The Key Ingredients of a Quality Cost Segregation Study

Posted by Don Warrant on 11/24/15 9:19 AM

A Recipe for Quality as Set Forth by the Chefs at the IRS

Some days tax practice is an art, and some days it’s a science. And every now and then, you get that rare day when it’s as easy as following a recipe. If you want to know if a cost segregation study that you and your client are planning meets the IRS standard for one of these studies, the Service’s “Cost Segregation Audit Technique Guide” spells out a list of 13 elements that contribute to a “Quality Cost Segregation Study.” A “quality” study is accurate and well-documented with respect to:

  • Classification of assets,
  • Explanation of rationale, and
  • Substantiation of asset basis.

In order to be considered a quality study, a cost segregation study should contain each of these principal elements:

  • Preparation by an Individual with Expertise and Experience. Typically, you want someone with a construction background, like a construction engineer, to conduct the study. In addition, someone with experience in cost estimation and allocation should also participate. The study should identify the preparer and describe the person’s relevant credentials, experience and expertise.
  • Detailed Description of the Methodology. The study must describe the methodology used and detail the steps taken to classify assets and determine costs.
  • Use of Appropriate Documentation. Contemporaneous documentation is critical to support classification of assets and determination of costs. Types of documentation may vary based on whether property is new or used and also on availability of original construction documents.
  • Interviews with Appropriate Parties. Contractors, subcontractors, taxpayers and property managers all have something to contribute when it comes to understanding the construction process and the use of the property. These interviews should be conducted and, in accordance with the bullet above, documented.
  • Use of a Common Nomenclature. This element flows out of the first bullet-point. Individuals with a construction background understand that terms used to describe the property should be consistent with blueprints and other project documents.
  • Use of a Standard Numbering System. It’s important to number assets consistent with contract bid documents and pay requests.
  • Explanation of Legal Analysis. A quality study should contain thorough analysis of relevant law, including relevant citations, to support section 1245 property classifications.
  • Determination of Unit Costs and Engineering “Take-Offs.” The process of breaking down total project costs into each unit or class of property must be carefully documented and the methodology used to assign costs to each asset should be clearly explained.
  • Organization of Assets Into Lists or Groups. Asset listings should also tie to the taxpayer’s fixed ledger.
  • Reconciliation of Total Allocated Costs to Total Actual Costs. The best way to confirm the accuracy of the allocations in the study is to reconcile them to actual costs. It’s also important to consider and list separately acquired Section 1245 property to avoid duplication.
  • Explanation of Indirect Cost Treatment. All costs associated with a particular project, both direct and indirect, should be listed and the treatment of indirect costs should be explained. That explanation should include the purpose of the indirect cost, its allocation and any deviations from commonly accepted practice.
  • Identification and Listing of Section 1245 Property. Clearly identify and list 1245 property and show any Section 1250 property that has been reclassified to Section 1245 property.
  • Consideration of Related Aspects. Related audit issues, such as IRC Section 263A, changes in accounting method, and sampling techniques should be addressed in the study. This element should include comments on the treatment of these items for tax purposes, especially if amounts are restated for prior years.

New Call-to-action Almost every business has some unique quirks and unusual processes that come to light when an outsider looks in. The key to translating those processes into a quality cost segregation study is finding a partner with a strong focus on cost segregation and experienced resources who understand both the construction process and the accounting rules associated with real property.

Tags: cost segregation, Don Warrant

There’s More to a Building than Meets the Eye

Posted by Jennifer Birkemeier on 11/18/15 8:56 AM

There’s much to be learned from looking at the building and talking to the folks who constructed and maintained it, but the proof for any deductions will be found in the drawings.

Cost_seg_gold_in_blueprintsMost of us have been through a home inspection when purchasing a residence. You walk through with a professional who is trained and licensed to spot the potential problems that could be lurking behind that beautiful façade you just couldn’t resist. Most home sales are contingent on that professional certifying that the residence is up to code and that any potential structural or systemic problems are brought to light before settlement.

When it comes to understanding the types of assets that make up the structure and systems in a commercial property, a similar type of inspection is needed. The professional who performs that review will do a walkthrough, but the key step in the process will require a look behind the walls and under the floors. In order to find opportunities for accelerated depreciation that may be hidden in 39-year assets, a person with a background in commercial property construction needs to see the blueprints and other schematics that tell the full story of everything in a building.  

A Blueprint for Success

The documentation starts with a blueprint, but effective cost segregation requires even more detail. An experienced construction professional will want to see:

  • Finish Schedules—These provide the specifics on the materials used in the walls and floor coverings. Two wall coverings may look identical to the untrained eye, but one might qualify for a deduction or credit that has previously been missed.

  • Electric Panel Legends—Many outlets and circuits are customized to support specific equipment. Costs associated with that wiring may be deductible over the life of the equipment, which will always be shorter than the life of the building.

  • Plumbing Schematics—Specialized supply and waste lines that support particular functions can also lead to accelerated deductions. Beverage dispensers, grease interceptors and other custom fittings could be depreciated more quickly than the overall property.

  • Tenant-Specific Improvements—If your client rents property to a restaurant, the industrial fans needed for ventilation may be expensed over the life of cooking equipment instead of the building. Hotels or mixed-use properties that include restaurants may have the same hidden savings available. Additional power sources, wall materials and water supply needed to support medical professionals can generate significant cost accelerations.

When Deductions Are Questioned, Plans Are Reviewed

The IRS has put out specific guidance on what should be included in a cost segregation plan. They also have an audit manual for these plans. The first step in an examination of segregated costs is a review of the building plans and schematics. If your client’s deductions get called into question, it’s important to know that the numbers are based on the information that the IRS relies on for verification.

Would You Buy a House Without an Inspection?

cost segregation guide for CPA firms Many of us can look at a house and spot glaring problems. But when it comes to putting your money down and making a purchase, you want the assurance of a professional that you haven’t missed something.  

It’s no different if you want to deliver cost segregation services to your clients. Having a knowledgeable professional review the building plans in addition to an inspection will deliver an accurate, exhaustive list of the costs that can be accelerated.  

Tags: cost segregation, commercial real estate, Jennifer Birkemeier

How a Light Switch Could Brighten Your Client’s Day

Posted by Don Warrant on 11/11/15 8:48 AM

The strange trip from a fixture to a tax deduction.

Light_switch_smileQ: How many light switches does it take to accelerate a tax deduction?
A: As few as 1, depending on what it’s connected to and how it’s wired.

While this is almost certainly the least amusing “How many light bulbs” riddle ever, the answer may still bring a smile to commercial property owners. Most of us look at light switches, outlets and fixtures with a mix of gratitude for their existence and a little bit of fear about what would happen if they didn’t work. A construction professional with a background in designing and installing this equipment looks at these things and sees distinctions that may accelerate depreciation deductions.

What Does It Control?

If your client rents an office with one switch on the wall that controls a fixture with fluorescent tubes in it, things are pretty basic. Generally, that’s what the Tax Code expects you to put in an office as part of the building, and it gets deducted as part of the building.

But what about the conference room? This room may have recessed lights. Those lights may be connected individually or in small groups to switches that may allow the user to dim them. Secondary or decorative lighting may depreciate faster than generic building lighting. In order to host presentations in the conference room, it may be equipped with specialized electronics that could be depreciated separately from the building over a much shorter lifespan.

Even if your client’s commercial office spaces include kitchens, things like garbage disposals and icemakers could require separate electric and water lines and switches. These can often be depreciated more quickly than the 39-year life of the building.

Where Does It Get Power?

The accelerated costs may not be limited to the additional hardware installed on the wall. Garbage disposals often require a separate fuse all the way back at the fuse box. Recessed lighting and dimmer controls may call for different wiring and specialized labor at installation. The costs associated with the installation may qualify to be segregated out and expensed more quickly. A review of the electric panel to determine how many circuits relate to specialized fixtures can also generate faster deductions for the cost of the panel.

How Do You Figure It Out?

cost segregation guide for CPA firms In short, you don’t. You bring in a construction professional with knowledge of building codes and tax law to help you and your clients figure out what items may qualify for accelerated depreciation. That professional should be part of a firm that performs studies for your commercial property clients and stands behind the report in the event the IRS decides to examine it.

A typical accountant may see the switches in a commercial property for years without stopping to consider how they are deducted. Whenever cost segregation professionals see a switch, they often react as if a light bulb has just gone off in their heads.

Tags: cost segregation, commercial real estate, Don Warrant, Accelerating depreciation deductions

3 Steps to Help Clients Understand 179D

Posted by Jennifer Birkemeier on 10/28/15 9:22 AM

How to give clients enough information that they understand the value of the deduction without getting too deep into the weeds.

179D_deduction_weedsThe Section 179D deduction for energy efficient construction and improvements to commercial buildings provides a great opportunity for commercial real estate owners to convert 39-year property into a deduction. Some clients will be perfectly happy to hear from you that a new election or credit will reduce their tax liability and that you are confident they can legally claim it on their return. Others, often newer clients or leads that you are trying to convert into clients, might want you to explain more about the opportunity in order to help them understand exactly what it is and how it relates to them. There’s always a fine line to walk with these folks, since they want to understand the value of what you’re doing for them but they don’t necessarily want to become experts on the topic.

A Trio of 3’s

The quickest way to remember the information that can help a client or potential client understand the value of Section 179D is the trio of 3’s:

  1. 3 Types of Construction Qualify:
    • Interior lighting systems.
    • HVAC systems.
    • Building envelope systems.
  2. 3 Levels of Qualification:
    • Level 1: To qualify for a $0.30-$0.60 deduction per square foot, an energy improvement must be made to the building’s interior lighting systems and improve energy use by 25%-40% or more. HVAC and building envelope improvements that meet the energy improvement threshold will qualify for $0.60 deduction per square foot.
    • Level 2: To qualify for a $1.20 deduction per square foot, an energy improvement must be made in two of the three types and improve the energy use by an aggregate of 33 1/3% or more.
    • Level 3: To qualify for a $1.80 deduction per square foot, an energy improvement must be made in all 3 types and improve the energy use by an aggregate of 50% or more.
  3. Not Just 3 Years of Amended Returns: The deduction is claimed via a change in accounting method for property owners, so it can be taken for construction or improvements as far back as 2006, the year the deduction was enacted.  

With government buildings, these benefits go to the primary designer (architects, engineers, lighting designers) of the energy efficient improvement since the government cannot use tax deductions. However, the primary designer must amend prior year tax returns to claim the deduction. Examples of government owned buildings are as follows:

  • Federal: offices, military bases, courthouses, post office, labs, etc.
  • State: offices, transportation facilities, state universities, courthouses, etc.
  • County, city, town, village, etc.: offices, schools, town halls, police, fire, libraries, airports, parking garages, etc.

Extender Status

One drawback to this deduction is that it is included in the package of tax rules commonly referred to as “extenders.” These provisions are not permanent. At this time, they have been extended through the end of 2014 and discussions are underway about extending them to the end of 2015 and beyond. So far, Congress and the President have found a way to extend this tax break every time it has neared expiration (or expired), but it’s hard to guarantee that will always be the case.

Support from a Strategic Partner

179D-customizable-sell-sheet Given the engineering expertise needed to verify the energy improvement, most accounting firms seek out a strategic partner to provide the studies that make it possible for a real estate owner to take this deduction. One thing to look for when evaluating a strategic partner is the level of support that firm will provide to you in your efforts to market this service. It’s reasonable to expect that a qualified partner should be able to provide printed and electronic materials that will help you sell this service to your clients and contacts. It’s much easier to explain the value of the service when you work with a partner that focuses exclusively on these types of deductions.


Tags: Section 179D, Jennifer Birkemeier, Energy efficiency tax deduction

What to Look for In a Cost Segregation Partner

Posted by Don Warrant on 10/14/15 8:50 AM

Your practice is about what you know. Cost segregation is also about who you know.

Cost_seg_checklistFor many accountants, the hardest part of a professional services career is the years spent learning accounting and tax rules and gaining experience applying them to a variety of differently situated clients. Over time, you build your practice based on this knowledge and your ability to use it in a manner that makes you a trusted business advisor.

Expanding your practice into cost segregation studies certainly engages those skills that have made you a success, but the first forays into this field will usually require an extra skill. You’ll need to evaluate firms that specialize in these studies to determine who will focus on providing this service in a manner that strengthens your clients’ relationship with your firm. Here’s a checklist of some key things to ask as you evaluate firms that could help you grow your practice to include cost segregation studies.

  • What is your firm’s history? This one actually covers several questions like, “How long have you been in business?” “How many studies have you performed?” and “Are you connected with a larger firm?” You want to make sure that the provider you select has been around long enough to develop experience and that you can count on them to be around in the event a study is challenged on audit in a few years.

  • Who does their studies? Specifically, are the professionals who perform the studies employees or contractors? Cost seg studies require construction and engineering expertise that many firms will contract on an as-needed basis instead of hiring. In-house experts work more closely with the CPAs and tax professionals who know the applicable law.

  • What credentials and certifications do they have? It’s important that the accountants and tax pros be able to show licenses like CPAs, LLMs and EAs that demonstrate knowledge of the tax law supporting the study. The specialists who examine your facilities should have licenses and experience in the construction and engineering field. And if you’re looking for a firm that specializes in cost segregation, you should expect them to be certified by the American Society of Cost Segregation Professionals (ASCSP).

  • Will the firm issue a report? Both parties need to be clear that the cost segregation firm is issuing a report, not just compiling a bunch of notes and thoughts that they deliver to your firm without expressing any conclusions. In addition, any report you receive should comply with the IRS standards for a quality study. And in order to help you comply with your requirements, all work product should meet the professional standards of a CPA.

  • Will the firm support you if the report is audited? Accurate, conservative positions can still be challenged by the IRS. Does the cost seg provider deliver any audit support if needed?
  • Describe the cost seg firm’s relationship with the client. Some firms want you to introduce them to your clients so that the firm can provide this study and then solicit for additional accounting and tax work. Be certain that the firm you work with will respect your wishes involving the level of engagement between the cost seg provider and your client. The provider should offer marketing materials and support for your efforts to advertise this practice, but those materials should allow for the option of private labeling with your firm’s name.

cost segregation guide for CPA firms It’s always a big step for a professional to contract for outside help when he or she has earned a reputation for personally delivering service of the highest quality. This checklist should help you evaluate cost segregation providers in order to find one that values its relationship with you as much as you value your relationship with your clients.

Tags: cost segregation, Don Warrant

Ask Your Clients These 5 Questions to Determine If 179D Is For Them

Posted by Jennifer Birkemeier on 9/30/15 8:58 AM

A Few Indicators Will Tell You If Their Deduction Will Be Worth the Cost of the Study

Energy_efficient_buildingWe spend a lot of time talking with CPA firms about section 179D and cost segregation studies. It’s a pretty great job to help accountants and their clients uncover substantial tax savings that they didn’t know were available or didn’t know how to claim. At the same time, we have to remind the folks that we talk with not to get too far ahead of themselves. It’s important to remember that the potential 179D deduction must be large enough to justify the cost of the study needed to claim it. Here are a few questions you can ask to determine if a client is in line for tax savings that warrant a study.

  • What type of improvements were made? Section 179D applies to energy efficient improvements made in 3 different categories:How big is the space? The deduction is calculated based on the square footage of the structure improved, so smaller spaces may not justify the cost of the study. Typically, 30,000 sq. ft. seems to be the threshold at which most Section 179D deductions exceed the cost of the calculation.

    • Lighting
    • HVAC
    • “Envelope,” which includes improvements to the shell of the building that make it more efficient, such as windows, roof, etc.  
  • How much did the work cost? The deduction is also limited to the amount spent on the improvements. It’s important to check the receipts before committing to the study in order to make sure that the potential deduction is large enough.

  • What are the energy efficiency ratings of the old materials removed and the new materials installed? The licensed engineer or contractor who reviews the improvements will make a determination based on the improvement in energy efficiency. The business needs to have enough information about the old and new materials to support that calculation.

The questions above apply to commercial property owners who have made or are considering making energy-efficient improvements to their properties. If you have a client or potential client that is an engineering or architectural firm, there’s a different question to ask that could uncover significant opportunities.

  • Do you serve government clients? If a government makes an energy efficient improvement to a building, it won’t have much use for a 179D deduction. However, the law provides some opportunities for an engineering or architectural firm that designs the energy efficient improvements to a government building to claim the deduction. If your firm serves these professionals, or if it would like to expand into this segment of the market, this is a great question to ask.  

As an accountant, you know better than most how to help a business evaluate the potential costs and benefits of any particular decision. When it comes to performing a cost segregation and claiming a section 179D deduction, these questions should help you make that evaluation quickly and accurately.

Tags: commercial real estate, Section 179D, Jennifer Birkemeier, tax saving opportunities

Have Your Commercial Property Clients Considered Every Tax Saving Opportunity?

Posted by Don Warrant on 8/4/15 9:17 AM

Which non-engineering based tax incentives present the greatest opportunity for commercial property owning clients? Why?

tax_incentivesSome artists will tell you that the hardest thing about creating a painting is knowing when it’s finished. This may be one of the few ways that tax practice resembles the creation of fine art. There are so many opportunities for savings, it’s hard to know when your commercial property clients have finished considering every one. Here’s a quick overview of some credits and incentives available to commercial property owners that don’t always get considered when planning to manage taxes.
  1. Property tax incentives
  2. Sales tax exemptions
  3. Employment incentives
  4. Location based incentives
  5. Historic tax credits
  6. Energy efficiency tax deduction
  7. Alternative energy improvements
Property Tax Incentives. State and local governments typically offer a property tax abatement for new construction or renovation of existing buildings. Commercial property owners should consider whether such abatements apply based on the type and location of the property.
In addition, a state may provide a real property tax credit based on the use of the commercial building in a qualifying activity. Commercial building owners should always consider how these incentives could impact their operating costs.
Sales Tax Exemptions. State and local governments may provide a sales tax exemption for new construction or rehabilitation of existing buildings. Commercial building owners generally must secure such exemptions before entering into a construction contract. Such exemptions can significantly reduce the overall cost of construction.
Employment Incentives. Federal, state and local governments typically provide incentives for hiring targeted individuals. For example, the federal Work Opportunity Tax Credit program provides a tax credit for hiring targeted individuals including honorably discharged veterans of any branch of the U.S. armed services. State and local governments may provide similar incentives for hiring targeted individuals.
Location Based Incentives. The Federal Empowerment Zones (“EZ”) program provides a tax credit for hiring individuals who live and work within designated areas. Commercial building owners should always check whether their building’s address is located within a designated area and if so, they may claim EZ credits retroactively for all prior years open under the federal statute of limitations.
In addition, to encourage cleanup and redevelopment of brownfield sites, states may provide incentives such as liability relief and tax credits. For example, New York State provides refundable tax credits for clean-up, new construction, real property taxes, and remediation insurance.
Historic Tax Credits. The IRS provides historic tax credits for the rehabilitation of historic properties. In many cases, these tax credits make the rehabilitation of a historic property feasible. In addition, State governments may provide a similar tax credit. For example, New York State will match the federal credit and it is refundable.
Energy Efficiency Tax Deduction. Commercial building owners who install energy efficient property as part of the commercial building’s interior lighting systems, heating, cooling, ventilation, and hot water systems, or building envelope may qualify for a federal tax deduction, even if the project was completed in a prior tax year (back to 2006). Certification must be obtained to verify that the property installed satisfies the energy efficiency requirements. Generally, any new lighting installation will qualify for the tax deduction. Therefore, the cost of any construction that involves lighting should be calculated taking into account the potential tax deduction that can accompany the installation.
Alternative Energy. Commercial building owners should consider incorporating alternative energy improvements during construction to reduce future operating costs. These types of improvements are typically subsidized by federal and state tax credits and grants. In addition, the federal recovery period for alternative energy property is 5 years.
Consider Tax Credits and Incentives Before Signing Contracts. The time to consider tax credits and incentives is before a construction contracts is signed. Commercial building owners will likely forfeit construction related incentives once they have committed to the project by signing a construction contract.
CSP360 Deep Dive Program Some Experience Required. If your firm has clients that might benefit from these incentives and an interest in pursuing them, you should evaluate the talents of your current team. In many cases, CPA firms can best add services like these to their portfolio of offerings by partnering with firms that are designed to support them with privately branded solutions.
If you think you might have some commercial real estate clients who have yet to explore the availability of all the credits and incentives that may apply to them, or if you want to reach out to potential clients and suggest a review, please contact us here or at (800) 591.0148.

Tags: commercial real estate, Don Warrant, Property tax incentives, Sales tax exemptions, Historic tax credits, Employment incentives, Location based incentives, Energy efficiency tax deduction, Alternative energy improvements

When New Clients Wave Red Flags—2 Signs Your New Client Got 263(a) Wrong

Posted by Don Warrant on 7/22/15 9:07 AM

If you’re onboarding a new commercial real estate client this summer, be sure to check tangible assets on the tax return

tangible_property_regs-4Summer isn’t just about quality time at the pool or the golf course. It’s also about quality networking time focused on growing your practice. Lots of calendar-year taxpayers are coming off of their annual experience with their tax preparers, and some of them are bound to be testing the waters to see if a new accountant might be a better fit. If you’re fortunate enough to be adding clients that own tangible property, especially commercial real estate clients, there are 2 key signs that they may have missed a significant tax-saving opportunity under the new 263(a) regs.
1-Does the Return Include a Form 3115?

If your new or potential commercial real estate client has already filed a 2014 tax return, that return should include a Form 3115, Application for Change in Accounting Method. If it doesn’t, the good news is that most clients can still file that form up to the extended due date of the original return. And the even better news is that you will likely be able to help them get a significant refund as a result.
2-If the Return Includes a Form 3115, Is There a 481(a) Adjustment?

If you onboard a new client or talk to a potential client who did file a return with a change in accounting method, you need to review that adjustment. The new regs under section 263(a) require affected businesses to change their accounting methods (Form 3115) and to adjust the basis of many existing assets to reflect that change (Form 3115—Part IV, Section 481(a) Adjustment). If you review a return for a new client that includes the change in method but not the adjustment, it’s likely that there is a mistake involved that needs to be corrected before the extended deadline for the return.
263(a) opportunities Even if the Form 3115 has been filed and a 481(a) adjustment has been claimed, it’s important to review the previous accountant’s work in calculating the adjustment. The one-time catch up adjustment for businesses that change accounting methods under the new rules has generated more than its share of confusion and errors this year.
If you’re looking at new clients that have tangible assets, you might want to consider getting a second opinion on the 481(a) adjustment from CSP360. Our professionals focus on tax issues affecting commercial real estate clients. We have helped many accounting firms that wanted an extra set of eyes on this issue at this critical time. If you have any questions or concerns about how the new rules may have affected your commercial real estate clients or prospects, a consultation with CSP360 could help you to better serve your client.

Tags: 263(a) regulations, tangible property regulations, Don Warrant

Time Is Running Out to Get 263(a) Elections Right

Posted by Don Warrant on 7/14/15 8:59 AM

The Window of Opportunity on These Tax-Saving Elections Closes This Fall

263aThe weather’s heating up. It feels like time for that midsummer lull between the spring tax season everybody knows about and the fall extension deadlines that wreak almost as much havoc on a CPA’s life without the relief of occasional tax jokes from late-night hosts. There’s a big difference this year, though. Any clients with depreciable property on their returns needed to make changes in accounting methods and consider making elections under new regs for their 2014 returns.
Taxpayers who already filed their returns can still make changes to those returns to take advantage of the tax saving opportunities or to include a missed election using the automatic extension procedures. Given the scope and complexity of the new rules, it makes sense to take a second look at the returns of your affected clients to make sure that the new rules were followed correctly. With the amount of potential tax savings at stake, you may want to consider having a second set of eyes that are focused on this issue reviewing those returns.
Most commercial real estate businesses are likely to see a significant impact from the regs. Given the constant need for repairs, replacements and maintenance on buildings, these clients need to make sure that they have correctly implemented the accounting method changes and claimed the related adjustments. Because the IRS will continue to release guidance this year, CPA firms should continue to consider this an important topic to discuss with clients.
If you’re confident that your firm got this complicated compliance initiative right for all of your clients, by all means hit the beach or the mountains or go wherever you need to go to relax this summer. If you’re wondering whether there’s a possibility you may have missed something and you want to consult with a professional who is focused on helping CPAs provide the best service possible to commercial real estate clients, a consultation with CSP360 might make your time off much more relaxing.
263(a) opportunities Just remember, the automatic extension procedures don’t close gradually over time and remain open for some people in certain circumstances. This window of opportunity slams shut on the extension date for the original return—either September 15 or October 15 for calendar year taxpayers. If the taxpayer didn’t file a Form 3115 with their 2014 tax return then the taxpayer has effectively made all of the method changes for tangible property without the benefit of a tax deduction. That is most likely not the best option for the taxpayer. Similarly, if the taxpayer filed a Form 3115 with their 2014 tax return reporting a $0 Section 481(a) adjustment, they have not taken advantage of the tax savings opportunities and may not have complied with these regulations. Now is the time to fix those returns if necessary.
These normally quiet months for tax practitioners can be a critical time for some clients. If you have any questions or concerns about how the new rules may have affected your commercial real estate clients or prospects, a consultation with CSP360 could help to put your mind at ease.

Tags: 263(a) regulations, tangible property regulations, Don Warrant

How to Pitch a Cost Seg Project to a Commercial Real Estate Client or Prospect

Posted by Don Warrant on 5/25/15 9:19 AM

Establish credibility by demonstrating cost segregation tax law and engineering expertise—then show them the money!

Last week we talked about how to qualify a commercial property owner as a strong prospect for accelerating depreciation deductions through a cost segregation study. Now how do you position your firm as the right solution to deliver those tax benefits?
In our experience, CPA firms are often strong contenders for cost segregation projects, primarily because they already have strong relationships with their existing clients and typically are not in a competitive bid situation. Even when pitching to a non-client, most accounting firms have a leg up over boutique cost segregation providers because CPAs typically are known in their markets for both integrity and tax know-how. However, general tax knowledge and trustworthiness usually are not enough to convince savvy commercial real estate owners to sign on the dotted line.
To win a seat at the table and get a chance to quote on a cost segregation project for a client or prospect, you need to demonstrate three important things:
  1. Understanding of the relevant tax code and case law.
From the 1997 Hospital Corp. of America Tax Court ruling to the January 2015 Louisiana district court ruling on placed in service dates, commercial property owners need confidence that your firm has access to the most up-to-date knowledge of relevant case law. For CPAs that haven’t already dedicated the time and resources to research this ever-evolving area of the tax code, partnership with a reputable cost segregation specialist might be the best path to delivering this service line.
  1. Engineering experience and industry expertise.
Just like snowflakes, every building has different features. That’s why cost segregations that rely on industry averages or “rules of thumb” are likely to be inaccurate and subject to restatement upon IRS examination. Cost segregation studies based on either actual construction costs or estimates based on engineering expertise, on the other hand, are more likely to generate depreciation deductions that are not only accurate and defensible but also more comprehensive—so the client will not be leaving money on the table.
Again, the backing of an established cost segregation strategic partner is the best route to give your client or prospect confidence that you will deliver the full package of tax minimization and IRS audit defense.
  1. “Show me the money.”

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. 

Preparing a Cost Segregation Quote

Once you have clearly demonstrated your firm’s credentials, you are ready to prepare a quote for the project. Different CPA firms take different approaches. Some provide an estimate of their time on top of the cost seg specialist’s fee, and others give the client a package quote that allows them to value bill for their role in delivering the cost segregation study. (Remember that the only pricing strategy that is completely off the table is a contingent fee.)
cost segregation guide for CPA firms For most CPAs, however, the true pot of gold at the end of the rainbow is the ability to keep competitors at bay and delight an important client with accelerated deductions that improve the owner’s cash flow.
Do you have a commercial real estate client or prospect who could benefit from a cost segregation study? Download our cost segregation data collection form, and we’ll give you a call to walk you through it and discuss how we can help you close on that opportunity and (most importantly) deliver valuable tax benefits to that building owner.

Tags: cost segregation, Don Warrant

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