a presentation on the glamorous world of cost...

A presentation on the glamorous world of

COST SEGREGATION

Erik Oliver602-668-0032

[email protected]

Cost Segregation Authority (C) 2017

OBJECTIVES

Presentation Objectives

1. Learn about this relatively less-understood tax strategy and its application in your business.

2. Discuss a brief overview of its history and evolvement.

3. How to identify opportunities to help SERVE your clients by implementing Cost Segregation.

4. Illustrate the low risk vs. high value of Cost Segregation


WHAT IS COST SEGREGATION?

A strategic tax tool that allows taxpayers to accelerate and maximize their DEPRECIATION expense.

Reclassification of assets from real (§1250) to personal (§1245) property.

IRS allows certain building components and land improvements to be reclassified from 39 years (commercial use) or 27.5 years (residential use) to shorter recovery periods of 5, 7, and 15 years.

This reclassification is done by an engineering-based Cost Segregation Study.


WHAT IS DEPRECIATION?

“It is desirable for taxpayers to maximize personal property costs in order to accelerate depreciation

deductions and, hence, reduce tax liability.”

IRS, Audit Guide


WHY KNOW COST SEGREGATION?

Cost Segregation is a Top Niche Tax and accounting service.

Tax, Real Estate, and Wealth Advisors are rapidly recognizing the value of studies to improve client’s cash flow.

Clients are better served, better informed, and retained.


HOSPITAL CORP. vs COMMISSIONER

Determined that a building could be separated into personal property and real property.

Determined that pre-1981 tests for determining tangible personal property for MACRS remained applicable.

Ruling effectively reinstated a form of component depreciation.

Modern “Cost Segregation” was born.


PERSONAL PROPERTY TEST

How to determine what components are tangible/personal property

IRC Section 38 Asset must be tangible depreciable property. Asset must NOT be a structural component of a building.

1. If the property can be removed without damage to building structure then it is personal property.

2. If the relationship between the asset and equipment or machinery is so close that they would be retired contemporaneously.

3. The relationship between the asset and the nature of the business are unique.


HOW IS THIS DONE?

THE ENGINEERING-BASED STUDY

• Property owners and Leaseholders should engage a qualified company to perform an engineering-based study to identify and formally reclassify personal (shorter-life) property.

• Creates a revised depreciation schedule.

• IRS guidelines have been established.


PRINCIPAL ELEMENTS of a QUALITY STUDY

IRS outlines 13 principal elements of a quality study 1. Preparation by an Individual with Expertise and Experience2. Detailed Description of the Methodology3. Use of Appropriate Documentation4. Interviews Conducted with Appropriate Parties5. Use of a Common Nomenclature6. Use of a Standard Numbering System7. Explanation of the Legal Analysis8. Determination of Unit Costs and Engineering “Take-offs”9. Organization of Assets into Lists or Groups10. Reconciliation of Total Allocated Costs to Total Actual Costs11. Explanation of the Treatment of Indirect Costs12. Identification and Listing of Section 1245 Property13. Consideration of Related Aspects


HOW COST SEGREGATION

Steps to a Quality Cost Segregation Study1. Execute Engagement Letter

2. Analyze Drawings

3. Inspect Property (site visit)

4. Estimate Current Cost of Assets Using IRS Recognized Costing Sources

5. Allocate Actual Costs

6. Allocate General Indirect Costs to Assets (important)

7. Determine Useful Lives

8. Itemize all Personal Property into Appropriate Asset Class with Supporting documentation

9. Issue Final Report

10. Complete Form 3115 as applicable.


http://www.marshallswift.com/default.aspx

http://www.marshallswift.com/default.aspx

COMMONLY SEGREGATED ITEMS

Sidewalks & RoadsCanals

Waterways

Drainage Facilities

Wharves and Docks

BridgesFences

Landscaping ShrubberyTransmitting Towers

Utility Improvements (some)

Retaining Walls

Parking Lot PavementsLighting Poles

Flagpoles

Lawn Sprinkler SystemsLoading Dock Ramps

Concrete Dumpster Pads

Dumpster Enclosures

Swing Sets

Playground Equipment

Accordion doorsBank Vault

Beverage BarsBillboards/SignsBlindsBooths for SeatingCabinets

CarpetingCarpeting Chandeliers

Communication Equipment

ComputersCopy MachinesDecorative LightingDesks

Drive Up WindowDuplicating EquipmentElectric Systems (some) Kitchens, ManufacturingElectric Special HookupsEmergency GeneratorsExterior Building Lighting

Exterior OrnamentationFalse BalconiesFalse FloorFire ExtinguishersFlood LampsFloor Coverings – Removable

Folding WallsGasoline Pump CanopiesHanging LanternIdentity Symbols

Kitchen HoodLaminated Plastic Cabinets

Lighting AccentsLighting DecorativeMillwork Ornamental FixturesPartition Movable

Patient HandrailsPeripheral EquipmentPlumbing Equipment Specialty

Portable HeatersSign Message BoardRecord VaultSafes

ScoreboardsSecurity LightingSigns on BuildingSmoke Detectors

Snowmaking GunsSpecial LightingSpotlightsVinyl CoveringsWall Coverings

Window TreatmentsWindow Air Conditioning Units

WiringWood Block Flooring

Land Improvements Tangible Personal Property


AVERAGE RECLASSIFICATION

PROPERTY TYPE AVERAGE BASIS REALLOCATION

APARTMENT BUILDINGS 20-50%

OFFICE BUILDINGS 10-40%

RESTAURANTS 20-50%

HOTELS 25-45%

MANUFACTURING 25-60%

GROCERY STORES 15-50%

RETAIL FACILITIES 20-50%

WAREHOUSING 10-30%

PROCESSING PLANTS 20-65%

R&D FACILITIES 20-50%


• Acquire or Purchase an Existing Building

• Build a New Building

• Renovate, Remodel or Expand an Existing Building

• Dispositions (Units of Property)

• Make Leasehold Improvements

• Sale of Property

• Currently Owned Property bought since 1987

• Property with 754 Step Up or Other Step Up


WHEN TO DO A STUDY

Engagement Question 1


Name 5 items that are commonly segregated as Personal Property from a

Cost Segregation Study.


CASE STUDY—APARTMENTS

Acquisition Cost: $9,800,000

Purchased: 2017

Current Tax Year: 2017

Portions of Plumbing


CASE STUDY—APARTMENTSItems reclassified to 5-year property

Cabinetry, Appliances, Counters

Portions of Electrical

Ceiling FansCarpets, Blinds


CASE STUDY—APARTMENTSItems reclassified to 15-year property

Parking Lots, Asphalt, Sidewalks, Dumpster Pads

Outdoor Lighting

Swimming Pool

Retaining Walls, GrassTrees, Bushes, Shrubs

BONUS BENEFITS


COMPLEMENTARY BENEFITS WITH COST SEGREGATION:

1. PARTIAL DISPOSITIONS

2. CATCH UP DEPRECIATION

3. BONUS DEPRECIATION

4. SOLD PROPERTIES

5. SALE OF ASSET (CAPITAL GAINS MAXIMIZATION)

6. 1031 EXCHANGES

IRS Regulations allow for the ability to EXPENSE the remaining basis of replaced components of a building, so a taxpayer will not have to continue to depreciate assets that are no longer in service.

Partial Disposition Election on a Timely Filed Return

May include removal costs

Must be expensed in the year of the disposition

Examples: Roof, HVAC systems, Carpet


PARTIAL DISPOSITIONS

CATCH UP or LOOK BACK BENEFIT

CATCH UP (Section 481(a) Adjustment)

• For existing properties, the IRS provides an automatic consent procedure to “catch-up” missed depreciation.

• Cumulative depreciation differences are allowed to be fully expensed in the year of the change.

• Uses Form 3115




Acquisition Cost: $9,800,000

Placed in Service: 2014


BONUS DEPRECIATION

BONUS DEPRECIATIONStimulus packages beginning in 2001 have created Bonus Depreciation elections to spur economic energy.

SERVICE DATE BONUS

9/11/01—5/5/03 30%

5/6/03—12/31/04 50%

1/1/08—9/8/10 50%

9/9/10—12/31/11 100%

1/1/12—12/21/14 50%

1/1/15—12/31/17 50%

1/1/18—12/21/18 40%

1/1/19—12/31/19 30%


REQUIREMENTS Original use property (new)

Recovery period of 20 years or less.

Best year is now! Finish your construction by December 31, 2017.



Construction Cost: $9,800,000

Placed in Service: 2014


Same Study with Catch-up and Bonus Depreciation

PATH ACT


2015 PATH ACT makes permanent 15 year recovery period for:

Qualified Leasehold Property

Qualified Retail Property

Qualified Restaurant Property

PATH ACT Creates New Category of Property:

Qualified Improvement Property

A quality Cost Segregation Study identifies and maximizes these benefits.

QUALIFIED LEASEHOLD PROPERTY


Qualified Leasehold Improvement PropertyPATH retroactively revives and makes permanent the §168(e)(3)(E)(iv) rule treating qualified leasehold improvement property as 15-year property. Thus, eligible for a bonus depreciation if placed in service before Jan. 1, 2020.

Is made under or pursuant to a lease.

The portion is to be occupied exclusively by the lessee.

Lessor and lessee must not be related.

Building must be at least 3 years old.

A quality Cost Segregation Study will determine this.

QUALIFIED RETAIL & RESTAURANT PROPERTY


Qualified Restaurant and Retail Property PATH retroactively revives and makes permanent the rules treating qualified restaurant property [§168(e)(3)(E)(v)] and qualified retail improvement property [§168(e)(3)(E)(ix)] a 15-year property.

They cannot get bonus depreciation unless they also meet the definition of qualified leasehold improvement property.

A quality Cost Segregation Study will determine this.

QUALIFIED IMPROVEMENT PROPERTY


Qualified Improvement Property Interior Improvements placed in service after December 31, 2015 to

an existing building.

Not eligible for Section 179 expensing unless it meets QLI or QRP.

39 Year Recovery Period.

Key Advantages

No 3-year rule

Building can be owner-occupied

Eligible for Bonus Depreciation

A quality Cost Seg Study will identify this benefit.

QUALIFIED IMPROVEMENT PROPERTY


Summary of Qualified Improvement Property Rules and Bonus

BONUS BENEFIT—SOLD PROPERTIES

SOLD PROPERTIES

An owner can conduct a cost segregation on any property sold within the last three years even though if the property is not currently part of their holdings.

A Cost Segregation Study can help these owners to receive a refund of overpaid taxes on those properties.


BONUS BENEFIT—SALE OF ASSET

MAXIMIZING TAX RATES ON DISPOSITIONS

A cost segregation study you can improve your marginal tax rateswhen you sell the property.

Taxpayer will depreciate assets at high tax rates and take the gains on the lowest rates possible, thus saving significant tax dollars on the disposition.


SALE WITHOUT COST SEG STUDY


Apartment purchased in 2012 for $2.5M sold in 2017 for $3.3M (excluding land)

SALE WITH COST SEG STUDY


Apartment purchased in 2012 for $2.5M sold in 2017 for $3.3M (excluding land)


Both properties must be for business or investment.

45 Day identification requirement.

180 purchase requirement.

Qualified intermediary requirement.

Title requirement (entity that holds the title on the sold property, must be the same that takes title on new property)

Reinvestment Targets (to defer all capital gains you must buy a property equal to or greater in value)

1031 EXCHANGES

PROPERTY SUGGESTIONS

Agriculture Producers

Airport Hangers

Apartment Complexes Assisted living facilities

Auto and Truck Dealerships

Automobile Service Centers

Banks

Convention Centers

Day Care Centers

Dental Facilities

Distribution Centers

Financial Institutions

Fitness Centers

Flex Properties

Food Processing Facilities

Franchises

Free Standing Retail Stores

Freeport Centers

Funeral Homes

Golf Courses

Grocery stores

Hospitals

Hotels

Industrial

Leaseholds

Manufacturing facilities

Marinas

Medical offices Mixed Use Properties

Motels

Movie Theatres

Office Complexes

Office Parks

Recreational Facilities Research & Development Centers

Residential Rentals Resorts

Restaurants

Retail Chains

Retail Properties

Self-Storage Units

Shopping Malls

Sports Stadium

Supermarkets

Surgical Centers

Theaters

Warehouse Centers

Data Centers

C-Stores

Charter Schools


Engagement Question 2


True or False:

1. My property doesn’t qualify because I’ve owned it since 2005.

2. I sold my property last year so I missed out.

INTERACTIVE ANALYSIS



AUDIT AWARENESS

IRS Audit Techniques Guide

• Issued 2004 and revised March 2014

• 13 Points to a Quality Study

Industry Specific Guidance Available

• Casinos

• Restaurants

• Retail Industries

• Biotech & Pharmaceutical

• Auto Dealerships

Low Audit Risk

COMMON QUESTIONS

1. What is the minimum cost of property that would justify a study?

2. What do they cost?

3. When would I NOT do a study?


CONCLUSION

1. Immediate tax savings.

2. Unseen deductions are discovered.

3. Cash flows are increased.

4. Clients are better served and loyalty is increased.

www.CostSegAuthority.com


CONTACT INFORMATION


Erik Oliver

602-568-0032

[email protected]

a presentation on the glamorous world of cost...

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