Tax Planning & Cost Segregation
If you have a client that owns Commercial or Residential Rental property that is currently profitable, or was profitable within the last five years, a properly performed engineering based cost segregation study could help reduce their current tax burden or help them qualify for a tax refund. We can provide a free initial evaluation for the property that you can use to assist them with year end tax planning strategies.
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How Does a Cost Segregation Study (CSS) Work?
Typically Building costs are generally classified for federal income tax purposes into three categories. Each has a different depreciation recovery period and method under the Modified Accelerated Cost Recovery System (“MACRS”):
TANGIBLE PERSONAL PROPERTY
Depreciates Over 5 OR 7 YEARS
At a 200% Declining Balance
LAND IMPROVEMENTS
Depreciate Over 15 YEARS
At a 150% Declining Balance
RESIDENTIAL RENTAL – REAL PROPERTY
Depreciates Over 27.5 YEARS
Straight Line (Residential)
COMMERCIAL – REAL PROPERTY
Depreciates Over 39 YEARS
Straight Line (Commercial)
In most cases, when a property is placed in service, the straight line method is used. In some cases, the obvious short life items are separated out and the remainder depreciates over the long term straight line method.
By reclassifying components from 39 year real property (subject to straight line) to five or seven year personal property (qualifying for 200% Declining Balance), the recovery period is greatly compressed. In addition to the reduction in the recovery period, all five and seven year property is depreciated at a 200% declining balance which further accelerates the depreciation. This provides the building owner the ability to greatly increase the depreciation for a property and thus significantly reduces the building owners taxable income and current income tax liabilities.
Our Engineering Based Cost Segregation Study will help identify items that should be properly classified as tangible personal property or land improvements, rather than real property that is depreciated over 39 years. The tax benefits begin in the first tax year and continue throughout the depreciable life of the identified assets.
For example, a taxpayer that owns a manufacturing facility could classify the cost of certain equipment foundations, exhaust and ventilation systems, and electrical distribution as tangible personal property. Certain site improvements such as landscaping, underground utilities, and site lighting could qualify as land improvements.
Knowing the difference is critical. So is the ability to support and document the decisions. That is why you need expert advice. Identifying items to be reclassified is only half the battle. The other half is to determine the costs legitimately associated with each item. The complication is locating single-item costs. For example, suppose you know that a portion of your facility’s electrical distribution for specific manufacturing equipment should be in the shorter-life category. You look at the contractor’s charges under electrical and find that all the electrical costs for the job are bundled into a single number, but you need only the cost associated with electrical distribution serving manufacturing equipment.
Our cost segregation specialists can un-bundle the costs and assign them appropriately – not only the direct costs, but also a portion of any indirect costs, such as architect and engineering fees, contractors general conditions, permits, bonds, etc. We have extensive knowledge of construction methods, engineering, and the Internal Revenue Code including the applicable Tax Court cases and Revenue Rulings. Our expertise is the ability to read blue prints and fully understand construction materials, cost, and taxation. We are consultants that bridge the gap between your accountants and the construction team.
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Toll Free at 1.866.303.6695
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2009 IRS 5 Year NOL Carry Back – How Cost Segregation Can Add Benefit
President Obama signed H.R. 3548, The Worker, Homeownership, and Business Assistance Act of 2009 into law. One of the provisions of the act is the extension of a Five Year NOL Carry Back to most businesses for 2008 or 2009. Previously, under the American Recovery and Reinvestment Act of 2009, eligible small businesses (with average gross receipts of $15 Million or less) were allowed to carry back Net Operating Losses (NOLs) from 2008 for three, four or five years rather than the standard two years.
The new act expands the election to allow most businesses (large and small) to carry back NOLs incurred in 2008 or 2009 (typically not both) to the previous five years. Under the new act, an NOL carried back to the fifth year before the loss is limited to 50% of the available taxable income for that year. Any remaining NOL can then be applied in remaining four carry back years.
BENEFIT: A business can carry back an NOL to a previously profitable year and obtain a refund for taxes paid in that year.
CONSIDERATION: Eligible businesses that own commercial or residential rental property should consider having a cost segregation study performed for the 2009 tax year. A properly performed Engineering Based Cost Segregation Study can increase the amount of the NOLs to be carried back and thus will provide a larger refund.
MAXMIZE YOUR TAX REFUND NOW!