Cost Segregation: More Important Than Ever?

Posted by Don Warrant on 11/15/18 4:26 PM

cost-segregation-more-important-than-everYou and your clients may be thinking that the proposed tax reforms will impact the utilization of cost segregation. Will the proposed changes to the tax law make cost segregation obsolete?

In recent years, the IRS and U.S. Treasury have created complexities when determining the proper tax treatment of expenditures related to commercial buildings. This is the result of the interaction of the federal cost recovery rules, the tangible property regulations, and the classification of improvements to commercial buildings as “qualified improvement property” and/or “qualified real property.” As a result of these changes, cost segregation has become more important than ever!

The capitalization or expensing of costs in the current year impacts the treatment of similar costs in future years under the tangible property regulations. Therefore, it is important to make the right decisions when capitalizing or expensing costs. Cost segregation is an important tool used to make these decisions.

If and when tax reform does occur, there will likely be many states that do not conform to the federal rules, or may transition over a period of years. As a result, cost segregation will continue to fulfill an important role in those states. 

In addition, as we have written before, there are many compelling reasons to perform cost segregation. Many of those reasons are discussed below.

2015 PATH Act

The Protecting Americans from Tax Hikes (PATH) Act of 2015 had a significant impact on the importance of using cost segregation specialists to compare the tax benefit of renovating an existing building vs. building construction. Since building construction doesn’t qualify for bonus depreciation, renovating existing buildings can generate significant tax savings, creating a source of funds to finance the project.

Other important uses of cost segregation include:

  • Bonus Depreciation and Section 179 Expense. A cost segregation study identifies “qualified property” for bonus depreciation and year-of-purchase expensing.
  • Accelerated Tax Deductions. A cost segregation study creates accelerated tax deductions by accelerating the period over which the cost of assets are recovered for tax purposes. Assets identified in a cost segregation study are reclassified from a 39-year cost recovery period to a 5-year, 7-year, or 15-year cost recovery period.
  • Tax Deferred Exchanges. The IRC Section 1031 exchange provision is a valuable strategy to defer the recognition of gain on the sale of buildings. Cost segregation used in connection with a tax deferred exchange can generate tax savings in addition to tax deferral.
  • Estate Tax Planning. A cost segregation study can be used to generate tax savings for both the decedent and the heirs of real estate by segregating costs for both parties before and after the date of death.
  • Partial Disposition of Building Property. Cost segregation is generally necessary to determine the adjusted tax basis of the portion of building property that was partially disposed of in connection with the partial disposition election.
  • Improvement vs. Repair Analysis. Cost segregation is generally necessary to determine whether expenditures improve or repair the building structure or any building system, and to determine the appropriate unit of property.
  • Tenant Improvement Costs Analysis. Cost segregation is often necessary to segregate the cost of tenant improvements between building property and tangible personal property, and to determine which expenditures are capital improvements or repairs.

Other uses of cost segregation include tax planning in the year of a building’s sale, to qualify for the small taxpayer safe harbor election, and for federal and state income tax planning. 

In summary, cost segregation is more important than ever, especially for buildings placed in service in years preceding any federal or state tax reform that reduces tax rates.

CSP360 is ready to assist you and your clients with these important uses of cost segregation, and to generate tax savings for your clients.

Tags: cost segregation, cost segregation study, tangible property regulations, tangible property

Cost Segregation Services: It’s Not Too Late for Your Clients to Qualify for 2016 Tax Deductions

Posted by Don Warrant on 4/13/17 9:00 AM

IRS cost segregation guidance in 2016 and 2017 makes it possible to qualify for 2016 deductions even after January 1, 2017.

Twenty Five Past Five-779425-edited.jpeg

Both the president and the Majority-Republican House of Representatives have proposed significant changes to the Internal Revenue Code (IRC). While they don’t agree on every point, they share a common cornerstone in that both would significantly reduce income tax rates for businesses and individuals. There is no guarantee that a tax rate reduction will occur in 2017, but the Trump administration is on record with a statement that a tax package will be part of its agenda in the first 100 days. That means legislation could be in play before the end of April this year.

In any year, you will generally recommend accelerating deductions (unless certain circumstances exist) based on savings resulting from the time value of the money deducted. That recommendation becomes stronger in a year like 2016, when there’s reason to expect that rates may drop in 2017.

The deductions are worth more in the year of higher rates. Effectively, you have a small window of opportunity to deliver tax benefits that might not be available next year.

Cost Segregation Studies and 2016 Tax Deductions

For the most part, your ability to generate tax deductions for clients for 2016 are generally limited once the calendar year ends. However, recent IRS rule changes make it possible to claim 2016 deductions based on cost segregation studies performed in 2017.

In some cases, a study may even result in tax-reducing amendments to returns already filed for the 2016 tax year. We often hear that clients put off cost segregation studies because the accelerated deductions are “only a temporary timing difference.” At this point, the significant possibility of reduced tax rates in the near future adds incentive in the form of a permanent timing difference to claim available tax deductions in a year with higher tax rates such as 2016.

The result of a cost segregation study performed on building property placed in service in prior years is reported as additional tax depreciation for the 2016 tax year using the automatic change in accounting method procedures outlined in Rev. Proc. 2015-13 and Rev. Proc. 2016-29. Under these procedures, your client automatically has until the extended due date to claim the additional tax depreciation on an original or amended tax return.

Five-Year Eligibility Rule Waiver

In addition, Notice 2017-6 waives the five-year “eligibility rule” that otherwise would prohibit your clients from using the automatic method change procedures to make the same change in method of accounting for a specific item more than once within a five-year period. 

The waiver of the five-year eligibility rule found in Section 5.05 of Rev. Proc. 2015-13 applies to the following automatic changes in accounting method allowed by Rev. Proc. 2016-29: 

  • Section 6.14 for a change in method of depreciation from a permissible method to another permissible method;
  • Section 6.15 for a change in method of accounting for dispositions of a building or structural components;
  • Section 6.16 for a change in method of accounting for dispositions of tangible depreciable property (other than a building or structural components);
  • Section 6.17 for a change in method of accounting for dispositions of depreciable property in a general asset account; and
  • Section 11.08 for a change in method of accounting for tangible property under the final tangible property regulations.

How to Help Give Your Clients the Good News About Cost Segregation Tax Deductions

Actions like these show that the IRS is doing what it can through its guidance channels to facilitate the transition to the tangible property regs. In doing so, the Service is also opening opportunities for you to help your clients claim deductions in 2016 or earlier based on the results of cost segregation studies and related information.

If your practice is currently in the midst of the typical filing season rush but you have clients that could benefit, this could be an excellent time to outsource a cost segregation study to a provider focused on this specialized practice. CSP360’s CPA Partnership Program could be just what you need to deliver this valuable additional service to your clients at a time when your staff is at full capacity.

For more information on the cost segregation services that CSP offers, call Don Warrant, CPA at 716-847-2651.

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Tags: Don Warrant, deductions, cost segregation, cost segregation study

Court Cases Show the Importance of Tax Knowledge in Cost Segregation Studies

Posted by Jennifer Birkemeier on 3/29/17 9:03 AM


You probably know that preparing your clients’ cost segregation studies requires specialized knowledge of their industry. You might not realize, however, the importance of tax knowledge—especially when it comes to conforming the studies to new IRS Audit Technique Guides (ATGs).

Know the Rules Before Making Any Decisions

The Court of Appeals for the 11th Circuit has concluded that for depreciation purposes, a taxpayer couldn’t unilaterally change its original purchase price allocations in two asset purchase agreements entered into in connection with acquiring certain assets.

In Peco Foods, Inc. & Subsidiaries v. Comm., the taxpayer had attempted to make the modifications in order to secure quicker depreciation deductions following a cost segregation analysis. The 11th Circuit agreed with the Tax Court that the law had been applied correctly.

Case background showed that Peco Foods acquired one poultry plant from Green Acre Farm, Inc. in 1995 for $27,150,000 and, in 1998, one poultry plant from Marshall Dublin Food Corp. and Marshal Dublin Farms for $10,500,000. As part of the purchase agreements, both parties agreed to and included a purchase price allocation (PPA) in the purchase documentation.

At issue in the Tax Court case was the classification of a “Processing Plant Building” on one purchase and the “Real Property: Improvements” on the other purchase. Peco initially depreciated these assets as nonresidential real property (39-year) before performing a cost segregation study on each.

The Tax Court ruled the study invalid because of the PPA. The PPA went as far as delineating the costs for items such as specific process-related items, land improvements, buildings and goodwill. Further, the PPA was explicit about the definitions of real and personal property as they pertained to the specific transaction. In addition, the PPA contained specific language that the allocations were to be used for all purposes including financial accounting and tax purposes. The taxpayer also filed the detail listing with their tax return as part of the Form 8594 for their respective year of purchase.

The decision in Peco points out that one must pay attention and know the rules before making decisions on what you put into a purchase agreement, as this can determine your options including whether one can perform a cost segregation study.

The second case, AmeriSouth v. Commissioner, hinged on the allocation of rental real estate assets into appropriate classes for calculating depreciation expense and how a quality study pinpoints all shorter-life personal property, such as furniture, fixtures and equipment, and land improvements, from the longer life 27.5-year residential building life and non-depreciable land. Recently taxpayers have also qualified for 50% and 100% bonus depreciation on any newly placed-in-service personal property and land improvements.

In AmeriSouth, the judge decided that many of the assets of the petitioner’s 40-building, 366-unit apartment complex should be reclassified from personal property to building. AmeriSouth purchased a $10.25 million market-rate apartment complex in 2003 and spent $2 million in renovations. They hired consultants to perform a cost segregation study that resulted in increased depreciation deductions of approximately $1,412,000 from 2003-2005. The IRS commissioner subsequently denied deductions of more than $1 million. AmeriSouth then filed its petition to challenge.

One major point of this case: The court places the burden of proof on the taxpayer to provide support for why an asset should have a shorter depreciable life. AmeriSouth fell short in this area. If they had followed the ATG, the company wouldn’t have taken the position it did.

As we see in AmeriSouth, the taxpayer did not substantiate their position under IRS audit since they had sold the building before trial began. It is unknown how the case would have been decided if the taxpayer had been responsive in this case. AmeriSouth took many positions that most cost segregation providers do not take. An accurate analysis of the statutes and judicial precedent for the positions taken in AmeriSouth could have avoided a costly legal challenge in court.

A Quality Cost Segregation Services Provider Has Quality Tax Experience

Cost segregation services are not just a commodity where your client should pick the lowest bidder. Make sure your clients know that the best way to prepare a cost segregation study based on the latest ATGs is to choose a provider with thorough tax knowledge. If you partner with another firm for this service to clients, understand the credentials of your partner firm and their expertise in cost segregation. Contact us for help.

Tags: accounting methods, cost segregation, cost segregation study, Jennifer Birkemeier

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

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

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

It May Be Time for a Second Look

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

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

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

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

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

  1. It’s too risky.

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

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

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

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

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

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

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

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

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

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

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

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

Tags: cost segregation, Jennifer Birkemeier

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

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

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

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

Section 179 Expensing

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

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

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

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

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

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

Bonus Depreciation Provisions

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

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

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

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

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

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

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

Cost Segregation More Important than Ever

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

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

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

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

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

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

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

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

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

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

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

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

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


Tags: cost segregation, Jennifer Birkemeier

6 Tips for Explaining Cost Segregation to Commercial Real Estate Clients

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

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

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

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

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

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

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


Tags: cost segregation, commercial real estate, Don Warrant

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

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

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

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

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

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

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

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

Tags: cost segregation, Jennifer Birkemeier, tax saving opportunities

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

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