year end :) | |
| 29 December 2007 | |
| Two weeks - good one. I was discussing 'that' with a client's bookkeeper; then she shushed me with the comment of SPEAKER PHONE! | |
| 30 December 2007 | |
| It looks as though this has been asked and answered, but I thought I'd throw one more wrinkle into the fold. This isn't precisely on point, but it's close enough to bring up. It depends on the nature of the engineering fees, as evidenced by the following excerpt from this link:
http://www.aicpa.org/pubs/jofa/aug2004/soled.htm "The process of cost segregation has shortcomings, however. First, and most easily quantifiable, is the actual cost of the engineering study. While the fees vary widely, a well-done study is not inexpensive: A typical cost segregation study and written report will cost between $10,000 and $25,000. Cost factors are the property’s location, whether the building is new or existing, the nature of the property (residential vs. nonresidential) and time pressures for completion of construction. As in any investment, the taxpayer must conduct a cost-benefit analysis. From the time of its initial commission, a cost segregation study should take about four to six weeks to complete. A business entity can deduct the cost of the study as a business expense under IRC section 162." Admittedly, these are likely not the kinds of engineering fees the original post was about, but the article and the excerpt are worth mentioning. I learned alot by reading it. | |
Taxstudent (talk|edits) said: | 1 January 2008 |
| I've seen agents try to force taxpayers to capitalize the cost of tax-only cost segregation studies. It didn't work in those situations. But depending on how the cost segregation study is set up, it, like the ordinary architectural expenses discussed previously, could end up as a capitalizable indirect. | |
| 22 January 2008 | |
| I said I would post my resolution of this issue. Here it is:
The general rule is that the abandonment of property is not a sale or exchange. Therefore, the loss is ordinary. (Many sources, including IRC Sec. 165, Treas. Reg. Sec. 1.165-2, Cummings’ Corporate Tax Insights 8/14/07, Volume 05, No. 15, FTC 2d M-2353) It is not the nature of the underlying asset that is abandoned that controls the nature of the loss; it is the transaction itself – whether or not it is a sale/exchange. Reg. Sec. 1.165-2(a) specifically discusses the abandonment of nondepreciable property used in a business or for-profit transaction. I found specific discussion of architect fees being abandoned. Abandoned project costs generate a loss when the plans for a building are scrapped. This is per discussion at FTC 2d L-5810 and M-2338, both of which reference separate 1927 BTA cases that I don’t have access to. I am not concerned about reviewing the cases because the discussion is consistent with everything else that I have read. PPC’s Guide to Real Estate Taxation says that Pub 544 says that the loss from abandonment of business or investment property generates an ordinary loss even if the property is a capital asset. I didn’t check the statement since PPC and the Pub are probably nearly equal in authoritative weight and this statement confirms everything else that I have read. PPC also references Pub 544 and Form 4797 instructions in saying that these losses are reported on Form 4797, Part II. This is consistent with my vague memory and makes sense. The proposed regs under 1.165-5 don’t apply because (1) they are not yet in effect and (2) the abandoned property is outside the definition of a security. | |
