How a Spoonful of Sugar Can Sweeten the Pill of Tangible Asset Compliance

Posted by David Barrett on 11/18/14 9:39 AM

3 messages that will help the medicine go down for clients owning commercial property.

tangible_property_regs-2You know that all of your clients and prospects must be in compliance with the final tangible property regulations by the time you file their 2014 returns. But how do you convince the client or prospect that the value is greater than the cost of compliance—especially for complex cases that can require hundreds of hours of your time?

Mary Poppins knows that a spoonful of sugar helps the medicine go down, and CPAs can use the same idea when communicating with commercial real estate owners about complying with the tangible property regulations.

Following are a few verses from a sweet song of tax minimization that you can use in your marketing materials or your one-on-one conversations with clients and prospects to help the pill of compliance go down easier.

“Do you own commercial property that requires frequent repairs? If so, then you could be eligible for tax savings that could more than offset the cost of compliance with the new tangible property regs.”

Your prospects and clients are likely cringing as they envision all the money, time and effort they will have to spend to bring their accounting into compliance with the tangible property regulations. Imagine their relief when they discover that the tax savings could far exceed the costs of compliance.

Commercial real estate such as office space, hotels, restaurants and manufacturing facilities all require expensive and frequent repairs and updates. Under the new regulations, many of these updates now constitute deductible repairs. And since commercial property owners can go all the way back to 1987 to deduct previously capitalized costs that now qualify as repairs, the total current tax deduction just from repairs and maintenance can easily reach tens or even hundreds of thousands of dollars.

“We have a limited-time opportunity to reap immediate tax benefits for prior year dispositions.”

Sugar seems sweeter when it’s in limited supply. The final dispositions regulations that came out this summer put an official time limit on recognizing a loss for prior year dispositions of structural components, and that deadline is December 31, 2014. While taxpayers will continue to be able to claim a loss on the disposition of a portion of an asset when the disposition occurred in the current tax year, the opportunity to go back to prior years to take deductions for dispositions will disappear forever after the 2014 filing season. Communicating this limited-time opportunity tends to make clients and prospects much more inclined to start the compliance process as early as possible to avoid losing out on that incentive.

“We could uncover opportunities to slash your tax bill through accelerated depreciation deductions while bringing you into compliance.”

Who doesn’t like getting two for one? A cost segregation that is conducted in conjunction with the 263(a) repair and maintenance review can deliver a sweet combination of current deductions, accelerated depreciation, and regulatory compliance. While a cost segregation study does not bring clients into compliance with the tangible asset regulations, the study can accelerate depreciation of building acquisition and improvement costs and segregate the cost of the eight building systems for purposes of applying the new improvement rules and future dispositions. So now is an ideal time to evaluate whether the client has property that would qualify for accelerated depreciation.

tangible property regs While these messages certainly sweeten the pill of compliance, your success will depend on being able to back those sweet words up with the tax and engineering expertise required to recognize these opportunities and make the required accounting method changes.

Contact CSP360 to find out how our engineering, tax and accounting methods specialists can partner with your firm to sweeten the pill of tangible property regulation compliance for your clients and prospects who own commercial real estate.

Tags: tangible property regulations, David Barrett, dispositions of tangible assets

5 Questions Accounting Firms Should Ask to Uncover Cost Segregation Opportunities

Posted by David Barrett on 11/11/14 9:09 AM

Purchase, construction, exchange or inheritance of commercial real estate can add up to huge tax savings.

cost_segAs you were finalizing your clients’ 2013 extended corporate and partnership tax returns, did you find yourself wondering whether there was any way you could have saved them even more money? A cost segregation study might just be the key to putting more cash in the pockets of many of those clients.

Here are 5 question that could result in huge tax benefits for your clients:

Did the client build or buy a building with a cost basis of at least $500,000 and a high proportion of nonstructural elements?

The good news for your clients is that a cost segregation can be conducted on property that was purchased, constructed, renovated or expanded all the way back to 1987. Hotels, restaurants, apartment buildings, golf clubs, retail establishments, manufacturing facilities, restaurants, auto dealership facilities, and office buildings are among the types of buildings that are more likely to provide the high proportion of nonstructural components needed to justify the cost of the study through accelerated depreciation deductions.

We generally find that about 20% to 35% of the purchase price of these types of properties can be classified as 5-, 7- or 15-year property. However, the true answer can only be revealed through a cost segregation study conducted by specialists with tax and engineering expertise.

Does the purchase agreement include an allocation of purchase price?

If so, proceed carefully. Ask for a copy of the purchase agreement and review it with your firm’s cost segregation strategic partner. If you don’t have a strategic partner, click here to learn more.

If the agreement specifies an allocation of the purchase price between real and personal property, the client might not be able to re-allocate those costs after the fact. Why? Because in Peco Foods, Inc. v. Commissioner, the Tax Court ruled that the parties were bound by the allocation of the purchase price within the agreement, which could not be altered by a cost segregation study.

While your hands may be tied with regards to that specific property, it is still worthwhile to discuss this lost opportunity with any client who is looking to purchase additional commercial property. In the future, if your client seeks your counsel up front, then you bring in your cost segregation strategic partner to advise the client on how to leave the door open for a cost segregation study. Or better yet, you can encourage the client to negotiate a cost segregation study on the property before the sale closes.

Is the client considering building commercial property?

Accelerated depreciation deductions can drastically improve the cost-benefit calculation of new building projects. Consider a construction project with a cost basis of $1 million. If 20% to 35% of the costs can be allocated to 5-, 7- and 15-year property, then the client could accelerate tax deductions of $80,000 to $140,000 into that period, significantly lowering the total construction costs.

Is the client inheriting commercial real estate?

When a family member inherits rental property from another family member, that rental income has the potential to create a burdensome tax liability. But by conducting a cost segregation on the portion of property that receives a step-up in basis (i.e., IRC Sec. 754 basis adjustment), your client may see some relief from that additional tax burden.

Is the client conducting a 1031 like-kind exchange?

You may already know that a property owner can defer gain (and thus tax) on the exchange of like kind property. But did you know that the property owner might be able to benefit from even greater tax savings by conducting a cost segregation on the replacement property? This combination can result in increased cash flow for the property owner—and a happier client for you.

cost segregation guide for CPA firms Don’t despair if you missed the opportunity for 2013! Now is the perfect time to dig deep for opportunities to accelerate depreciation deductions and delight your clients with a significantly lower 2014 tax liability.

CSP360 can help you become a tax-slashing hero. Contact us to find out how we are partnering with CPA firms around the country to delight their clients with lower tax bills and greater cash flow through cost segregation and other tax strategies based on an engineering foundation.

Tags: cost segregation, commercial real estate, David Barrett

CPA Firm Growth Opportunity: Real Estate, Cost Segregation Markets Heat Up

Posted by David Barrett on 6/12/14 9:07 AM

Higher percentage of Top 100 accounting firms see revenue growth from cost seg services.

cost_segregation-1Accounting Today Top 100 firms are realizing the top-line benefits of offering cost segregation services. Is it time for your firm to explore this opportunity to grow revenues and delight clients and prospects?

In the 2014 survey, nearly half of responding firms saw increased revenue from cost segregation, up from roughly 40 percent of firms in each of the past two years’ surveys.

Correspondingly, industries that have the most potential to benefit from cost segregation studies – real estate , construction,and manufacturing - are now among the top niche practice areas. That’s great news for firms looking for more growth via engineered tax opportunities.

  • Nearly 80 percent of 2014 Top 100 firms saw increased business from real estate clients, bumping the niche to third on the list of top client segments, up from fifth in 2013.
  • Construction moved up 14 percentage points to 66 percent of responding firms, putting it sixth on the list of top client categories, up from eight in 2013.
  • Manufacturing businesses continue to drive growth for the largest percentage of responding firms, with just over 80 percent saying that their firm is increasing business within that industry.

What’s driving the trend?

A confluence of factors is driving the opportunity for new revenue for CPA firms via cost segregation.

First, the final tangible property regulations have turbocharged the value of a cost segregation study. By combining a cost seg study with a 263(a) repair and maintenance review, clients can potentially double their tax savings. That’s a great story to bring to clients and prospects!

Are you aware that clients for whom your firm has performed a cost segregation in the past are ideal candidates for a 263(a) review? Since a portion of the heavy lifting was already completed during the initial cost seg study, the client will see a lower overall cost of 263(a) compliance.

Second, the value of commercial real estate is beginning to recover. As wealthy individuals and businesses increasingly look to acquire and improve commercial properties, CPA firms that can demonstrate their ability to lower those property owners’ tax bills will maintain and build their competitive advantage.

Open the door with commercial real estate owners

cost segregation guide for CPA firms Cost segregation provides the perfect door opener with growth-oriented business owners. And once that door is open, you have easier access to additional corporate and personal tax services, or even the annual audit.

Think about it. Once you’ve demonstrated your firm’s ability to deliver tens or even hundreds of thousands of dollars in tax savings through cost segregation and tangible property reviews, clients are likely to be receptive to other tax-minimization opportunities, from 179D to location based credits and incentives.

Recognizing hot trends is one thing. Being in a position to take advantage of those trends requires access to the right expertise and tools. Learn more about the 5 Key Lessons for Integrating Cost Seg Studies into Your Firm’s New Business Program.

Tags: cost segregation, 263(a) regulations, tangible property regulations, David Barrett

Do Not Let These Cost Segregation Horror Stories Happen To You!

Posted by David Barrett on 4/14/14 9:29 AM

‘Twas a dark and stormy night…

cost_segregation_nightmareDespite the many benefits cost segregation can offer your firm and your clients, the specter of what can go wrong if you bring in a less-than-qualified provider can send a shiver down the spine of any CPA. 

Two recent high-profile cases—AmeriSouth and Peco Foods—ratcheted up the anxiety around cost segregation. Both AmeriSouth and Peco Foods relied on cost segregation studies performed by third-party consultants, and in both cases the IRS disallowed some or all of their positions. But the most alarming part of these cases is not that the IRS prevailed in court. (In the AmeriSouth case, the “defendants” failed to defend themselves at all, and the Peco cost segregation violated long-standing tax policy regarding the allocation of purchase price.) The truly scary part is that these cases have established precedence for the IRS to target similar businesses that use this legitimate and accepted method of accelerating depreciation.

CPAs who want to offer cost seg services can reduce their anxiety about offering this service by working with an experienced, reputable cost segregation specialist. On the other hand, by relying on an inexperienced firm, you could find yourself starring in your own cost seg horror story. For example:

  • You could be in the hot seat in the event of an IRS audit. Many cost segregation studies fail to stand up to IRS scrutiny because they use benchmarks to estimate percentages of costs that qualify for shorter depreciation lives (i.e., rule of thumb approach), rather than a detailed and well-documented engineering methodology. Remember: At the end of the day, if your client’s accelerated depreciation is disallowed and your cost segregation strategic partner cannot support the study with thorough documentation, you are liable.
  • Your client could miss out on significant tax savings. Because the rule-of-thumb approach does not rely on an in-depth analysis of actual construction or acquisition costs, the tax benefits are substantially less than those based on a detailed engineering analysis.
  • Your client might not be in compliance with 263(a). Since the IRS issued its final regulations regarding repairs and maintenance, no cost segregation can be considered complete without a review of compliance with the new regs. Budget providers of cost segregation services most likely will not offer this additional service.
  • Deadlines could be blown. Say it’s March 12 and you’re still waiting on the depreciation calculation from your cost segregation provider so that you can complete Schedules K-1 for the partners of a large real estate investment group. You are essentially held hostage—unable to move forward because of the failure of that subpar provider. But guess who the client will hold responsible?
  • Your client relationship could be damaged. Even in the event that the provider performs all the technical aspects of the engagement properly, he or she still could act unprofessionally, circumvent you, or divulge information (such as your firm’s markup on the job) that puts you in a position of having to defend your practices.

Cost Segregation Strategic Partner

cost segregation guide for CPA firms You can avoid these horror stories by aligning your firm with a reputable cost segregation specialist. Backed by deep engineering and tax expertise, the right cost segregation strategic partner will perform an in-depth study backed by thorough documentation that will withstand an IRS audit… and bring significant tax benefits to your clients. That strategic partner also should act as an extension of your firm at all times.

Backed by the resources of Buffalo, N.Y.-based Top 100 firm Freed Maxick, CSP360 partners with CPA firms to offer private-label cost segregation studies that withstand IRS scrutiny while lowering your clients’ tax bills. Contact us or call (800) 591.0148 to schedule a consultation about our CPA Partnership Program. 

Tags: cost segregation, Section 179D, tangible property regulations, David Barrett

Subscribe to Email Updates

real property tax-savings election
263(a) opportunities

Our Latest Resources

Tax slashing hero

cost segregation

CSP360 Deep Dive Program

Latest Posts

Follow Us