COST SEGREGATION: A SMART TAX STRATEGY THAT IS OFTEN … · 2018-01-24 · HOW A COST SEGREGATION...
Transcript of COST SEGREGATION: A SMART TAX STRATEGY THAT IS OFTEN … · 2018-01-24 · HOW A COST SEGREGATION...
QUESTIONS How to ask questions during today’s webinar:
• Use the “Chat” or “Question” feature on the GoToWebinar panel.
• You can also email Dennis Keller at [email protected].
• Questions will be addressed at the end of the webinar.
LET’S GET STARTED
• Brendan Walsh, Tax Manager, leads the CSH Cost Segregation Practice
• Brendan has earned his designation as a Certified Cost Segregation Professional, as authorized by the American Society of Cost Segregation Professionals
• Three in the state of Ohio
ON TAP FOR TODAY
• What is cost segregation? • How organizations could benefit from a cost segregation study • How to identify projects that would qualify for this service • How a cost segregation study is conducted • Common questions and misconceptions • How to choose a cost segregation provider • Current cost segregation market issues and trends • Resources
WHAT IS COST SEGREGATION? • A tax planning technique that separates real property into various
depreciable categories
• Allows taxpayers to depreciate property over much shorter periods of time than the typical 39 year (or 27.5 year) period
• The cost of a building can be segregated into 5, 7, 15, and 39 year categories
• A Cost Segregation Study determines how much of the building cost goes into each category, and provides documentation and support for that determination
HOW CAN ORGANIZATIONS BENEFIT FROM A COST SEGREGATION STUDY?
• Increased depreciation in the first years of building ownership
• Increased cash flow
• Time value of money
• Bonus depreciation
PRIOR YEAR PURCHASES • Even if you purchased a building in a prior tax year, cost
segregation is available
• Catch up on missed depreciation
• No amended returns required
• File Form 3115 (Change in Accounting Method) and attach to federal return
• Potential benefits are significant
HOW TO IDENTIFY ACTIVITIES THAT QUALIFY FOR THIS SERVICE?
• Purchases
• New construction
• Renovations
• Additions
• Owner/tenant
• Examples
HOW A COST SEGREGATION STUDY IS CONDUCTED
• Cost seg studies come in many shapes and sizes
• Different methods can be used to perform a study
• IRS standard – Detailed Engineering Approach
• Cost seg report must connect the dots and provide support for asset classifications
ELEMENTS OF A QUALITY COST SEGREGATION REPORT
• Summary letter/executive summary
• Narrative report
• Schedule of assets
• Schedule of direct and indirect costs
• Schedule of property units and costs
• Engineering procedures
• Statement of assumptions and limiting conditions
• Certification
• Exhibits
ELEMENTS OF A QUALITY COST SEGREGATION STUDY
• Preparation by an individual with expertise & experience
• Detailed description of methodology
• Use of appropriate documentation
• Site visit
• Interviews conducted with appropriate parties
• Use of a common nomenclature
• Use of a standard numbering system
• Explanation of legal analysis
• Determination of unit costs and engineering “take-offs”
ELEMENTS OF A QUALITY COST SEGREGATION STUDY (cont.)
• Organization of assets into lists or groups
• Reconciliation of total allocated costs to total actual costs
• Explanation of the treatment of indirect costs
• Identification and listing of §1245 property
• Consideration of related aspects – i.e. repair regulations
INFORMATION REQUIRED FOR COST SEGREGATION STUDY
• New Construction – Proposal phase o Construction cost o Square footage of new space o Use of new space (e.g., manufacturing, retail,
warehouse, etc.) o Date the facility will be placed in service
INFORMATION REQUIRED FOR COST SEGREGATION STUDY (cont.)
• New Construction – Study phase o Architectural drawings o Construction contract o Construction budget for the project (if not included with the
contract) o Contractor’s payment applications throughout the project o Change orders o Contractor’s final application for payment o Final project costs breakdown
INFORMATION REQUIRED FOR COST SEGREGATION STUDY (cont.)
• Acquired Properties – Proposal phase o Tax depreciation schedule o Use of the building (e.g., office, retail, mixed-use, etc.) o Square footage of the building
• Acquired Properties – Study phase o Available construction documents (e.g., drawings, contract, etc.) o Offering Memorandum o Appraisal o Site visit is critical!
COST SEGREGATION PROCESS
• Contact cost segregation provider to prepare proposal
• Provide necessary documents
• Proposal will estimate depreciation benefit and ROI
• Quality proposal will include Net Present Value estimate
• Some industries can benefit from cost seg more than others
INDUSTRY EXAMPLES
Property Type
Typical % of project cost reclassified
Increased depreciation years 1-5 for
$1,000,000 project
Present value tax benefit for
$1,000,000 project Heavy Mfg/Processing 30-60% $162,000-$324,000 $51,000-$102,000
Car Dealerships 25-40% $135,000-$216,000 $42,500-$68,000
Offices 15-25% $81,000-$135,000 $25,500-$42,500
Restaurants 20-40% $108,000-$216,000 $34,000-$68,000
Apartments 20-35% $108,000-$189,000 $34,000-$59,500
Retail 20-30% $108,000-$162,000 $34,000-$51,000
EXAMPLES OF PERSONAL PROPERTY
• 15-year – parking lots, fences, etc.
• 7-year – office furniture, desks, safes, etc.
• 5-year – dedicated electrical, shelves, signs, etc.
COMMON QUESTIONS/MISCONCEPTIONS
• Doesn’t cost segregation only work on new construction?
• Is there a minimum building cost to be eligible for cost segregation?
• Isn’t this really just a timing difference?
• When should a cost seg study be done?
• How long does it take to complete a study?
• How much does it cost?
• What is the risk of doing a cost segregation study?
HOW TO CHOOSE A COST SEGREGATION PROVIDER
• Experience – construction and tax law/compliance
• Ethics – no contingency fees
• Adherence to standards set forth in IRS Cost Segregation Audit Techniques Guide
• Audit support
• Credentials – American Society of Cost Segregation Professionals (i.e., CCSP)
CURRENT MARKET ISSUES AND TRENDS
• Tangible Property Regulations
• Qualified Improvement Property
• Potential tax code changes in 2017
RESOURCES • American Society of Cost Segregation Professionals
(www.ascsp.org) o National organization for cost segregation providers o Mission is to create and maintain minimum quality
standards and a code of ethics for cost seg providers to adhere to
• Clark Schaefer Hackett (www.cshco.com)
CONTACT
Brendan Walsh, JD, MBA, CCSP Tax Manager (513) 338-0908 [email protected]