cost segregation: a smart tax strategy that is often ... · cost segregation: a smart tax strategy...
TRANSCRIPT
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Cost Segregation: A Smart Tax Strategy that is Often Overlooked
Presented by: Brendan Walsh
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Let’s get started
• Brendan Walsh, Tax Manager, leads the CSH Cost Segregation Practice
• Brendan has earned his designation as a Senior Cost Segregation Professional, as authorized by the American Society of Cost Segregation Professionals
• Two in the state of Ohio
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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 seg provider • Current cost segregation market issues
and trends • Resources
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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
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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
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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
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How to identify activities that qualify for this service?
• Purchases
• New construction
• Renovations
• Additions
• Owner/tenant
• Examples
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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
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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
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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” • 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
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Information required for cost segregation study
• New Construction – Proposal phase ₋ Construction cost ₋ Square footage of new space ₋ Use of new space (i.e. manufacturing, retail, warehouse, etc.) ₋ Date the facility will be placed in service
• New Construction – Study phase ₋ Architectural drawings ₋ Construction contract ₋ Construction budget for the project (if not included with the contract) ₋ Contractor’s payment applications throughout the project ₋ Change orders ₋ Contractor’s final application for payment ₋ Final project costs breakdown
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Information required for cost segregation study
• Acquired Properties – Proposal phase ₋ Tax depreciation schedule ₋ Use of the building (i.e. office, retail, mixed-use, etc.) ₋ Square footage of the building
• Acquired Properties – Study phase ₋ Available construction documents (i.e. drawings, contract, etc.) ₋ Site visit is critical!
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Cost segregation process
• Contact cost seg 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
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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
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Examples of personal property
• 15-year – parking lots, fences, etc.
• 7-year – office furniture, desks, safes, etc.
• 5-year – dedicated electrical, shelves, signs, etc.
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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?
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How to choose a cost seg 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 or SCSP)
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Current market issues and trends
• Tax extenders
• Tangible Property Regulations
• Peco Foods case
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Resources
• American Society of Cost Segregation Professionals (www.ascsp.org)
• National organization for cost seg providers
• 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)