Expense it, or Capitalize it?


New IRS Regulations Detail Standards on How to Categorize Property Repairs

Reprinted from the November 2014 edition of Smart Business Cleveland with permission from Smart Business (www.sbnonline.com) and Skoda Minotti (www.skodaminotti.com).


New regulations from the IRS and Treasury Department went into effect Jan. 1 relating to the deduction and capitalization of expenditures for tangible property. The regulations affect businesses of all types and sizes.

“These new rules set more guidelines on what can be done and what you have to analyze to get into the proper category,” says Dennis C. Murphy Jr., CPA, Senior Manager with Skoda Minotti. “Basically it’s expense it or capitalize it.”

Smart Business spoke with Murphy about the new rules on how to classify repairs and maintenance on tangible property.

What is the purpose of the new rules?
Based on three standards, the regulations give companies a guideline of whether an expenditure should be treated as an expense or a capital expenditure, which needs to be depreciated in future years. An expenditure just needs to meet one of the three standards to be classified as a capital expense.

Of course, in taxpayers’ eyes, the more that can be expensed, the better, since it lowers the taxable income. The new regulations give a better base to taxpayers for classifying future expenditures as either an expense or capital expenditure.

What requirements do the standards set?
The new regulations set forth three capitalization standards: betterment, restoration or adaptation.

The betterment standard applies to a repair if it is expected to correct a material condition or defect at the time of acquisition or production, results in a material addition to the unit of property, or results in a material increase in the capacity, productivity, strength, efficiency or quality of the unit of property.

The restoration category applies when an expenditure replaces a disposed component, returns the unit of property to its ordinary operating condition after the property has deteriorated to a state of disrepair and is no longer functional, or replaces a major component or substantial structural part of the property.

An expenditure results in capitalization under the adaptation category if the adaptation is not consistent with the taxpayer’s ordinary use of the unit of property when it was placed into service.

What are the major benefits taxpayers might see from the regulations?
The first takes a conceptual approach. The regulations attempt to resolve past discrepancies between the IRS and taxpayers. It sets more guidelines and rules and offers more examples.

The second is a new election in the regulations relating to the partial disposition of assets. This election allows taxpayers to claim a loss on a disposed component or replaced component of a building or any other asset classified as a single unit of property. In addition, the election eliminates the instances where two of the same components or asset must be simultaneously depreciated.

For example, if a company has a building, and in 2014 added to or replaced its roof, the company can make an election on its 2014 tax return to deduct the original cost of the roof. For the 2014 tax year only, taxpayers that disposed of tangible property in prior years through abandonments, renovations and retirements but continue to depreciate these assets will be able to write them off in 2014.

Finally, the third benefit about the new tangible property regulations is a new safe harbor election regarding the de minimis rule. Under this election, taxpayers can expense costs depending upon the level of financial statement assurance the taxpayer produces on an annual basis.

There are typically three levels of financial statement assurance: the audit, the review and a compilation. If a company has an audit performed on its books, those businesses are allowed to deduct all amounts for repair or improvement less than $5,000. For taxpayers without this level of assurance, the threshold is $500.

A written capitalization policy must be in place at the beginning of the year for which the election is made.

To make sure they have all their procedures and information current in order to use the new provisions, companies should talk to a tax adviser.

For over 30 years, Skoda Minotti has provided its clients with a complete business advisory experience that now expands beyond traditional accounting, tax and consulting to include financial services, professional staffing, risk advisory services, strategic marketing and technology solutions. To learn more about this topic and how Skoda Minotti can help your business, contact Dennis Murphy at: dmurphy@skodaminotti.com (440) 605-7124 and/or visit www.skodaminotti.com.

For nearly 25 years, Smart Business Magazines, Events and Books has produced high-quality, award-winning periodical content, events and marketing materials for a diverse audience of entrepreneurs and senior executives in major business markets all across the United States. To learn more, log on to: Smart Business Magazine.

Appellate Court Ruling on Oil and Gas Leases Appealed to Ohio Supreme Court


On September 26, 2014, in Hupp v. Beck, the 7th District Court of Appeals in Ohio overturned the trial court’s decision that certain oil and gas leases in Monroe County, Ohio between landowners and Beck Energy Corporation (Beck) were void from their inception.  On Friday, November 7, 2014, the plaintiff landowners filed an appeal with the Ohio Supreme Court.


The leases at issue contained clauses regarding the lease term that are commonly used in oil and gas leases, and therefore the outcome of this litigation can have far reaching effects in Ohio. The lease term was two-tiered, with a 10-year primary term and a secondary term that could continue indefinitely so long as certain conditions were met. During the primary term, if the property wasn’t being drilled, Beck, as the lessee, would be obligated to pay a ‘delay rental’ payment to the landowner.  Landowners challenged Beck’s form lease arguing that this two-tiered term structure rendered the leases “no-term” or “perpetual” leases, which are contrary to public policy and therefore void.


While the trial court agreed with the landowners, the 7th District Court of Appeals disagreed and reaffirmed the viability of leases containing these typical provisions. The 7th District covers the following Ohio counties: Belmont, Carroll, Columbiana, Harrison, Jefferson, Mahoning, Monroe and Noble.  Now that an appeal has been filed with the Ohio Supreme Court, we wait.  The court typically (but not always) announces whether it will accept an appeal approximately 2 to 4 months after the appellee’s memorandum in response is filed. If the Ohio Supreme Court elects to hear the landowners’ appeal and decides in the landowners’ favor, it could trigger a massive scramble by gas and oil companies to rewrite their leases.
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Real Estate, Haunted Houses and Ohio.

Written on October 31, 2014

It seems appropriate on “All Hallows Eve” to see what Ohio real estate law and haunted houses have in common.

For example, do you need to disclose the presence of spirits (not the distilled kind) prior to the sale of your "psychologically impacted" or otherwise "stigmatized" property? Depending on the state, owners and real estate agents may or may not be required to inform prospective buyers of properties with such issues. Currently, about twenty-one states have property disclosure laws.  Even in such states, however, there is variability in what must be disclosed. In fact, some states like Florida provide, as a matter of law, what need not be disclosed. Florida specifically provides that it is not a material fact that a homicide occurred within a home, and that a failure to disclose such fact would not be actionable in a court of law. Ohio’s disclosure statute merely deals with physical defects such as roof and drainage issues.

Apart from statutory law, however, there is case law on this issue, most notably the 1991, Stambovsky v. Ackley decision out of New York State. In Stambovsky, a buyer of property claimed such property was haunted, and sued to rescind the contract of sale on the premise that the seller knew it was haunted and fraudulently failed to disclose this fact prior to the sale. The court in Stambovsky admitted that there was no duty to disclose the paranormal activities to the buyer, but, according to the court, it thought it appropriate to make an exception to the doctrine of caveat emptor because the court was “nevertheless moved by the spirit of equity [fairness] to allow the buyer to seek rescission of the contract of sale and recovery of his down payment.”

While no case directly on point in Ohio was uncovered by my research, it is interesting to speculate. Based upon case law to date, however, I think we would get the same outcome in the Buckeye State, on facts similar to the facts in Stambovsky v. Ackley.

Basically, the doctrine of caveat emptor in Ohio precludes a purchaser from recovering for a property’s defective condition if the following conditions are met:  1) the property defect is discoverable upon inspection or open observation; 2) the purchaser has an unimpeded opportunity to examine the property and 3) there is no fraud on the part of the seller. Layman v. Binns, 35 Ohio St.3d 176 (1988). 

 In the context of real estate transactions, there are basically two types of fraud: fraudulent misrepresentation and fraudulent concealment (with “fraudulent nondisclosure” sometimes being referred to as either a third type of fraud, or, a type of fraudulent concealment).  If there is no actual statement, made, there is no fraudulent misrepresentation.

 The basic elements of fraudulent concealment are (a) actual concealment; (b) of a material fact; (c) knowledge of the facts concealed; (d) intent to mislead another into relying upon such conduct; (e) actual reliance; and (f) injury resulting to such person because of such reliance.  Even without an affirmative misrepresentation or “actual” concealment, an action for fraud, commonly referred to as “fraudulent nondisclosure” is also maintainable in Ohio for failure to fully disclose material facts where there exists a duty to speak.  In such regard, the Supreme Court of Ohio has held that a “vendor has a duty to disclose material facts which are latent, not readily observable or discoverable through a purchaser’s reasonable inspection”.  Binns, 35 Ohio St.3d at 178. 

In Binns, the Ohio Supreme Court reasoned that a steel bracing supporting a defective wall was readily observable and discoverable; hence no fraud. In a 2013  decision of the Summit County Court of Appeals in Wilfong v. Petrone, 2013-Ohio-2434, the court found that a heater mounted on a ceiling of a lake house supported by stilts in a flood zone (and other observable facts) indicated that water intrusion was observable and discoverable; hence, no fraud was involved.

 In Stambovsky v. Ackley, the haunting of the house was widely known in the area and the house had even received national press attention. Accordingly, it seems that just by talking to the neighbors, and checking with “Mr. Google” online, the buyer could easily have discovered the “stigma”. Based on similar facts, it seems likely the Ohio Supreme Court would say no duty to disclose; hence, no fraud. While the Stambovsky court did not believe the “hauntings” were easily discoverable, the decision is over 20 years old, and the online information age is much more upon us now.

Even though courts have carved out exceptions to the rule, over the years, the moral of this scary story for buyers is still caveat emptor. Don’t pin your hopes on costly litigation and an equitable judge looking to make new law. Certainly hire a broker and a house inspector; but don’t end your due diligence/investigation there. Seek to know exactly what you are buying. Talk to neighbors, go online, don’t be haunted after you buy.


Real Estate Apps For Foreclosure Properties

Below is a summary of some of the apps for Apple and Android devices that allow someone to search for homes in foreclosure.


USHUD.com -- Their web site and application contains both foreclosure and conventional listings from HUD, FMNA foreclosures and bank REO properties. When opening the app, the initial screen shows a picture of the US and all 50 states. Tap on a state and the app produces a list of the counties. Tap on a county and it provides a list of the cities. Select the city and view the listings. The listingReal san be filtered by price range, number of bathrooms and/or bedrooms, whether a conventional or foreclosure listing.  Property listings from any search result can be saved as a "Favorite for easier access later. The app is very user friendly.


HUDSeeker.com -- Their web site and application searches HUD properties.  When opening this app, the initial screen provides 2 search options: (1) searching foreclosures in its database by city, state, zip code, price range and number of bedrooms and/or bathrooms; and (2) searching by current location. To use this second option, the app must be allowed to access the devices location. Search results are mapped out and users can change their map options from standard, to satellite or a hybrid of the two. Other selection options on the home screen allow users to run  their credit score, locate a realtor or a lender (through the "Foreclosure Expert" button)  or learn more about HUD properties and how to buy them. The one negative of this app is the requirement to provide a name, email and phone number before the app allows the user to access photos or other details about a property listing.


Luxury Foreclosures -- Another app by HUDSeeker.com that is powered by SimpleForeclosures.com but with more emphasis on higher end discount properties and foreclosures. This app functions the same as HUDSeeker with a similar home screen. The only difference being the narrower focus of the foreclosure properties that are searched.
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CLE Update: Upcoming Real Estate Seminars in Ohio

Falling behind this season with CLE credits? Want to become a more seasoned real estate professional this fall/winter? Below are links/information to selected seminars/webinars and teleconferences being offered between now and year end.


Sterling Educational Services
 –                                                                                                                                                 

When: 10-24-2014 - 8:30 AM
Where: Crowne Plaza Downtown
33 E 5th St-Dayton, OH
What: Landlord-Tenant Law: Leases, Evictions, Litigation and Settlements
$329 
per person
$319 
per person for 2 or more (applied automatically)




When: 12-08-2014 - 8:30 AM- 6hrs CLE
Where: Holiday Inn Independence
6001 Rockside Road-Independence, OH
What: Land Use Law: Current Issues in Subdivision, Annexation and Zoning
$329 
per person
$319 
per person for 2 or more (applied automatically)
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When: 12-10-2014 - 8:30 AM (Canton); 12-11-2014 - 8:30 AM (Cleveland) - 6hrs CLE
Where: Canton: Hilton Garden Inn Akron-Canton Airport
5251 Landmark Boulevard-Canton, OH
 Cleveland: Doubletree Hotel
6200 Quarry Lane-Independence, OH
What: Title Workshop: From Examination to Commitment
$359 
per person
$349 
per person for each additional registrant



When: 11-05-2014 - 8:00 AM- 6hrs CLE
Where: (LIVE) Columbus-OSBA-1700 Lake Shore Dr.
 (SIMULCAST)-Cleveland-The Ritz-Carlton -1515 W. 3rd St.
Fairfield-Reception Conference Center North-5975 Boymel Dr.
Perrysburg-Hilton Garden Inn-6165 Levis Commons Blvd.
What: Residential Real Estate Transactions
From $187 (govt. attorneys
-members) to $300 (walk-in, non-member) per person



When: November 13 and 14, 2014 -8:15/8:30 AM- Up to 12.75 CLE
Where: Cleveland Metropolitan Bar Association, 1375 East Ninth Street, One Cleveland Center, Cleveland, OH  44114
What: 36th Annual Real Estate Law Institute
Sponsored by the Real Estate Law Section of the Cleveland Metropolitan Bar Association



Title Policy Corner: An Overview of the ALTA 9 Series Endorsements


The article below was contributed by the National Commercial Services Team at Fidelity National Title:
 
In 2012, the ALTA Forms Committee adopted significant changes to the series of ALTA 9 Restrictions, Easements and Agreements (REA) endorsements, not only to clarify the specific extra title coverage provided, but also to address the result of litigation about a Schedule B exception for an REA.  The old “plain Jane” ALTA 9 endorsement provided coverage to an owner or a lender against three major title issues:  violations of recorded REAs that could affect the validity of title or the lien status of a mortgage, encroachments, and mineral rights.  Now, the Committee has separated coverages for these issues into ALTA 9 (REA), ALTA 28 (encroachments), and ALTA 35 (mineral rights). Below is an explanation of the latest ALTA 9 series endorsements.
 
ALTA Form 9-06    Loan policy:  This endorsement contains all the coverages provided under the old ALTA 9 except that it removes coverage over any encroachment from adjoining property (or onto adjoining property) that is identified in the Schedule B exceptions.  The change is handled primarily through a clarification of what constitutes a “violation".  Disclosure of a known violation in the Schedule B exceptions removes that violation from coverage under the ALTA 9-06 endorsement.
 
ALTA Form 9.1-06   Unimproved land — Owners Policy: This form endorsement only addresses covenants and restrictions.  The ALTA 28.1 and ALTA 35 endorsements must be added to address encroachments or mineral rights.
 
ALTA 9.2-06   Improved land — Owners Policy: Revisions to this form endorsement also only addresses covenants and restrictions.  Coverage for encroachments (ALTA 28.1) and mineral rights (ALTA 35) must be addressed separately as additional endorsements.
 
ALTA 9.3-06   Loan Policy: Like the ALTA 9.2-06 for Owners Policies above, this endorsement only addresses covenants and restrictions and any coverage for encroachments or mineral rights would be dealt with by separately under the ALTA 28 or ALTA 35 series of endorsements.
 
ALTA 9.6-06   Private Rights — Loan policy: This endorsement provides coverage to the lender against loss that results from the invalidity, unenforceability or lack of priority of the insured mortgage arising from “private rights” such as a private charge or REA assessment, option to purchase, right of first refusal, or right of prior approval of a future purchaser or occupant.
 
ALTA 9.7-06   Land under Development — Loan policy: This endorsement is substantially similar to the ALTA 9-06 discussed above, providing the broadest form of coverage to the lender, but is only used for issuance on a future development site.  In order to provide this endorsement, the title office needs a specifically identified set of building plans and specifications that it can compare against any recorded restrictions.
 
ALTA 9.8-06     Land under Development  — Owners policy: This endorsement is substantially similar to the ALTA 9.2-06, except that it applies to future development. It does not contain any coverage against encroachments or mineral rights. In order to provide this endorsement, the title office needs a specifically identified set of building plans and specifications that it can compare against any recorded restrictions.

ALTA 9.9-06    Private Rights — Owners policy: This endorsement provides coverage to the owner against loss that results from the invalidity of the insured title arising from “private rights” such as options to purchase, right of first refusal or right of prior approval of a future purchaser or occupant.

Overall, the revised ALTA 9 series is designed to provide owners and lenders with flexibility in being able to choose their desired coverage based on the specifics of the real estate transaction.

*   *   *
 
In a future blog post, Fidelity National Title will review the new ALTA 28 and ALTA 35 endorsements.
 
If anyone has questions about any of the endorsements discussed in this blog article, they can contact Jeremy Freed, Commercial Underwriter on the National Commercial Services Team at Fidelity National Title (Jeremy.freed@fnf.com) or 800.626.9881 or 614.818.4822.
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Unruly Horse Renders Stable Owner Immune from Liability for its Unruly Dog

Prior to the twentieth century, the old adage- “every dog gets one free bite” was in effect in most jurisdictions. In other words, a dog owner was only held liable for his dog's biting someone if the owner had reason to know the dog would bite.

In Ohio, as of the date of this article, Ohio’s law governing unruly dog behavior is the opposite of the old “one free bite rule.” Pursuant to Ohio Revised Code Section. 955.28, to prove a statutory cause of action for injuries caused by another person’s dog, the plaintiff need only prove: (1) ownership or keepership [or harborship] of the dog; (2) that the dog’s actions were the proximate cause of the injury; and (3) damages. This is what is known as a “strict liability statute.

What if the unruly dog’s behavior does not directly result in harm, but causes a horse to be unruly, which then results in injury to a person? In a strange but true “premises liability”action, that very question was before the Court of Appeals for the Ninth Judicial District (Lorain County) in the case of Graham v. Shamrock Stables, 2014-Ohio-3977.

The facts of this case are simple enough; it is the law that is a bit unusual.  In October, 2011, Lethea Graham went to Shamrock Stables to look at a miniature horse for possible adoption. As she was walking  the horse back to its stall (according to Graham), a large dog  began barking and jumping at the horse’s back legs which “spooked” the horse and knocked Graham to the ground, causing serious injuries to two of  Graham’s fingers. Afterwards, Graham and her husband sued Shamrock Stables for the injuries Graham sustained as a proximate result of the dog Shamrock Stables harbored on its property.

Graham claimed Shamrock Stables was liable based upon the “unruly dog statute”, Ohio Revised Code Section. 955.28. Shamrock Stables asserted that the “unruly dog statute” did not apply, because Graham’s injury was the result of equine (horse) activity, and therefore, the “equine immunity statute” applied.

Ohio’s equine immunity statute, R.C. 2305.321, provides immunity from liability for harm sustained by an equine-activity participant allegedly resulting from the inherent risk of equine activities. As explained by a recent Ohio Supreme Court decision: 1) “the phrase ‘equine activity participant’ is broad enough that it encompasses a person controlling in any manner an equine, whether the equine is mounted or unmounted;” and 2) “almost every activity associated with a horse is an equine activity.”  The reason for such a statute, according to the Ohio Supreme Court is that horses are unpredictable, and there are inherent risks that arise when horses are near people.

The trial court agreed with Shamrock Stables, that the equine immunity statute applied, and Graham appealed. The Ninth District Court of Appeals affirmed the trial court’s decision.

To reach its conclusion, the court of appeals in Graham first acknowledged that the issue at hand was deciding, which statute applied-the unruly dog statute, or the equine immunity statute. The court then found its answer in the plain language of the horse immunity statute. The court explained that “one of the inherent risks of an equine activity specifically listed in the statute was the unpredictability of an equine’s reaction to other animals”, and “since the General Assembly did not exempt dogs from the foregoing provision”, the horse’s reaction to the defendant’s dog would qualify as an inherent risk of equine activity, thus triggering the immunity.

The one dissenting judge in Graham asked a very good question in its dissent. “Why should the owner of both the horse and the dog (Shamrock Stables) escape strict liability arising out of the act of the dog, merely because the dog caused injuries via the horse?” The dissenting judge theorized that at issue was a general immunity statute (“horse immunity statute”) and a special provision specifically imposing strict liability on dog owners (the “unruly dog statute”), and that according to precedent, when two statutes, one general, one special cover the same subject matter, the special provision should be construed as an exception to the general statute which might otherwise apply. In spite of a well-reasoned dissent, however, two (judges) against one (judge), always wins.


So what is the moral of this story?  Simply, (in the words of my 10 year old nephew) “Horses rule, dogs drool.” In other words, even if a dog (or other animal) causes a horse to injure its rider (or other participant in an equine activity) the dog’s owner, and horse’s owner are immune from liability, at least when the owner of the dog and the horse are the same person. The dissenting judge’s theory that there would be no issue if a neighbor’s dog had run onto the property and startled the defendant’s horse, injuring Mrs. Graham seems to make a lot of - horse sense.