Real Estate Tax Strategies: Incentives to Grow Your Practice

Posted by Jennifer Birkemeier on 4/26/17 8:57 AM


All politics is local. Many real estate tax-saving opportunities are as well.

Former Speaker of the House Tip O’Neill famously stressed the idea that “all politics is local.” In this political season, it’s important to remember that many real estate incentives are, as well.

We often stress in this blog that cost segregation is an excellent opportunity to provide additional services to your existing commercial real estate clients and to attract new ones. But if you want to provide the full range of services these clients need, you have to remember that tax incentives and commercial real estate go hand in hand. And not just at the federal and state level. The more local you get, the more an agency or elected official may be willing to support development of specific properties.

You Don’t Have to Be a Business to Have a Business Plan

Local governments frequently maintain an inventory of properties that they would like to see developed or redeveloped. Their business plans often call for experienced commercial real estate investors to lead these projects from the private sector side. In order to attract these investors, authorities are usually willing to discuss additional incentives that may be customized to the needs of each site.

A good starting point is to make contact with the economic development agency for a particular locality. Ask them about neighborhoods or areas within their district that might qualify for federal incentives, like a historic district. Also consider state credits, like New York’s historic tax credits and “brownfield cleanup” programs.

Once you know some of the sites that might qualify for federal and state tax savings opportunities, ask the local authority for information on any specific properties that they might want developed. When you find opportunities that may qualify for multiple credits at various levels, contact your clients who invest in real estate and gauge their interest. Introduce them to the local development agency and suggest a discussion about incentives that might help a city or region turn planned redevelopments into reality.

CSP360 for Real Estate Tax Consulting

As your practice grows, we also want you to think of us as a real estate tax consultant that can help you develop creative, customized ideas that continue to deliver new value to your clients. When it comes to local development, CSP360 can help you with everything from concepts and agendas for meetings with local agencies to actual in-person support for a meeting that your firm hosts.

When it comes to other opportunities to improve your service as an advisor to commercial real estate clients, we have the experience and know-how to help turn your ideas into practical services.

Contact us to get started developing helpful real estate tax strategies for your clients today. Also, don't forget to view our other helpful articles such as, Three Lessons for Building Your Commercial Real Estate Practice Using 179D, to help you grow your real estate practice.

Tags: Jennifer Birkemeier, commercial real estate

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

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 OpportunityWe 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

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

Finding Hidden Tax Opportunities for Real Estate Clients

Posted by Don Warrant on 12/22/15 9:06 AM

Just like real estate itself, when you want to find tax opportunities for real estate clients, it’s all about location, location, location.

Hidden_tax_opportunities_real_estateReal estate opportunities often involve hidden tax opportunities. To find those opportunities, you need to know where to look. The location may vary depending on the opportunity and the client, so it’s important that everyone at your firm understand how to search effectively.

Existing Clients

If you have the tax return and depreciation schedules for a client that has significant real estate holdings, you have the key to unlock several different potential deductions. “Significant” in this case doesn’t necessarily mean multiple properties. A non-real estate business that owns its own building may have hidden tax savings locked up in its property just as easily as a landlord. For that matter, even a business that rents its space might have invested in leasehold improvements that qualify for certain credits, deductions or accelerated depreciation.

The first and easiest place to look is on IRS Form 4562, Depreciation and Amortization attached to the tax return. Specifically, look to Part III, Lines 19h and 19i. Amounts listed here for residential rental property and nonresidential real property could indicate that a cost segregation study might be of value. If amounts on these lines exceed $1 million, it’s worth touching base with a client to see if they have ever considered cost segregation. If in fact the amount represents a capital improvement, then consider whether the improvement qualifies for the IRC Section 179D deduction for energy efficient improvements to commercial buildings. In addition, an election to recognize a partial disposition of tangible property should always be considered when capital improvements are made to existing buildings.

It’s also possible that when applying the unit of property rules for buildings, the amounts that were originally reported as capital improvements on Form 4562 should have been claimed as deductible repairs. For example, an amount incurred to replace a portion of a roof may qualify as a repair. However, if the roof was completely replaced, then the election to recognize a partial disposition should be considered for the old roof.

In addition to looking for new opportunities, all of your client-serving professionals should be trained to listen for them as well. If a client is talking about making improvements to real estate, relocating an office or adding a second location, that client needs to know that there are potential tax advantages available based on everything from the location they choose to the materials and fixtures they use. One way to stay ahead of the curve on this is to bring it up every year when you go over the tax return. When you walk through the Form 4562, always remind them that if they are considering any significant changes to real property assets, those opportunities should be reviewed for possible tax advantages.

Prospective Clients

Tax opportunities that relate to real estate provide an excellent foot in the door with potential new clients for 2 reasons. First, most significant real estate transactions are a matter of public record. Second, businesses rarely engage in real estate transactions alone.

The public filings related to real estate purchases and improvements announce to your community just about every project that could lead to tax savings. In most areas, you can subscribe to a service that notifies you when building permits are filed or deeds are recorded. With that information, you can reach out to the relevant parties with a very targeted contact that asks if they have considered all of the possible tax benefits of their new project, or if they have planned the new project in a way that takes full advantage of deductions and credits available.

Cost Segregation Partnership Opportunity The community that supports real estate purchases and improvements can be an excellent source of referrals. Your local construction businesses, loan officers and real estate brokers all have an interest in making sure their clients qualify for as much building as they can afford. The money saved by focusing on real estate deductions and credits could make the difference for a business that is on the verge of a significant improvement.

So whether you’re looking to offer more services to your existing clients or reach out to new clients, real estate tax opportunities can spark an important conversation that often leads to happy clients.

Tags: cost segregation, commercial real estate, 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.

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

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

Is 179D Tax Deduction Right For Your Commercial Real Estate Client or Prospect?

Posted by Jennifer Birkemeier on 5/12/15 9:28 AM

Here are 3 pieces of data you need to tell if a 179D study will generate at least 10-to-1 ROI.

179D_tax_deductions_for_commerical_real_estateGreen is the new black, and chances are good that your commercial real estate clients and prospects have replaced windows, HVAC units, or lighting in the past few years with more energy-efficient models.
The status of the 179D tax deduction for energy efficient commercial buildings currently is in limbo for 2015 and beyond. However, this perennial “tax extender” is a popular one that enjoys broad support, and so it will most likely be implemented retroactively for the 2015 tax year.
Digging for just a few pieces of information now will allow you to see if your commercial real estate clients would benefit from this valuable tax deduction (up to $1.80 per square foot) that can generate ROI for the property owner of up to 10 times (or more) the cost of the study.
The pieces of data you will need to perform a 179D analysis include:
  1. Square footage of the building and the energy efficient improvement or addition.
Ask the client or prospect for architectural drawings of the buildings to get an accurate measurement of the overall square footage and the size of the addition or improvement. Generally, because 179D requires an independent certification by licensed engineer licensed and thorough modeling for each individual building, the building should be at least 30,000 square feet for the benefits to outweigh the costs of the study.
  1. Technical specifications on efficiency improvement.
Next, you will need the technical specifications about the energy efficiency of the new unit. The engineer will compare each building’s performance to government standards to determine if it reaches the required threshold of energy savings.
  1. Invoices for energy-efficient upgrades and additions.

Currently, the maximum 179D tax deduction is $1.80 per square foot for buildings that achieve the threshold of 50% energy and power cost savings for the whole building, or $0.60 per square foot for partially qualifying property. However, the deduction is capped at the taxpayer’s actual costs for the improvements. So to determine whether the deduction will or will not be worthwhile, you will need the client’s invoices for the improvement project or new building. 

Do the Benefits of 179D Outweigh the Costs?

Once you’ve gathered all these pieces of data, you can use the U.S. Department of Energy’s 179D calculator to estimate the potential tax savings for your client.
Buildings of at least 30,000 square feet that meet the government’s technical specifications typically generate ROI of at least 10 times the cost of the 179D study. However, since the lookback on this deduction goes all the way back to January 2006, commercial property owners that have performed efficiency upgrades over multiple years might see even better returns, in some cases closer to 20-to-1.
If you would like to evaluate your clients’ previous or upcoming building or renovation projects to determine whether they qualify for the 179D tax deduction, we can help. Contact us to schedule a consultation.

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

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