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What is Cost Segregation?

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Accelerate depreciation on commercial building to improve Cash Flow.

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What is Cost Segregation?

  1. 1. Discover Powerful, Underutilized, Tax-Saving Strategies for Commercial and Investment Real Properties.What is Cost Segregation?The principle goal of a cost segregation study is to increase cash flow from constructed buildings, purchased properties and renovations by accelerating depreciation expense deductions. Through this analysis, the components of a building are reclassified intoproper class “lives” according to government legislation, case law, and IRS revenue rulings/procedures. Substantial tax savings can be achieved by accelerating depreciation deductions. Would you rather receive your money back today… or in 39 Years?Identify all construction related costs that can be depreciated over 5, 7,and 15 years and reclassifying from 39, 31.5 and 27.5 years.Moving reclassified items to Personal Property from Real Property.Reducing Tax Lives results is accelerated depreciation deductions, areduced tax liability, and increased Cash Flow.IRS approved “look back” study allows for catch-up capturing ofreclassified depreciation , generating possible current refunds.Free up money for investment allowing compound growth.Added flexibility when conduction demolition or remodeling ininvolved.Reduces real estate property taxesIncreases Cash Flow for maximum bank financing.Major Lease hold improvements may also be applicable.
  2. 2. Detailed Engineering ApproachIdentify the specific project/assets that will be analyzedObtain a complete listing of all project costs and substantiate thetotal project costsInspect the facility to determine the nature of the project and it’sintended usePhotograph specific property items for referenceReview “as-built” prints, specifications. A/A contracts, bid documents,contractor invoices and other construction documentationsIdentify and assign specific project items to property classesPrepare quantitative take-offs for all the materials and paymentrecords to compute actual unit costs“Catch up” or “Look Back” provisionIf a CCS is conducted on an existing structureThe unclaimed depreciation on personal property components thatwere previously classified as real property can be deducted as a CodeSec 481 (a) adjustment in the year of changeThe automatic change of accounting rules of Rev. Proc. 2002-9 applyIf a CCS is conducted on a building that was placed into service in a TaxYear that ended before December 30, 2003The IRS will allow a tax payer to file amended returns to claim thebenefitsInterest is payable by the IRS on the refund
  3. 3. What is Cost Segregation? Does this increase my chances of being audited?The principle goal of a cost segregation study is to No. The chances of getting audited are notincrease cash flow from constructed buildings, automatically increased.purchased properties and renovations by accelerating How long does a Cost Segregation study take?depreciation expense deductions. Through this For small to medium size projects, we typicallyanalysis, the components of a building are reclassified issue the final deliverable three to six weeks frominto proper class “lives” according to government the point that all information is received.legislation, case law, and IRS revenue Naturally, the time of year matters a great deal,rulings/procedures. Substantial tax savings can be consultant workload is much heavier in theachieved by accelerating depreciation deductions. periods just before filing deadlines. Upon receiptWhy have I not heard about Cost Segregation of an engagement letter, a specific schedule forbefore? completion is assigned to each project based uponThough it has been around, in its current form, since client needs, time of year and, of course, IRS1987; Cost Segregation was, for some time, almost deadlines.solely offered by Big 4 accounting firms and a handful What if my project is still under construction?of large real estate consulting companies who No problem here. In fact, this situation is good forserviced only the largest of clients. There were very both sides. Our Advisor will work withfew qualified practitioners and, for small to medium construction personnel to document costs andsize taxpayers, the service was cost prohibitive. Within other information to streamline the process asthe last few years however, Cost Segregation has much as possible.become available, at a very reasonable cost, to Could I not just use my ownsmaller companies and individual property owners. architects/engineers?How does Cost Segregation work? For a few reasons, this is probably not a goodAssociates For Savings team of experts will gather idea.documentation, such as construction plans, contractor First of all, our architects, engineers and CPA’s areinvoices, depreciation schedules, etc. From these specialists, in this field, with decades of Costdocuments, we will identify the qualifying items and Segregation experience. They know the ins andassociated costs to be reclassified into shorter-life outs not just of the construction project, but alsocategories. One of our consultants will visit the the accounting side documentation, tax law, etc.property to compare what was actually built against Architects and engineers alone are typically notthe plans, and take photographs of the property. familiar with the many subtleties involved in aResults are aggregated and presented in a report, comprehensive study.along with relevant case law data, definitions, photo Secondly, we offer a combination of constructiondocumentation and calculation details. industry professionals; in house CPA’s and fullIs this all legal? time research staff provide you with theAbsolutely! Over 1000 IRS revenue rulings and court assurance that your study will be fully compliantcases provide the necessary guidelines for proper with the latest changes in the tax law and courtconduction of Cost Segregation studies. The IRS has cases.also recently issued an Audit Techniques Guide that Lastly, our team is experienced in defending ourdefines a quality Cost Segregation study. work in the event of an audit, at no additional charge.
  4. 4. What sort of documentation do I need?What sort of benefit might I expect? At the front end of a Cost Segregation study, we onlyThe benefit of a Cost Segregation study lies in have to know certain basic information, such as thethe timing of tax payments. Assuming a 35% capitalized cost, property location, placed-in-serviceFederal tax rate, an 8% discount rate, half-year date, etc. to provide an estimated benefit. Onceconvention, and no bonus depreciation, for engaged, the more information available, the better.every $1,000,000 of property reclassified from The following list is fairly comprehensive:39 years has a cumulative present value of tax New Construction:deferral equaling approximately: The date of acquisition or “placed in service date”$195,000 for 5-Year Property The capitalized costs$178,000 for 7-Year Property Complete set of plans$108,000 for 15-Year Property Contractor’s final application for payment or similarIn other words, the benefit is approximately $.19 documentfor every dollar reclassified to five years from A complete list of all change orders with a briefthirty-nine years. description of eachNo amended return? Even if my building was A copy of the specifications (If readily available)acquired/constructed in a prior year? Rent roll or similar document (For multi tenantThat’s right. IRS provisions will allow you to “catch buildings only)up” on missed depreciation by filing a 3115. No A list of owner incurred costs above and beyond theneed for an amended return. General Contractors costs. Examples includeWhat if there is a 1031 exchange associated with architectural and engineering fees, permits, testingmy property? and materials paid for directly by the ownerIn some situations (certainly not all) this can Purchased Properties:reduce the benefit if the tax basis is decreased. The date of acquisition or “placed in service date”We recommend speaking to us about the specifics The capitalized costsof your property; together we can devise the best Depreciation scheduleplan of attack for you. Plans, site plans and surveys (If available)I am interested in learning more. Do you charge Square footage of buildings and sitefor estimates? Appraisal (If available)No, we would very much like to hear from you. Rent roll or similar document (For multi tenantLet us discuss your property and tax situation in buildings only)order that we might maximize your tax savings. A site visit is an essential part of a good study;Do I need all the documentation available for the sufficient information can be collected, from such ainitial estimate of benefits? visit, to accurately perform a Cost Segregation studyNo. While more information will result in a more in the event that construction drawings and costaccurate estimate, we can utilize information information are not available.collected from similar projects to estimate Will I need to file an amended return?benefits for your situation; of course, more No. IRS Revenue Procedure 96-31 allows a taxpayerdetailed information produces a more accurate to file a form 3115 Automatic Change in Accountingestimate. rather than an amended tax return. This form can be used to fix depreciation as far back as 1987. If you wish our team of experts will prepare the 3115 for you. Tactical Leverage LLC / Thomas J. Tysl / 1701 W. Northwest Hwy Grapevine, Texas 76051 817.404.9011 / Fax 817.224.2924 / ttysl@advocatesforsavings.com