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.

Deductions Lighting Q: 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 Things That Might Surprise You About Cost Segregation’s Tax-Slashing Potential

Posted by Jennifer Birkemeier on 4/28/15 9:19 AM

What you don’t know about tenant buildouts, asset abandonment, and bonus depreciation could cost your clients tax benefits.

cost_segregationWe performed our first cost segregation study for a property owner 20 years ago—and my, how the discipline has evolved since those early days.
We’ve learned quite a few things along the way. Here are a few that might surprise you and delight your commercial real estate clients and prospects.
  1. Tenant’s build outs reinforce tax savings.
Leasehold improvements represent a wealth of tax deductions for property owners. Because these build outs typically do not involve the building shell, a high percentage of those costs typically are for tangible personal property. The only way to claim those depreciation benefits? Allocate costs to their proper asset groups through a quality cost segregation study.
  1. When abandonment is a good thing.
Most tenant build outs involve replacing an asset. If the old asset is still being depreciated, then the property owner might be able to write off the remaining tax basis of the asset that is being disposed of. There are two prerequisites to take advantage of this tax benefit: First, the new asset must be capitalized (i.e., you can’t deduct both the new and the old asset). Second, the cost of the abandoned asset must be specifically identified. So once again, cost segregation saves the day!
  1. A bonus surprise.

You probably already know that property owners can take bonus depreciation on personal property with a depreciable life of less than 20 years. (Currently, bonus depreciation is available only for assets placed in service in 2014 and earlier.) You also know that cost segregation identifies assets that qualify for shorter depreciable lives.
By conducting a cost segregation, your client benefits from accelerated depreciation for newly segregated personal property AND ALSO a bonus depreciation deduction on those assets.
And there’s even better news. Property owners can go all the way back to 2001, when this particular benefit came into law, to claim bonus depreciation on tangible personal property placed in service in previous years.

Tax and Engineering Expertise Required

Capturing depreciation benefits through cost segregation is a complex area of taxation, and there are many more nuances than we can explore in this blog post. For example, bonus depreciation is one of those tax “extenders” that has come in and out of the law throughout the last 15 years at different percentages, so CPAs must be careful to apply the correct percentages to the assets in question.
cost segregation guide for CPA firms Recognizing and taking advantage of depreciation benefits requires a special combination of both tax and engineering expertise. In fact, the IRS Cost Segregation Audit Technique Guide states:
The preparation of cost segregation studies requires knowledge of both the construction process and the tax law involving property classifications for depreciation purposes.
As you’re working on your clients’ extended 2014 tax returns, keep an eye out for the above opportunities to boost your their depreciation deductions through a cost segregation study. Feel free to contact us if you have questions about how to spot and take advantage of those opportunities.

Tags: cost segregation, Jennifer Birkemeier, Accelerating depreciation deductions, bonus depreciation

Don’t Overlook These 3 Client Transactions That Qualify for a Cost Segregation Study ... and Tax Savings!

Posted by Jennifer Birkemeier on 3/16/15 9:03 AM

If your client owns a group of commercial buildings that has a combined cost basis of $1 million or more, you may have some good news in store for them.

CostsegregationSo you’re sold on why tax time is the perfect time to talk about cost segregation opportunities with your client. Now you just have to spot those opportunities—and, of course, bring in the right cost segregation strategic partner to deliver those tax savings.
As you’re preparing your clients’ tax returns, look out for these three types of transactions that generally present an opportunity to accelerate depreciation deductions to the tune of at least 10 times the cost of the cost segregation study:
  • Purchase or construction of a building with a cost basis of $1 million or more. The cost-benefit calculation generally is most beneficial at the $1 million price point. However, in certain types of buildings with a high proportion of nonstructural components (such as hotels, restaurants, apartment buildings, retail establishments, and manufacturing facilities), a lower cost basis (such as $750,000) might also justify the cost of the study.
  • Multiple buildings of the same type that, all together, add up to a cost basis of $1 million or more. When one entity or individual conducts cost segregation studies on multiple buildings of the same type (e.g., 2-3 quick-service restaurants), as long as those buildings are within the same geographic market, the client will see efficiencies of scale in conducting cost segregation on that group of properties.
  • Tenant buildout with a cost basis of $500,000 or more. While new buildings tend to get all the attention, leasehold improvements are the unsung heroes of the cost segregation world. Because they are likely to involve fewer improvements to the building envelope or structural components, these construction projects likely are comprised of a higher percentage of Sec. 1245 property that qualifies for 5- and 7-year depreciation.
cost segregation guide for CPA firms If you missed these opportunities in prior years—don’t worry! Cost segregation can be conducted on properties that were placed in service as early as 1987. In fact, we recommend that CPAs automatically extend for all commercial property owners—not only to give them time to bring those owners into compliance with the Tangible Property Regulations, but also to perform cost segregation studies and other engineered services to minimize the tax bill.
Need help uncovering transactions that qualify for cost segregation? Contact us to schedule a Deep Dive into your commercial real estate client base to identify those tax-minimization opportunities.

Tags: cost segregation, Jennifer Birkemeier, Accelerating depreciation deductions, bonus depreciation

4 Reasons to Talk About Cost Segregation With Your Commercial Real Estate Clients NOW!

Posted by Jennifer Birkemeier on 3/11/15 9:05 AM

Tax season is the perfect time to talk to clients about lowering their tax bill by accelerating depreciation deductions.

taxslashingheroYou’re deep in the throes of preparing your commercial property owners’ tax returns, and your partners are clamoring for those clients’ Schedule K-1s so they can close the books on 2014. The last thing you’re thinking about right now is how to create more work for yourself.
That might be shortsighted. Now is the perfect time to identify and discuss with your clients how they can reduce their 2014 tax bill through accelerated depreciation deductions—especially since the actual work to segregate out the costs can be deferred until the extension deadline.
Why is now the ideal time to talk about cost segregation?
1. Position yourself as a tax-slashing hero.
With the Bush era tax cuts far behind us, your clients are likely facing a significant tax bill for 2014. As you are meeting with your clients to gather information or deliver their tax returns, you can offset the bad news of a looming tax bill with the good news that you uncovered ways to lower that bill. Consider this: The average cost segregation study delivers accelerated depreciation deductions that add up to at least 10 times the cost of that study. So take the time now to sniff out cost segregation opportunities.
2. Leverage your Tangible Property Regulations compliance work.
Another great reason to bring up cost segregation opportunities now: You’re already doing part of the work. The Tangible Property Regulations require you to analyze your clients’ costs for purposes of testing them as repairs vs. improvements. As long as you’re digging into that fixed asset schedule, why not look for opportunities to accelerate depreciation deductions on Sec. 1245 property?
Here’s a shortcut: If you find a high proportion of 39-, 27.5- and 15-year property on the client’s depreciation schedule, it might be time to consider a cost segregation study on that property.
3. Take advantage of bonus depreciation for 2014.
Congress’ last-minute bill retroactively extended, for 2014 only, the 50% bonus depreciation. Since that incentive applies to 5-, 7-year, or 15-year property, conducting a cost segregation to identify those shorter-lived assets could mean even greater opportunities for depreciation deductions, which may or may not be available in 2015 and beyond.
4. Get in front of commercial property owners’ purchase agreements.
cost segregation guide for CPA firms We’ve all had clients who closed on the acquisition of a commercial property without consulting us and were faced with unfavorable tax consequences. Here’s one of those consequences you’ll want to steer your clients away from: Thanks to Peco Foods, Inc. v. Commissioner, if the purchase agreement includes an allocation of purchase price, then the purchaser might be precluded from conducting a cost segregation. If you have an opportunity to get out in front of your clients’ acquisitions of property, we recommend bringing in a cost segregation strategic partner to advise the client on how to leave the door open for a cost segregation study.
If you have questions about any of these opportunities, we’d be happy to help. Contact us to schedule a consultation.

Tags: cost segregation, Jennifer Birkemeier, Accelerating depreciation deductions, bonus depreciation

‘Placed in Service’ Ruling - New Depreciation Opportunities for CPA Firms to Bring to Commercial Property Owners

Posted by Jennifer Birkemeier on 3/2/15 9:39 AM

Can you start depreciating a client’s commercial building before their business opens? U.S. District court says yes.

Accelerating_depreciation_deductionsEvery CPA knows that a building is considered placed in service—and thus depreciation begins—when it is open for business. Right?
A recent U.S. district court ruling turned that conventional wisdom on its head, and in turn, gives CPA firms the opportunity to bring good news to their commercial property-owning clients and prospects. In the case of Stine, LLC v. United States, a Louisiana district court found in favor of a taxpayer who argued that his two new retail stores were placed in service as of Dec. 31, 2008, because they both had received certificates of occupancy—despite the fact that neither was open for business.
At stake was the property owner’s ability to take advantage of an accelerated depreciation allowance granted by the Gulf Opportunity Zone Act of 2005. The IRS had disallowed Stine’s depreciation deduction and assessed the building supplies retailer with more than $2 million in taxes for the tax years 2003 through 2008. Stine sought a refund of these taxes.
In supporting Stine’s motion, the Court stated the following (emphasis added):
“…understanding that Congress could have easily expressed that a building be placed in service when open for business leads this court to believe that there is no requirement that a building be open for business in order for it to be placed in service for purposes of a depreciation allowance.”

Did your client buy a commercial building in December? Accelerate tax benefits into 2014.

The Stine finding is a welcome opportunity for commercial building owners and their CPAs who might otherwise have deferred depreciation benefits for 12 months or more because the business had not yet started and therefore, depreciation was not claimed.
As you complete your commercial real estate clients’ 2014 tax returns, keep an eye out for buildings that were purchased, built, or renovated near the end of the year, and consider the benefits of conducting a cost segregation study on that building for the 2014 tax year. If the cost-benefit calculation works out in the client’s favor, then extend or amend that property owner’s return so that you can take advantage of that opportunity to slash the client’s 2014 tax liability.
Need help identifying and taking advantage of tax-minimizing opportunities? Let's talk.

Tags: commercial real estate, Jennifer Birkemeier, placed in service, Accelerating depreciation deductions

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