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.

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