IRS Issues Tangible Property Audit Guide to Help Examiners Recognize Tax Issues

Posted by Don Warrant on 11/10/16 9:00 AM


Tangible Property Regulation Compliance Audits

In September 2016, the IRS released its Audit Techniques Guide (ATG) on Capitalization of Tangible Property which IRS examiners will use to identify potential tax issues when examining taxpayer compliance with the tangible property regulations. With the release of the ATG, it is fair to say that IRS audits of tangible property will begin soon if not already underway.

The 202-page ATG provides useful insight into the questions that examiners will ask and the documentation that they will request. Each chapter concludes with a list of “Audit Procedures,” including specific questions that examiners should ask about the concepts explained in the chapter.

The guide also includes some new examples that offer additional insights and clarification on certain issues. The ATG gets more specific about the treatment of certain types of repairs, noting for instance that the replacement of a roof membrane is not always a repair. A new example clarifies the treatment of an HVAC unit that is part of a multi-unit system. Previous guidance suggested that replacement of one unit in a three-unit system did not constitute replacement of a substantial portion of the HVAC system. The ATG points out that if each unit serves a different part of the building, the replacement of one unit may constitute an improvement to the HVAC system.

The IRS recognizes the importance of cost segregation and its interaction with the tangible property regulations. Specifically, the ATG recognizes the increased importance of cost segregation studies to identify building systems for purposes of applying the improvement rules. Examiners are instructed to request and review all cost segregation studies, past and present in connection with their examination to make sure the study was conducted properly. This information is needed by the examiner to determine the following:

  • Whether the taxpayer changed the classification of property after it was originally placed in service through a cost segregation study
  • How the taxpayer determined the unit of property for buildings and building systems
  • Whether the taxpayer took into account prior method changes that may affect the calculation of the Section 481(a) adjustment for the year of change
  • Whether a prior year cost segregation study was used to determine the adjusted basis of disposed assets
  • Whether the taxpayer is consistent in its treatment of the unit of property for both depreciation/disposition and determination as to repair-expense deduction

The ATG highlights the importance of selecting a cost segregation provider who understands how the tangible property regulations interact with cost segregation studies. All prior year and current year studies are now subject to examination by IRS specialists in connection with tangible property regulation compliance audits. In addition, cost segregation reports should always include information the taxpayer needs to comply with the tangible property regulations. 

Compliance with the Tangible Property Regulations

All taxpayers are required to comply with the tangible property regulations for tax years beginning on or after January 1, 2014. These regulations address every phase of an assets life cycle from acquisition, to repair and maintenance, to disposition. To comply with the regulations, taxpayers either:

  • Filed Form(s) 3115 as required to change accounting methods and received IRS audit protection for all prior years;
  • Followed Rev. Proc. 2015-20 making changes in accounting methods for tangible property starting with the 2014 tax year without receiving IRS audit protection for prior years (See our blog post on the topic.); or
  • Failed to file required Form(s) 3115 (See our blog post on the topic).

The regulations create new criteria for classifying costs as de-minimis, materials and supplies, and repairs and maintenance, and new rules for the disposition of assets. In addition, the regulations include taxpayer favorable elections and safe harbors. The elections and safe harbors require annual consideration by taxpayers and tax return preparers. Certain elections require a statement to be filed each year with a timely filed tax return and other elections are made by reporting on the tax forms. In addition, certain safe harbors require a change in accounting method to adopt.

How to Prepare for a Tangible Property Regulation Compliance Audit

For many taxpayers and the preparers who serve them, compliance with the tangible property regulations remains a work in progress. With IRS examiners now prepared to begin examining taxpayer compliance starting with the 2014 tax year, it’s time to conduct a tangible property regulation compliance review. We recommend a thorough review of the client’s overall compliance with the tangible property regulations and filing of corrective Forms 3115 in advance of being contacted for audit. The IRS ATG serves as a useful guide for this review.

CSP360, a leading provider of cost segregation and tax minimization services, has developed expert knowledge of the tangible property regulations and implementing procedures, and how the regulations interact with cost segregation studies. Please contact a CSP360 representative for assistance with a 263(a) tangible property regulation compliance review or for IRS audit assistance.

Tags: tangible property regulations, audit guide

12 Services That Cost Segregation Clients Often Need

Posted by Jennifer Birkemeier on 10/18/16 9:02 AM

Helpful Dozen” service offerings can turn a cost seg study into recurring work.

iStock_87208963_SMALL-834353-edited.jpgAccounting success depends almost as much on relationship management skills as it does on knowledge of debits, credits, and principles. You don’t become a trusted advisor just by shaking someone’s hand at a networking event. You need to demonstrate knowledge and a level of service that exceeds what your contact expects in order to convert that person into a client.

We’ve talked frequently about how a cost segregation study can give your practice an edge when it comes to getting that first project with a potential client. The next step is to build on that first engagement with related services based on what you learn in preparing a cost seg study.

Here’s a list of 12 service opportunities that clients might need in order to take full advantage of the study you’ve just completed:

  1. Build new v. acquire existing building and improve analysis—Last year’s PATH Act had a significant impact on the cost comparison between renovating an existing building v. new construction. New construction will not qualify for bonus depreciation treatment. When calculating the cost segregated tax impact of new construction v. renovation, this change may tip the scales toward renovation for some taxpayers.
  2. Qualified property for bonus depreciation and Section 179 expensing—A cost seg study doesn’t just identify assets with different lives that exist within a building. It often identifies assets that may qualify for bonus depreciation deductions, or year-of-purchase expensing under Section 179.
  3. Reclassifying property into 5-, 7-, and 15-year recovery periods—One service that often rolls right out of the cost seg study is the adjustment of depreciation schedules to reflect accurate basis amounts for any systems that were carved out of the building’s basis because they qualified for a different asset life.
  4. Cost seg and IRC section 1031 exchanges are two of the most valuable tax-deferral strategies available to commercial real estate owners. With proper planning, using the two methods can provide a tremendous opportunity for taxpayers to defer income taxes and maximize cash flow through accelerated depreciation deductions.
  5. Estate tax planning—A cost seg performed prior to or for the year of death will benefit the decedent via tax savings and avoid depreciation recapture. And since inherited property is “stepped-up” to fair market value, a cost seg performed on the step-up benefits the heir(s) via additional tax savings. As a result, cost seg should be considered when performing estate tax planning.
  6. Determining the tax basis of disposed property—The tangible property regulations allow taxpayers to recognize a partial disposition of building property (e.g. a roof replacement). Cost seg is an approved methodology for determining the amount of the deduction.
  7. Improvement v. repair analysis—Cost seg is the methodology used to identify and cost the building structure and each building system needed to determine whether a cost was incurred for a deductible repair or a capitalizable improvement to building property.
  8. Tenant improvement costs analysis—Certain tenant improvements may qualify for treatment as a repair under the tangible property regulations. However, before performing the tenant improvement cost analysis, personal property costs must be segregated from real property costs since different rules apply to personal property.
  9. Structuring leases—Under the tangible property regulations, the landlord and tenant have different units of property in which to apply the improvement v. repair analysis. Generally, the analysis will favor the party with the larger unit of property which is most often the landlord. This factor should be considered when structuring leases.
  10. Tax planning in the year of sale—A cost seg study can be performed in the year the building is sold. With proper planning, the benefits of accelerated depreciation deductions could result in a net tax benefit to the seller reducing overall tax liability.
  11. Qualification for the small taxpayer safe harbor election—Qualification for this election is based on the original cost basis of the building not exceeding $1 million. A cost seg study could result in qualification for the election by reducing the cost basis of real property below this threshold.
  12. Federal and state income tax planning—Cost seg should be used for both federal and state income tax planning, especially when the tax rules differ as to the treatment of real and personal property (i.e., recapture rules).

Even when it stands alone, cost segregation can be a valuable practice builder for an accounting firm. But when a firm uses the knowledge gained through a cost seg study to help a business improve its tax position, the service can be just the beginning of a long-term client relationship.

IRS PATH Act Rev-Proc Answers Questions About 2015 for Fiscal Year Filers

Posted by Don Warrant on 10/11/16 9:00 AM

Revenue Procedure 2016-48 provides transition rules for PATH Act depreciation changes.

iStock_61137508_SMALL-006016-edited.jpgWe’ve discussed the effect of the PATH Act on real property clients before on this blog. In those discussions, we’ve noted that the PATH Act became law at the end of 2015 and that it retroactively reinstated certain depreciation provisions that had expired at the end of 2014. Even though retroactive reinstatement was widely expected, those provisions were not available during calendar year 2015 impacting fiscal year filers and short tax years beginning and ending in 2015. Therefore, the IRS provided the following guidance in Revenue Procedure 2016-48:

  • Section 4 provides the procedures for claiming or not claiming bonus depreciation while the provision had lapsed, or who elected to not claim bonus depreciation for a class of property.
  • Section 3 provides the procedures to carryover the amount of qualified real property expensed in a prior year that was limited by the taxable income limitation, to a taxable year beginning in 2015.
  • Section 5 provides the procedures for a corporation to elect to forgo bonus depreciation in order to allow tax credits generated before 2006 to be used.

Bonus Depreciation

The PATH Act retroactively reinstated and extended bonus depreciation for qualified property and made changes impacting improvements to commercial buildings placed in service after December 31, 2015 (please see our prior post). Taxpayers with a fiscal tax year that ended in 2015 or with a short tax year that began and ended in 2015 may not have claimed bonus depreciation during the period in which the provision had lapsed, or may have elected to not claim bonus depreciation for a class of property. These taxpayers have the following options:

  1. Amend the tax return to claim bonus depreciation on qualified assets before filing the return for the fiscal tax year ending in 2016;
  2. File Form 3115 under Section 6.01 of Rev. Proc. 2016-29 with a timely filed tax return for the fiscal tax year ending in 2016 or 2017; and
  3. Revoke the election to not claim bonus depreciation for a class of property by filing an amended federal tax return by the earlier of November 11, 2016, or before filing the return for the fiscal tax year ending in 2016.

Section 179 Expensing

The PATH Act reinstated Section 179 expensing of assets in the year placed in service retroactive to January 1, 2015, and made the provision a permanent part of the Tax Code. The Act did retain the limited applicability of this section to commercial real estate to only “qualified real property,” meaning:

  • Qualified leasehold improvement property,
  • Qualified restaurant property, or
  • Qualified retail improvement property.

The permanent provision allows a $500,000 deduction (up from $250,000), but still phases that deduction out dollar-for-dollar to the extent that property placed in service in the year exceeds $2 million. Both the $500,000 and $2 million are indexed for inflation going forward. If a taxpayer makes this election for qualified real property, the entire cost of the qualified real property is taken into consideration for the annual dollar limitation.

Unused deductions can be carried forward to future years. Prior to the PATH Act changes, the carryforward provision as it applied to qualified real property required that any amount carried forward must be treated as depreciable property placed in service on the first day of the last tax year ending in 2014. The Rev. Proc. allows taxpayers to carryover the amount to any taxable year beginning in 2015.

New Options for Commercial Real Estate Owners

The PATH Act has presented commercial real estate owners with new or expanded options that haven’t been available before. Advisors need to make sure that they and their clients are seeing the big picture when it comes to potential tax-saving opportunities. Under the old version of Section 179, benefits for real estate phased out quickly at a low threshold and the carryforward was limited to no later than 2014. As a result, people have gotten accustomed to not considering it in their projections. The new rules allow an indefinite carryforward and also index the deduction amount and the phase-out threshold for inflation. The deduction remains unchanged for 2016, but the phase-out threshold will increase to $2,010,000.

The PATH Act made bonus depreciation available to more property owners, expanding the previous “qualified leasehold improvement property” restriction to a broader “qualified improvement property” category. As a result, commercial real estate owners should realize even more tax savings over the next four years by engaging cost segregation professionals who can segregate costs to acquire and improve commercial buildings.

As always, CSP360 is ready to help. Some of your clients may have a fiscal year situation that was remedied by Rev. Proc. 2016-48. Our commercial real estate focus makes us an ideal back-office support team when it comes to providing specialized, high-quality service to real estate clients. Please contact us for more information about how we can help you better serve current clients and grow your real estate practice.

Tags: commercial real estate, PATH Act, Revenue Procedure 2016-48

The Top 7 Most Frequent Questions Commercial Property Owners Ask About Cost Segregation

Posted by Jennifer Birkemeier on 4/12/16 9:22 AM

The right responses can help your CPA firm get more cost segregation opportunities and close more cost segregation deals faster

FAQs.jpgIf your firm is offering or going to offer cost segregation services, you’ll be faced with a number of questions from the commercial property owner. Here are some quick FAQs that will help you prepare your responses.

Question 1: Is this a scam?

Cost segregation is an accepted strategy with clear guidelines, has passed scrutiny by the IRS and Tax Courts, and is not a scam.

In our blog post, 6 Tips for Explaining Cost Segregation to Commercial Real Estate Clients, we wrote:

The IRS has accepted cost segregation as a legitimate tax planning strategy for years. The Service has released clear guidelines on what information must be included in a quality cost segregation study. Depending on the provider you choose to perform the cost segregation study, you may be eligible for support in the event that the IRS chooses to audit your study.”

Question 2: What makes my building(s) eligible for cost segregation?

Cost segregation can be an appropriate tax savings strategy for new building construction, existing property placed in service after 1986, a new real estate purchase, renovation of an existing building, or leasehold improvements which are the unsung heroes of the cost segregation world.

In our blog post Don’t Overlook These 3 Client Transactions that Qualify for a Cost Segregation Study, we highlighted:

  1. Purchase or construction of a building with a cost basis of $1 million or more, but this could be as low as $750,000 for certain types of buildings
  2. Multiple buildings of the same type that, all together, add up to a cost basis of $1 million or more, and
  3. Tenant buildout with a cost basis of $500,000 or more because these projects are likely to be comprised of a higher percentage of Sec. 1245 property that qualifies for 5- and 7-year depreciation.”

Question 3: How much can I save?

Generally, the ROI from a cost segregation study is 10 to 1, but we try to make it closer to 20 to 1.

In our blog post, How to Pitch a Cost Seg Project to a Commercial Real Estate Client or Prospect, we wrote:

When it comes down to it, commercial property owners are most interested in knowing how much they can expect to save on their taxes in the next few years. In general, we find that tax-paying owners of commercial buildings with a tax basis of $1 million or more see accelerated depreciation deductions that add up to at least 10 times the cost of the study. With just a few pieces of data, a reputable and established cost segregation firm can provide a detailed estimate of anticipated tax benefits.”

Question 4: How long does it take?

A cost segregation study typically takes 30 days to complete, unless there are extenuating circumstances (multiple locations, lack of access to information).

Question 5: How does cost segregation relate to compliance with the Tangible Property Regulations?

There is a direct and critical relationship between cost segregation and annual compliance with the Tangible Property Regulations. Effectively, the combination of the annual compliance requirements of the Tangible Property Regulations combined with the data gathered and tax savings power of cost segregation makes for a powerful 1-2 punch.

In our blog post The Complex Process of Simplifying Tangible Property Regulations we wrote:

Cost segregation plays an important role in a business’ compliance with the new tangible property regulations. A cost segregation study identifies the appropriate unit of property needed to apply the new improvement rules to each building system and the major components of the building itself. Any costs incurred to improve real property must be segregated between real and tangible personal property before applying the improvement rules. In addition, cost segregation is necessary to recognize partial dispositions of building structures and systems, and to segregate removal costs from acquisition or production costs.”

Question 6: What happens if I get audited?

Because we have followed IRS Guidelines and have worked with a quality provider, we are confident that the study we do for you will pass IRS scrutiny.

Quality providers deliver substantial authority as required by the IRS. A quality provider will provide some level of support on audit as part of the fee for preparing the study.

And lastly ...

Question 7: Does Your Firm Have the Experience and Expertise to Conduct a Cost Segregation Study?

Even after you’ve convinced your client or prospect about the merit of doing a cost segregation study, you still have one critical question to answer from them: does your firm have the necessary skills, training, and experience to do a cost segregation study that will capture every post tax savings opportunity in an audit compliant manner?

Because most firms don’t have building engineers or construction experts on staff, this could be a tough sell, and a surefire way to lose a client (or face a lawsuit from the client) if the study your firm performs is audited and found to be deficient.

In our blog post, Plan for a Rainy Day, we wrote “… If your client’s cost segregation study fails to hold water, then your client will be handing all of those tax savings back over to the IRS.”


How CSP360 Can Help

It’s likely that if your firm wants to provide cost segregation services, you’ll need to partner with a boutique firm like CSP 360. Regardless, when selecting partner, there’s three questions you’ll want to get answered before you can answer a question from a client or prospect about credentials and credibility:

  1. Does the provider follow the Cost Segregation Audit Technique?
  2. What is the provider’s basis for “substantial authority” as required by the IRS?
  3. Does the provider understand the implications of the Peco Foods, Inc. v. Commissioner case, in relation to purchase contracts?

Cost Segregation Partnership Opportunity We invite you to learn more about CSP360 and the opportunities for us to create a strategic partnership with you to serve commercial property owning clients and prospects in your market. To get a better understanding of our experience and expertise, we invite you to read our related posts about cost segregation, download any of our resources, or call me at (800) 591.0148 today.

Tags: cost segregation, commercial real estate, Jennifer Birkemeier

The 4 Most Horrible Excuses We’ve Heard From CPA Firms About Why They Don’t Want to Do Cost Segregation

Posted by Jennifer Birkemeier on 3/24/16 9:06 AM

It May Be Time for a Second Look

Stop_excuses.jpegThere are a slew of very good reasons why a CPA firm should add cost segregation into its mix of tax services for commercial property owners, but yet, a lot of small and mid-sized firms are reluctant to pull the trigger.

In some cases, it’s a matter of not having enough experience. In other cases, it’s a matter of not having enough bandwidth or resources to perform a cost segregation study that’s compliant with IRS Guidelines. It could even be a matter of the lack of construction or engineering expertise that’s necessary to identify building components eligible for accelerated depreciation.

These are all valid concerns, and each can be easily resolved with a strategic alliance or partnership with an experienced and credentialed cost segregation provider like CSP360.

However, there are still a lot of misconceptions about cost segregation that are holding smaller CPA firms back from delivering tax savings that will delight their clients, while concurrently protecting their client roster from poaching by a larger firm and creating opportunities for new business.

Here’s a list of our four least favorite, horrible excuses:

  1. It’s too risky.

    If you team up with a qualified, credentialed partner, that’s simply not true. They will bring a “just right” combination of experience and expertise to the table, along with a comprehensive way of complying with the IRS’ Cost Segregation Audit Techniques Guide. Also, for those studies they have done, quality providers will offer cost segregation audit defense services at no additional charge.

  2. Our clients’ commercial property is too small to qualify.

    While that may be true, you might also be surprised at what could qualify, and once you look through your roster of commercial property owning clients, you might be delighted by the hidden opportunities. Buildings with a value of $750,000 or over may be eligible, as may buildouts valued at over $500,000, depending upon the taxpayer’s tax bracket.

  3. Not worth it if my client is not going to be holding on to a property for a long time.

    Again, this is not true. A cost segregation study can be done in the year that your client disposes of a property. For example, we did a cost segregation study for a commercial property owner that didn’t have the money to pay taxes on the sale of his property, and used the study to recharacterize the taxable gain and reduce the total taxes due.

  4. I don’t see a value because my clients’ tax savings are really just a matter of a timing difference.

    Cost segregation is built on the time value of money. As we wrote in a previous blog post, 6 Tips for Explaining Cost Segregation to Commercial Real Estate Clients, you save money on taxes sooner.

    Proper segregation of real property and personal property assets allows for more deductions in the early years of the property’s life. If you’re talking with buzzword-happy entrepreneurs, you can say, “The accelerated deductions decrease taxable income in the early years thus expediting the anticipated ROI on the asset.” However you say it, as long as your audience understands the basic concept that money in hand today is worth more than the same amount in hand a few years from now, they’ll see the value of cost segregation.

How do you really know if you don’t investigate the opportunities?

CSP360 has partnered with quite a few CPA firms that have approached cost segregation with a healthy degree of skepticism and worry. After we partner on a study or two, universally, their skepticism turns into enthusiasm for adding, promoting, and delivering cost segregation services to their current client roster and as a means to attract prospects to their firm.

Cost Segregation Partnership Opportunity If you’re a skeptic, you’ll never know if cost segregation is right for your firm until you do a bit of investigation. Start with some free education, like reading and subscribing to our blog, here. Or, download a couple of our whitepapers, here.

Best of all, we’re only a phone call away and would welcome the opportunity to kick the tires with you. You can do that by calling us at (800) 591.0148, or use this form to initiate the conversation.

Tags: cost segregation, Jennifer Birkemeier

A PATH to Tax Savings: New Law Makes Important Changes to Extended Provisions

Posted by Don Warrant on 3/7/16 9:27 AM

We’ve gotten so used to hearing that these provisions have been extended “as is” for another year that it’s easy to overlook some significant changes for commercial real estate clients in this year’s “extenders” bill.

Clear-Path.jpgIn December of 2015, Congress passed the Protecting Americans from Tax Hikes (PATH) Act of 2015, affecting a number of tax provisions that, until now, have not been permanent parts of the Tax Code. This extenders package is different from many previous ones in that it actually makes some provisions permanent and it makes changes to some provisions that can be helpful to businesses. In particular, some of the changes made to Section 179 expensing and bonus depreciation may be of interest to commercial real estate clients. When combined with the recent tangible property regulations, the new law increases opportunities for your clients to accelerate deductions using cost segregation studies.

Section 179 Expensing

The Section 179 deduction for small businesses was made a permanent part of the tax code at its pre-2015 level of $500,000 per year. The extension is retroactive to 2015. As before, the deduction will phase out on a dollar-for-dollar basis when the cost of eligible property exceeds $2 million. However, the $2 million threshold and the $500,000 deduction limit will now be indexed for inflation beginning in 2016. For the 2016 tax year, no adjustment will be made to the $500,000 deduction, but the phase-out will start at $2,010,000.

The PATH Act did not change the limited applicability of section 179 expensing for commercial real estate. The provision still only applies to “qualified real property,” which is limited to:

  • Qualified leasehold improvement property,
  • Qualified restaurant property, or
  • Qualified retail improvement property.

However, the Act did remove limitations on carrying forward Section 179 deductions that exceeded income in prior years.

A summary of PATH Act changes to Section 179 are as follows:

  • The $500,000 limit is retroactive to 2015 and made permanent going forward;
  • The deduction amount and phaseout threshold are indexed for inflation beginning with the 2016 tax year; and
  • Beginning with the 2016 tax year, the normal Section 179 carry forward provision applies to qualified real property.

Bonus Depreciation Provisions

The PATH Act retroactively extended the bonus depreciation rules for MACRS property with a recovery period of 20 years or less. For property placed in service before January 1, 2016, the act basically extended the rules that had expired at the end of 2014. For property placed in service after December 31, 2015, there are some significant changes to consider.

Bonus depreciation will phase out as follows: 50% for 2015 – 2017, 40% for 2018, and 30% for 2019.

Prior to the PATH Act, bonus depreciation was available to commercial building owners for qualified leasehold improvement property only. Qualified retail improvement property and qualified restaurant property did not qualify unless they were also qualified leasehold improvement property.

Qualified leasehold improvement property placed in service after December 31, 2015 is no longer eligible for bonus depreciation. Instead, a more expansive “qualified improvement property” is eligible for bonus depreciation. Qualified improvement property is an improvement to the interior of a nonresidential real property that is placed in service after the date that the building was placed in service.

As a result of this change, the following requirements no longer apply: 1) the building must be in service for at least three years, 2) the improvements must be made pursuant to a lease, and 3) improvements to common areas are ineligible. However, certain improvements such as enlargements, elevators/escalators, and internal structural framework continue to be excluded. Unfortunately, qualified leasehold and retail improvement property, and qualified restaurant property are not eligible for bonus depreciation unless they are also qualified improvement property.

A summary of the PATH Act changes to bonus depreciation are as follows:

  • The bonus deprecation was extended for five years: 50% (2015-2017), 40% (2018), and 30% (2019);
  • Qualified improvement property placed in service after December 31, 2015 is eligible for bonus depreciation; and
  • Qualified leasehold and retail improvement property, and qualified restaurant property are not eligible for bonus depreciation unless they are also qualified improvement property.

Cost Segregation More Important than Ever

The changes under the PATH Act make it more important than ever to properly classify improvements to commercial buildings. As a result cost segregation specialists will be in high demand to make the following classifications:

  • Repairs expense resulting in an immediate tax deduction;
  • Tangible personal property subject to shorter recovery periods and eligible for bonus depreciation;
  • Qualified improvement property eligible for bonus depreciation
  • Qualified leasehold and retail improvement property, and qualified restaurant property subject to a 15-year recovery period and Section 179 expense election, and qualification for bonus depreciation.

The misclassification of improvement to commercial buildings will likely result in missed tax deductions for bonus depreciation, Section 179 expense, and accelerated depreciation.

New Call-to-action The PATH Act has created additional tax saving opportunities for commercial building owners for a limited time. As a result, it is more important than ever to engage qualified cost segregation professionals to assist with the proper classification of improvements to commercial buildings.

If you would like to talk with a CSP360 cost segregation professional about how these changes may affect your clients, please click the button to schedule a free 15-minute consultation.

Tags: cost segregation, Don Warrant, PATH Act of 2015

PATH Act Extends More than 50 Tax Provisions

Posted by Leia Marino on 2/23/16 9:24 AM

How business owners are impacted by the changes

New Call-to-action As a recent guest on WBEN's Growing Buffalo, Director of Freed Maxick's Tax Practice, Don Warrant, summarized the significance of the Protecting Americans from Tax Hikes (PATH) Act of 2015.

Click here or on the button for Don's take on the act's most important tax extenders for businesses large and small.

Tags: Don Warrant, PATH Act of 2015

5 Mistakes That Accounting Firms Make When It Comes to Cost Segregation

Posted by Jennifer Birkemeier on 2/18/16 8:38 AM

To err is human, but these 5 mistakes that relate to cost segregation are easily avoided.

Cost Segregation NYWe all make mistakes. It’s part of being human. In the accounting profession, we work to minimize mistakes through an ongoing process of continuing education and a thorough regimen of redundancies and internal reviews designed to protect our firms and our clients from a mistake made by any one individual. When it comes to cost segregation, many firms are making mistakes that lead to missed opportunities for improved client retention and revenue growth.

These 5 examples demonstrate some common misconceptions about cost segregation and mistakes that could cost your firm revenue. 

  1. Misunderstanding Qualifying Dollar Amounts. Some firms miss cost segregation opportunities because they get a $1 million threshold stuck in their heads. That’s an accurate number for standalone buildings, but buildouts of leased space often benefit from cost segregation studies at values as low as $500,000. These projects typically involve fewer structural components, making it realistic to expect that as much as 60-70% of the costs may be classifiable as property with an asset life of less than 39 years.
  2. Intimidating Entry Costs. Many CPAs shy away from this service because the amount of training needed, as well as the close relationships with building professionals. If you start from scratch, it’s a tough expertise to build. However, if you work with a trusted partner to provide the service to your clients, you can be learning about cost segregation while you are working with an experienced professional who can deliver a quality cost segregation study.
  3. Creating Marketing Materials. Some accountants think of the effort it takes to create materials to advertise a new service line and decide their time can be more profitably spent providing existing services. However, a quality cost segregation partner can provide top-notch private-labeled marketing materials to help you discuss the new service line with clients and prospects without demanding significant amounts of your time.
  4. Misunderstanding Cost Segregation’s Ability to Draw New Clients. We talk to a lot of firms who tell us that they just don’t have enough clients who need this service to justify partnering with us to provide it. While your firm may not have a significant real estate practice now, a new service like cost segregation can help you to grow in that area. When you partner with an outside provider, your initial investment remains relatively small while you learn the service and build your client base with it.
  5. Failure to Recognize the Value of Cost Segregation Under New Tangible Property Regs. Beyond its well-known value in accelerating depreciation deductions, cost segregation now has a significant role in properly allocating costs under the new tangible property regulations. Clients who may not have had a use for it in the past may find themselves in need when calculating depreciation in the future.

Cost Segregation Partnership Opportunity Any one of these mistakes could cost a firm significant opportunities to grow revenue and expand its client base. We’ve talked to some firms that have made several of the mistakes on this list, and it typically doesn’t take them long to see the value of partnering with a quality cost segregation specialist to expand their service offering.


Tags: cost segregation, Jennifer Birkemeier

6 Tips for Explaining Cost Segregation to Commercial Real Estate Clients

Posted by Don Warrant on 2/4/16 9:12 AM

Once you can explain the basic concepts and advantages of cost segregation, the service basically sells itself.

business-handshake.jpgMany of the people who are drawn to study accounting and choose careers in the profession don’t realize that, at some point, their career growth will depend on their ability to sell accounting services. It takes a lot of studying to get a degree, then more studying and significant experience to get a CPA license. Along the way, successful accountants learn that their license doesn’t get them very far if they don’t have projects to work on. And they don’t get projects to work on if they don’t have clients to pay fees for the work.

Cost segregation is a great client offering because it’s relatively easy to explain to property owners and the value it delivers is fairly obvious to most businesspeople. If you have existing commercial real estate clients or even if you need a quick idea to share with someone you meet at a networking event, cost segregation does a pretty good job of selling itself.

Here are 6 tips to help you explain the service to potential clients and grow your practice.

  1. You save money on taxes sooner. Proper segregation of real property and personal property assets allows for more deductions in the early years of the property’s life. If you’re talking with buzzword-happy entrepreneurs, you can say “The accelerated deductions decrease taxable income in the early years thus expediting the anticipated ROI on the asset.” However you say it, as long as your audience understands the basic concept that money in hand today is worth more than the same amount in hand a few years from now, they’ll see the value of cost segregation.
  2. No amended returns are needed. Sometimes clients will resist filing amended returns. The great news about cost segregation is that it is treated as an accounting method change. That means the modifications can be calculated as far back as the effective date of the law in 1987 and related deductions taken on the current year’s return.
  3. Annual compliance with the tangible property regulations. A proper cost segregation study will assign costs to the major structural components of a building and 8 different building systems. Accurate cost information on these assets is needed each year to comply with the tangible property regulations. This information is useful in determining whether current year construction costs may be expensed or must be capitalized.
  4. Disposition of building property. Effective cost segregation practices make it easier to identify and determine the adjusted basis of building property. The adjusted basis is necessary in order to accurately recognize a disposition for tax purposes.
  5. Small taxpayer safe harbor election. When the cost of tangible personal property is properly segregated from the cost of the building, the tax basis of the building is reduced. In some cases, proper segregation of costs can reduce the cost of a building below the $1 million threshold needed to qualify for the small taxpayer safe harbor election. This safe harbor allows for costs that might otherwise be capitalized as improvements to the building to be expensed as incurred for tax purposes, again accelerating deductions for the client.
  6. Accepted strategy with clear guidelines, not a scam. The IRS has accepted cost segregation as a legitimate tax planning strategy for years. The Service has released clear guidelines on what information must be included in a quality cost segregation study. Depending on the provider you choose to perform the cost segregation study, you may be eligible for support in the event that the IRS chooses to audit your study.

Cost Segregation Partnership Opportunity Not everybody is cut out to be a salesperson. Some of us can sell ice to Eskimos, while others can lead horses to water but never get them to drink. Regardless of your skills in sales, it’s always easier to work with a product that sells itself. Cost segregation studies provide such obvious benefits that they make anyone a more effective seller.


Tags: cost segregation, commercial real estate, Don Warrant

Explaining Cost Segregation to Clients Can Be as Easy as 1-2-3

Posted by Jennifer Birkemeier on 1/19/16 8:57 AM

Many tax concepts are difficult to explain to clients. Cost segregation can be explained with 3 easy talking points.

Cost Segregation for Clients - CSP 360Albert Einstein has often been quoted as saying, “The hardest thing in the world to understand is the income tax.” That means a couple of things for accountants and tax professionals.

  • Job security, and
  • You spend much of your career trying to help clients understand the hardest thing in the world to understand.

Fortunately, not every section of the Internal Revenue Code is THAT hard to understand. Also, you have resources at your disposal who can help you explain parts of the income tax to clients and to prospects that you hope will become clients. Like this blog post, for instance. It will provide you with 3 easy talking points to explain the value of a cost segregation study to clients who own real property.

  1. Maximize your tax savings by accelerating deductions. Realistically, most clients will hear “bigger deductions on this year’s return” and tune you out after that. You won’t need to show spreadsheets explaining the time value of money and why they save money even though the total amount deducted over the course of the building’s life may not change significantly. That’s not to say you shouldn’t be ready to dive into the details if asked. But start at a high level and see if that’s enough to get someone interested.
  2. A cost segregation study creates its own documentation. Like most conversations about maximizing tax savings, this one will likely raise the specter of the IRS. One of the attractive selling points of a cost segregation study is that the IRS has put out very clear guidance in its “Cost Segregation Audit Technique Guide” that explains how a study should be conducted and how the report should be prepared. It’s possible that the IRS may question the deductions, but your client will already have in hand the exact documentation that the Service needs in order to support the positions taken. Depending on who prepares the study, they may also have professional representation to help them through any examination.
  3. Cost segregation goes way back. Maybe you’ve talked with your clients about amended returns before, or maybe they’ve learned elsewhere that amended returns can typically only be done for 3 years after the original return was filed. But cost segregation is treated as an accounting method change. Clients may not care to learn about the terms or the definitions, but they need to understand this key point. A cost segregation study may help with more than just accelerating future deductions into the current year. In many cases, it could also lead to the recalculation of prior year depreciation amounts to reflect the acceleration that would have occurred if they had segregated costs initially. That means additional deductions may be available in this tax year for property put in service as far back as 1987. If the segregation study identifies property with less than a 20-year life, bonus depreciation deductions may be available in addition to accelerated amounts.

Obviously, no tax deduction applies to every client all of the time. The good news about cost segregation is that it’s pretty easy to identify the clients who might benefit from a study. And, with these 3 easy talking points, it can be pretty easy to explain the benefits to them. Good luck!

Tags: cost segregation, Jennifer Birkemeier, tax saving opportunities

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