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UNIT OF PROPERTYLeased, Co-op or Condo PropertyBDO KNOWLEDGE Tax Webinar Series ‒ Final IRC §263(a) Tangible Property Regulations: Technical UpdatePage 24

UNIT OF PROPERTYProperty Other than BuildingsGeneral Rule: FunctionalInterdependencePlant Property: Discrete andMajor FunctionNetwork AssetsBDO KNOWLEDGE Tax Webinar Series ‒ Final IRC §263(a) Tangible Property Regulations: Technical UpdatePage 25

UNIT OF PROPERTYPersonal PropertyBDO KNOWLEDGE Tax Webinar Series ‒ Final IRC §263(a) Tangible Property Regulations: Technical UpdatePage 26

UNIT OF PROPERTY EXAMPLESReal PropertyReal PropertyExpenditureUOPRetail Store ‒ Stand-aloneStore Refresh ‒ LightingreplacementElectrical systemRetail store ‒ Shopping Mall(leased space)Store Refresh ‒ LightingreplacementLeased portion of buildingelectrical systemOffice ‒ Owned buildingRemove conference room wallBuilding structureOffice ‒ Leased spaceRemove conference room wallBuilding structure within leasedspaceManufacturing PlantRoof replacementBuilding StructureApartment BuildingSingle Unit Heat/AirreplacementBuilding HVAC SystemBDO KNOWLEDGE Tax Webinar Series ‒ Final IRC §263(a) Tangible Property Regulations: Technical UpdatePage 27

UNIT OF PROPERTY EXAMPLESPersonal PropertyPersonal Property: Non-BuildingExpenditureUOPRestaurant ovenBurner replacementOvenGarbage truckEngine repair /replacementTruckApartment unit furnishingsNew carpet for individualunitCarpetDonut bakery manufacturing line ‒Interconnected mixers, ovens, conveyers, loafslicer, packagingKnife replacement /sharpeningSlicer componentRetail Donut Store Bakery ‒ Interconnectedmixers, ovens, conveyers, loaf slicer, packagingKnife replacement /sharpeningEntire baking lineBoiler tube replacementBoiler ‒ Refer to IndustryGuidance Rev. Proc. 201324Power Plant ‒ Coal pulverizers, boilers, turbine,and a generatorBDO KNOWLEDGE Tax Webinar Series ‒ Final IRC §263(a) Tangible Property Regulations: Technical UpdatePage 28

Capitalization Standards:§1.263(a)-3BDO KNOWLEDGE Tax Webinar Series ‒ Final IRC §263(a) Tangible Property Regulations: Technical UpdatePage 29

IMPROVEMENTS TO PROPERTYBettermentAdaptationRestorationBDO KNOWLEDGE Tax Webinar Series ‒ Final IRC §263(a) Tangible Property Regulations: Technical UpdatePage 30

IMPROVEMENTS STANDARDS“BAR”Apply the following tests to the UOP to determine whether the expenditure is a capitalexpenditure:BDO KNOWLEDGE Tax Webinar Series ‒ Final IRC §263(a) Tangible Property Regulations: Technical UpdatePage 31

CASUALTY LOSS RULERestorations Elective casualty loss or current-year repair deduction has been removed Amount required to be capitalized as a restoration of damage to a UOP is limited to theexcess of‒ The adjusted basis in the single identified property at the time of the casualtyover‒ Amount paid for the restoration of damage to the UOP from the casualty thatwould otherwise be a capital improvement Total deduction between the Section 165 casualty loss and repairs cannot exceed out-ofpocket costs incurred in the year of the casualty eventBDO KNOWLEDGE Tax Webinar Series ‒ Final IRC §263(a) Tangible Property Regulations: Technical UpdatePage 32

ROUTINE MAINTENANCE SAFE HARBORReal and Personal PropertyAmount paid is deemed NOT to improve the UOP if it is for the recurring activities that ataxpayer expects to perform as a result of the taxpayer’s use of the UOP “to keep” the UOPin its ordinarily efficient operating condition Routine maintenance for non-building property: activity is expected to be performedmore than once during the ADS class life Expanded to include routine maintenance for building property ‒ Substitute10-year period for ADS class life Does not apply to:New!‒ Betterments‒ Restoration standards relating to loss on replaced component, casualty loss,and restoration from a state of disrepair‒ Network assets‒ Certain rotable spare partsBDO KNOWLEDGE Tax Webinar Series ‒ Final IRC §263(a) Tangible Property Regulations: Technical UpdatePage 33

SMALL TAXPAYERSSafe HarborNew Safe harbor provided for small taxpayers:New! Election to not capitalize repairs, maintenance, or improvements Applies to taxpayers with three-year average gross receipts not to exceed 10M Applies to owned or leased buildings with unadjusted basis not to exceed 1M Total amount paid during the tax year for repairs, maintenance, and improvementscannot exceed the lessor of:‒ 2% of the unadjusted basis of the building, or‒ 10,000BDO KNOWLEDGE Tax Webinar Series ‒ Final IRC §263(a) Tangible Property Regulations: Technical UpdatePage 34

BOOK CAPITALIZATION ELECTIONElection to Follow Book New!Taxpayers may elect to capitalize repair and maintenance consistent with thosecapitalized on its books and records Annual election to treat repairs and maintenance as improvements, Election applies to ALL amounts paid for repairs and maintenance that are capitalizedon the taxpayers books and records. Election is irrevocable Amounts expensed on books and records remain subject to the Code and regulationsand must be analyzed for compliance May elect back to 2012 through amended returnsBDO KNOWLEDGE Tax Webinar Series ‒ Final IRC §263(a) Tangible Property Regulations: Technical UpdatePage 35

BETTERMENT EXAMPLES A retail chain refreshes its stores to maintain the appearance and functionality of its storebuildings after several years of wear. The work consists of replacing and reconfiguringdisplay tables and racks to provide better exposure of the merchandise, lightingrelocations, flooring repairs, moving one wall to accommodate the reconfigured tables,patching holes in walls, repainting, replacing ceiling tiles, cleaning flooring, and powerwashing the building. The display tables and racks constitute 1245 property. The refresh isNOT a BETTERMENT because it did not materially increase the productivity, efficiency,strength, quality, or output of the building structure or system. Taxpayer must capitalizethe amounts paid for the 1245 property [Example 6] Same as above, except the taxpayer also pays amounts to increase the storage space, adda loading dock, a second overhead door, and upgrades to the electrical system at thesame time as the refresh. Amounts paid for the above are deemed BETTERMENTS and mustbe capitalized. However, for reasons discussed in Example 6, taxpayer is not required totreat the amounts paid for the refresh as a betterment [Example 7]BDO KNOWLEDGE Tax Webinar Series ‒ Final IRC §263(a) Tangible Property Regulations: Technical UpdatePage 36

BETTERMENT EXAMPLES (CONTINUED) Taxpayer owns a retail chain. Due to changes in the retail market, taxpayer decides toupgrade its stores to offer higher end products. Taxpayer substantially remodels its storesincluding replacing large parts of the exterior walls with windows, replacing the escalatorswith monumental staircase, adding a new glass enclosed elevator, rebuilding the interiorand exterior facades, replacing vinyl floors with ceramic flooring, replacing ceiling tileswith acoustical tiles, and removing and rebuilding walls to move changing rooms andcreate specialty departments. The work also includes upgrades to the electrical system,including mood enhancing lighting fixtures. In addition, all of the bathrooms wereremodeled by replacing contractor-grade plumbing with designer-grade fixtures thatconserve water and energy. Finally, taxpayer paid amounts to clean debris, patch holes inwalls that were made to upgrade the electrical system, repaint existing walls with a newcolor scheme to match the new interior construction, and to power wash buildingexteriors to enhance the new façade. Taxpayer must capitalize the above items as aBETTERMENT [Example 8]BDO KNOWLEDGE Tax Webinar Series ‒ Final IRC §263(a) Tangible Property Regulations: Technical UpdatePage 37

ADAPTATION EXAMPLES X owns a building consisting of retail spaces that were designed to be reconfigured. Onetenant wishes to expand its occupancy to include two adjoining retail spaces. X pays anamount to remove the walls between the three retail spaces. Assume the walls betweenspaces are part of the building and its structural components. Amounts paid to convert theretail spaces into one larger space for a tenant DOES NOT ADAPT X’s building structure toa new or different use and is not required to be capitalized. [Example 2] Taxpayer owns a grocery store. Taxpayer decides to add a sushi bar for its customers.Expenditures were made for counter and chairs, additional wiring and outlets, additionalpipes and a sink, replacement of flooring and wallcoverings. The amount paid to convertpart of the retail grocery to a sushi bar is NOT an ADAPTATION. The sale of sushi isconsistent with the taxpayer’s intended, ordinary use of the building structure and thesystems in the grocery sales business, which includes selling food to its customers atvarious specialized counters. [Example 6]BDO KNOWLEDGE Tax Webinar Series ‒ Final IRC §263(a) Tangible Property Regulations: Technical UpdatePage 38

RESTORATION EXAMPLESRESTORATION ‒ Major component/substantial structural part: Replacement of the entire roof (decking, insulation) [Example 14] Replace chiller in office HVAC system (consists of one chiller, one boiler, pumps, duct work,diffusers, air handlers) [Example 16] Sprinkler system in a building [Example 19] Replace wiring throughout the building to meet building code [Example 20] Retail business replaces the plumbing fixtures in all of its restrooms (no piping) ‒ Two floors[Example 22] Hotel replaces all bathtubs, sinks in hotel rooms in four of the 20 floors; intends tocomplete renovation of the remaining rooms over next two years [Example 23] Replaces 200 of the 300 exterior windows (total windows are 25% of the building surfacearea [Example 26] Replaces 100 of 300 windows, but the windows cover 90% of the building surface [Example27] Replace all floors in the public areas of a hotel ‒ Public areas represent 40% sq ft [Example29]BDO KNOWLEDGE Tax Webinar Series ‒ Final IRC §263(a) Tangible Property Regulations: Technical UpdatePage 39

RESTORATION EXAMPLES (CONTINUED)NOT RESTORATION ‒ Not a major component/substantial structural part: Replacement of roof waterproof rubber membrane [Example 15] Replacement of one furnace ‒ HVAC system consists of three furnaces, duct work,etc. [Example 16] Replacement of three of 10 rooftop units in HVAC system ‒ HVAC system consists of10 rooftop units, ductwork, etc. [Example 18] Replace 30% of wiring to meet building code [Example 21] Replace eight of 20 sinks in restrooms in a retail store (no piping) [Example 23] Replace 100 of 300 exterior windows (windows cover 25% of exterior surface)[Example 25] Replace flooring in lobby ‒ 10% of the sq. ft. of the entire hotel building [Example29]BDO KNOWLEDGE Tax Webinar Series ‒ Final IRC §263(a) Tangible Property Regulations: Technical UpdatePage 40

MACRS DispositionsBDO KNOWLEDGE Tax Webinar Series ‒ Final IRC §263(a) Tangible Property Regulations: Technical UpdatePage 41

DISPOSITIONSOverview of Proposed RegulationsNew! Comments must be received by November 12, 2013 May be relied upon for the 2012 and 2013 tax years IRS and Treasury Department intend to publish final regulations in 2013 ‒ The finalregulations are expected to apply to tax years beginning on or after January 1, 2014BDO KNOWLEDGE Tax Webinar Series ‒ Final IRC §263(a) Tangible Property Regulations: Technical UpdatePage 42

DISPOSITIONA disposition of property occurs when the asset’s ownership is transferred or when the assetis permanently withdrawn from use either in the taxpayer’s trade or business or in theproduction of income.A disposition occurs when an asset is: Sold or exchange; Retirement; Physically abandoned; Destruction (including casualty); Transferred to a supplies, scrap, or similar account; Involuntary conversion; or Disposition of a portion of an asset as a result of a casualty event, like-kindexchange, involuntary conversion, sale of a portion or an asset, or a “partialdisposition” electionBDO KNOWLEDGE Tax Webinar Series ‒ Final IRC §263(a) Tangible Property Regulations: Technical UpdatePage 43New!

PARTIAL DISPOSITION ELECTIONNew! Taxpayers may elect to treat a partial disposition of an asset as a disposition Taxpayer claims a loss upon the disposition of a structural component (or a portionthereof) of a building without identifying the component as an asset before the dispositionevent The election is made on a timely filed return “including extensions” in the taxable year inwhich the disposition occurs Partial disposition rule is mandatory in certain cases (casualty event, like-kindexchange, involuntary conversions) Proposed regulations provide simplified method for determining adjusted basis ofdisposition, including discounted replacement cost, replacement cost of partial dispositionas a percentage of replacement cost, cost segregations. There no longer is a consistencyrequirement Amend return or method change for 2012 and 2013BDO KNOWLEDGE Tax Webinar Series ‒ Final IRC §263(a) Tangible Property Regulations: Technical UpdatePage 44

GENERAL ASSET ACCOUNT (“GAA”)ElectionNew! Under the GAA, no loss on disposition recognized until all assets in the GAA have beendisposed Definition for qualifying disposition more restrictive ‒ Limited to partial or completedisposition by casualty, charitable contribution, termination or sales of business, andcertain non-recognition transactions Use of GAA returns to prior law Do NOT make a GAA election if goal is to claim losses on partial replacements, includingbuilding structural componentsBDO KNOWLEDGE Tax Webinar Series ‒ Final IRC §263(a) Tangible Property Regulations: Technical UpdatePage 45

Other ConsiderationsBDO KNOWLEDGE Tax Webinar Series ‒ Final IRC §263(a) Tangible Property Regulations: Technical UpdatePage 46

NEXT STEPS AND OTHER CONSIDERATIONS Analyze whether current policies are in compliance with the new capitalization standards Determine adequacy of written policy for the de minimis safe harbor BEFORE thebeginning of 1/1/14 Consider making the following elections:‒ De minimis safe harbor‒ Follow book capitalization method,‒ Capitalize as acquisition costs, the overhead and employee compensation costs‒ Capitalize and depreciate rotable, temporary, or standby emergency spareparts‒ Optional method of accounting for rotable and temporary spare parts‒ Routine maintenance safe harbor for buildings‒ Safe Harbor for Small Taxpayers‒ General Asset Accounts‒ Recognize gain or loss on partial dispositionsBDO KNOWLEDGE Tax Webinar Series ‒ Final IRC §263(a) Tangible Property Regulations: Technical UpdatePage 47

NEXT STEPS AND OTHER CONSIDERATIONS(CONTINUED) Consider ASC 740 financial reporting implications (e.g., FIN 48, disclosures) Consider future reduction/increase in tax rates Determine the accounting method changes required Revisit previous “repair” accounting method changes for revisions to conform to the finalrules Quantify potential tax savings for repairs/dispositions (cash flow) Develop sustainable processes and procedures to continue for future tax years Determine the most advantageous timing to comply with the regulationsBDO KNOWLEDGE Tax Webinar Series ‒ Final IRC §263(a) Tangible Property Regulations: Technical UpdatePage 48

Questions and DiscussionBDO KNOWLEDGE Tax Webinar Series ‒ Final IRC §263(a) Tangible Property Regulations: Technical UpdatePage 49

Speaker BiographiesBDO KNOWLEDGE Tax Webinar Series ‒ Final IRC §263(a) Tangible Property Regulations: Technical UpdatePage 50

BIOGRAPHYNathan Clark, CPANathan Clark, CPASenior Director ‒ Fixed AssetAdvisory ServicesBDO USA, LLP1001 Morehead Square DriveSuite 300Charlotte, NC 28203Direct: (704) 887-4205Fax: (704) 887-4290nclark@bdo.com@ NathanPClarkNathan has 15 years of public accounting experience,including nine years with a Big 4 firm, with a deep focuson capitalization and depreciation accounting methodchanges. His experience ranges from working with smallprivately held businesses to, publicly traded, Fortune500 companies. He has significant experience in retail,manufacturing, real estate, and hospitality industries,among others.Nathan regularly implements tangible propertyregulation accounting method change studies, as well asstudies focused on capitalization issues including, butnot limited to, reclassification, Sec. 174, bonusdepreciation, cost segregation, internally developedsoftware, and ready and available. He works with hisclients from identification and implementation throughIRS examination.In addition, Nathan implements custom solutions forclients with unique fixed asset concerns, such asdeferred reconciliation, acquisitions, and fixed assetsystem conversion planning / consulting.BDO KNOWLEDGE Tax Webinar Series ‒ Final IRC §263(a) Tangible Property Regulations: Technical UpdatePage 51

BIOGRAPHYMarla Miller, CPAMarla Miller, CPASenior Director ‒ Fixed AssetAdvisory ServicesBDO USA, LLP1700 Market Street29th FloorPhiladelphia, PA 419103Direct: (215) 636-5520Fax: (215) 636-5501mmiller@bdo.comMarla has more than twenty years of experience inboth the public and private sectors, practicing inthe areas of federal, and state and local tax. Shehas been involved in all aspects of the income taxfunction, including FIN 48, FAS 109, and the taxcompliance function. Marla has handled federal andstate tax examinations, including IRS JointCommittee and appeals cases. She also hasprovided consulting services in the areas of FixedAsset Reviews and Capital vs. Expense Reviews toboth multinational and domestic companies invarious industries, including real estate, financialservices, retail, food and beverage, and heavy andlight manufacturing.BDO KNOWLEDGE Tax Webinar Series ‒ Final IRC §263(a) Tangible Property Regulat

BDO KNOWLEDGE Tax Webinar Series ‒ Final IRC §263(a) Tangible Property Regulations: Technical Update Page 1 BDO USA, LLP, a Delaware limited liability partnership, is the U.S. member of BDO International Limited, a UK company limited by guarantee, and forms part of the