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Section 250 Compliance: Creating a New ADS Depreciation Book

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Summary

Steps to create a new ADS book for Section 250 compliance.

Cause

See Code Section 250 Background for more details on the origination and purpose of Section 250.

Section 250 Foreign-derived Intangible Income (FDII) and Global Intangible Low-taxed Income (GILTI) Compliance.

Create an ADS book for your assets to meet the requirements of Section 250 and to calculate the depreciation for eligible assets for the QBAI portion of FDII and GILTI (learn more in Code Section 250 Background below). The best approach is to use the Copy Book (How to Copy a Book) and Bulk Edit (Bulk Edit) features in Sage Fixed Assets. The Sage Expert Services team is also available If you prefer for them to establish the ADS book or if you have a particularly complex situation. Contact your Account Manager for more information.

Resolution

CAUTION: Use caution when working with the below product functionality. Always create a backup of your data before proceeding with advanced solutions. If necessary, seek the assistance of a qualified Sage business partner, network administrator, or Sage customer support analyst.


The following steps assume:

  1. The Tax book is currently using the MACRS GDS (general depreciation system)
  2. The ADS Life field for each asset is correct (see the Depreciation Lives and Methods Conversion section below)
  3. A book is available for use as the new ADS book.

In Sage Fixed Assets Depreciation

  1. Use Copy Book to copy the tax book data to the chosen ADS book. See How to Copy a Book for details
    Note: There is an option to change the name of your new ADS book, See How to rename a book for details


  2. Use Group Manager to create a group of assets that qualifies for the Section 250 calculation (See How to create a group for details). This group should include only qualifying assets, such as currently active and tangible assets. Please check the regulations (or get tax advice from a professional) to be sure only qualified assets are included in the group


    • For example: Depending on the nature and attributes of your assets, it may be as simple as creating a group of active assets whose property type is NOT Z (amortizable) to exclude intangible assets. Then group's criteria would be:

      Activity Code is A
      Property Type is not Z


    • You may need to use a general information field to identify specific assets that are not qualified and use that field in the Group criteria to filter out such assets. See How to create a group of assets that does not have any field in common? for details


  3. Bulk Editing the assets:

    Use Bulk Edit to change the existing Depreciation Method and Estimated Life to their new ADS Depreciation Method and Life.

    Note: There is not an Undo feature for Bulk Edit. Make sure you have made or make a backup of the company (See How to back up a company) prior to running the Bulk Edit

    Panel 1: Check the I have a current backup box, click Next
    Panel 2: Select the group of assets created in step 2 (the Section 250 assets), and select the new ADS book, click Next
    Panel 3: Enter the criteria for each set of assets that need to change from a specific GDS Method/Life to a specific ADS Method/Life.

    For example: For all assets that are currently MF200, 7-years that need to be AD, 10 years, enter the following:
    1. Select Depreciation Method, enter From: MF200 To: AD
    2. Select Estimated Life, enter From: 07 00 To: 10 00
    3. Click Next

      Note: For assets using a bonus method (i.e. office furniture), run a separate Bulk Edit by selecting Depreciation Method from MA200 to AA and Est Life From: 07 00 To: 10 00


    Panel 4: Select the Placed-in-Service Date as the effective date, do not select Retain Begin Info, deselect Only change assets with a Placed-in-Service Date of: and click Next
    Panel 5: Review the summary above the Validate button to ensure that the correct Asset group, Books and Changes have been chosen for the Bulk Edit transaction
    Panel 5: Select Validate to review the Bulk Edit Validation Report to ensure all assets either appear as Valid or with a Warning that is acceptable. If the company has transferred assets, See Bulk Edit Validation error on partial and whole transfers for other possible workarounds
    Panel 5: Click Execute to complete the conversion process.

    Note: Repeat the same steps above for each set of assets that needs to changed.


  4. In order to see the changed asset on reports with the new calculation: Calculate depreciation and run the Net Book Value report for each quarter of the year since quarterly calculations are required per the Section 250 requirements. Save these reports to use as a reference to calculate the average investment for each tax year.

Depreciation Lives and Methods Conversion

While most asset classes have standard ADS lives in relation to GDS lives, variations often exist in the farming, real estate, manufacturing and transportation industries for specialized assets. See the table below for the common GDS/ADS lives. For more examples, go to the IRS Table link at the bottom of any Asset Detail page in Sage Fixed Assets. For the complete list of asset lives, go to IRS Publication 946, Appendix B.

Regarding software: it is our position that off-the-shelf software that is depreciable per IRS Publication 946 is an eligible asset for QBAI purposes. Off-the-shelf software is readily available for purchase by the general public, is subject to a nonexclusive license, and has not been substantially modified. Customized software and databases not incidental to the software (i.e. software that does not meet the off-the-shelf definition) is an intangible asset and does not qualify as a QBAI asset. Since off-the-shelf software is depreciated on a straight-line basis and the GDS life = ADS life, no conversion is necessary.

Table 1 - Common GDS and ADS Lives

Description

GDS Life

ADS Life

Off-the-shelf computer software33
Computer equipment & peripherals55
Adding machines, calculators, copiers56
Autos, light trucks and vans55
Buses59
Office furniture, phones, construction equipment712
Airplanes, commercial712
Fences, land improvements1520
Residential rental real estate (placed in service before 2018)27.540
Residential rental real estate (placed in service after 2017)27.540
Commercial real estate3940

Special Cases for GDS and ADS Lives

One GDS Life => many ADS lives. 10 years is the common ADS life for many 7-year GDS life assets, however, many exceptions exist, An example of this is a commercial airplane which has an ADS life of 12 years, as can be seen in Table 1 above. For assets with the same GDS life, but different ADS lives use the Asset Group feature to create more refined groups as needed and execute the Bulk Edit changes separately for each separate ADS Life.

GDS Life = ADS Life. On Bulk Edit, Panel 3 it’s still necessary to enter the Estimated Life. For example, for automobiles using a bonus method the selections would be Depreciation Method From: MA200 To: AA and Estimated Life From: 05 00 To: 05 00. Since the GDS and ADS life are both 5 years – the From: life of 05 00 is entered to filter down to assets that are MA200 AND 5 years.

GDS to ADS Method Conversion

The Table below shows the ADS method that should be selected when converting a GDS Tax book to an ADS book.

Table 2 – Sage Fixed Assets GDS to ADS Equivalents

GDS Method

ADS Method

MA100AA
MA150AA
MA200AA
MF100AD
MF150AD
MF200AD
MT100AD
MT150AD
MT200AD


Code Section 250 Background

Code Section 250 – Foreign-derived Intangible Income (FDII) and Global Intangible Low-taxed Income (GILTI) came into law as part of the Tax Cuts and Jobs Act of 2017. It is applicable to tax returns filed for tax years beginning 2018 and later. The legislative intent is to neutralize the tax choice of locating intangibles and the related income within the US or in a CFC (Controlled Foreign Corporation). In addition, the FDII and GILTI deductions help keep US corporations competitive by providing a deduction for corporations which have made real foreign investments while also earning intangible income overseas.

While FDII and GILTI are the ultimate end results, the fixed assets related calculations are part of a sub-calculation that factor into these higher-level results. Under Section 250, fixed assets are referred to as Qualified Business Asset Investment (QBAI) and part of the calculation to determine Deemed Intangible Income (DII). The full calculation is: DII = DEI - [QBAI x 10%]. DII is the sub-calculation that flows from Part II, Line 3 of the Form 8993 to Part IV Line of the Form 8993 “ Determining FDII and/or GILTI Deduction.

QBAI is specifically defined in IRC Code Section 951(a) (see Tax Notes below). To briefly summarize QBAI: only tangible depreciable assets are included, internal transfers (outright transfers or leases to related companies) are generally treated as if the transfer or still owns the property for QBAI purposes, and QBAI assets must be depreciated using ADS straight line per IRC 167.

Transferred Assets

In Sage Fixed Assets, internally transferred assets behave differently with Bulk Edit than most other assets. Assets involved in a transfer (parent or child) cannot be depreciated back to the Placed-in-Service Date, only back to the Beginning Date (i.e. the date of the transfer). For Whole Transfers, the parent transferred asset becomes Inactive and cannot be changed with Bulk Edit, while the child asset can only be depreciated or edited going forward from the Beginning Date. For Partial Transfers, both the parent and child can only be depreciated or edited going forward from the Beginning Date. Given the complexity of transfers, it is important to realize that the IRS rules surrounding transfers are primarily anti-abuse provisions (i.e. transferring assets to manipulate the Section 250 calculations and taxable income). Meaning that if transactions are immaterial or can be clearly documented for business purposes, there may be ways to simplify the reporting for Section 250.

If net transfers are deemed to be immaterial as a whole, the best approach is to depreciate the transfers as they currently exist in your Sage Fixed Assets books with the change to an ADS method and life starting at the Beginning Date. The Bulk Edit feature will change the assets as of their beginning date; the validation and execution will display a warning message. For more significant transfers an approach would be to 1) set the ADS book to $0 Acquisition Value and NO Depreciation Method for child and remaining parent assets, and 2) manually enter the child and remaining parent assets as new assets, then set all other books to NO depreciation method with a $0 Acquisition Value, except for the ADS book. If you need more help, the Sage Expert Services team can customize the details of your asset transactions to assist in compliance. As always, consult a tax professional when considering the best options for your situation.


Tax Notes

Formal definitions of QBAI:

IRC 250(b)(2)(B) Deemed tangible income return

The term deemed tangible income return means, with respect to any corporation, an amount equal to 10 percent of the corporation’s qualified business asset investment (as defined in section 951A(d), determined by substituting deduction eligible income (DEI) for tested income in paragraph (2) thereof and without regard to whether the corporation is a controlled foreign corporation).

951A(d) Qualified business asset investment. For purposes of this section—

(1) In general. The term qualified business asset investment means, with respect to any controlled foreign corporation for any taxable year, the average of such corporation’s aggregate adjusted bases as of the close of each quarter of such taxable year in specified tangible property—

(A) used in a trade or business of the corporation, and

(B) of a type with respect to which a deduction is allowable under section 167.

(2) Specified tangible property

(A) In general. The term specified tangible property means, except as provided in subparagraph (B), any tangible property used in the production of tested income.

Related Party Definition:

IRC 250(b)(5)(D) Related party

For purposes of this paragraph, the term related party means any member of an affiliated group as defined in section 1504(a), determined—

(i) by substituting more than 50 percent for at least 80 percent each place it appears, and . . .



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