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Real Estate Tax Strategies: Incentives to Grow Your Practice

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

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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

Accounting Method Changes: A New Client Strategy Worth Investigating

Posted by Jennifer Birkemeier on 4/5/17 8:52 AM

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Choosing the wrong accounting method might not trigger an audit, but it can sure cost a business money.

To sustain organic growth in your firm, you need to find ways to distinguish yourself from your competitors. Sometimes the other firms might make it easy by forgetting to ask an important question or failing to recognize the low hanging fruit of a particular election. But many of the most desirable clients on your wish list will likely be dealing with quality accounting firms that cover the basics pretty well and provide solid advice when it comes to planning.

When you’re up against a quality firm, it helps to have some go-to areas on the tax return where even seasoned professionals miss opportunities. Tax accounting methods is one such area.

The tax accounting method choices that a business makes frequently provide opportunities for improvement for two reasons:

  • Cousins DILLY and SALY: When a firm prepares returns for a business over the course of a few years, it’s easy to fall into the pattern of “do it like last year” (DILLY) or “same as last year” (SALY). Good firms work diligently to make sure their clients incorporate law changes and regulations into their strategies, but they sometimes fail to challenge bedrock assumptions like accounting methods.
  • Bad accounting methods aren’t illegal, just expensive: In most cases, taxpayers choose accounting methods that are permissible under IRS rules. However, either because of poor advice on the choice or a change in circumstances over time, they don’t always choose the one that provides the best result for tax purposes. This choice is unlikely to trigger an audit because the taxpayers aren’t doing anything wrong. They’re just missing a chance to be right and have a lower tax bill.

The best way to review a business’ tax accounting method choices is to look at its returns. However, there are a few questions you can ask and assumptions you can challenge even in casual environments like networking events or golf games.

  • Is your business on the cash or accrual method for tax purposes? Are you required to use that method, or should you review your options? We recently encountered a case where a preparer assumed a business had to be on the accrual method because they had over $5 million in sales, but the tax return preparer hadn’t considered a recent Revenue Procedure that allows the use of the cash method to continue in certain circumstances on up to $10 million in revenue. The tax return preparer didn’t realize they met the requirements, so the company and its owners overpaid their taxes for a number of years.
  • How do you treat property tax and insurance payments? Even businesses that are required to use the accrual method for tax purposes are permitted to use the cash basis for these expenses in certain circumstances.

Once you have a chance to look at the return, there are all kinds of things you can learn. If you’re not familiar with reviewing accounting method choices on tax returns, you can also outsource the review to us or we can train your staff to find the opportunities that potential clients may have missed in this area.

CSP360 professionals bring an in-depth focus to a review of fixed asset schedules and depreciation method changes that few accountants can match. We frequently help our clients deliver value to their clients by identifying the use of impermissible accounting methods, most often by correcting depreciation methods resulting in significant tax savings.

For more information on accounting method changes or to inquire about a review of a taxpayer’s tax accounting elections, please contact us.

Tags: tax accounting, accounting methods, Jennifer Birkemeier

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

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

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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.”

Ouch.

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

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

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

5 Steps to Build Cost Segregation Into Your Tax Practice

Posted by Jennifer Birkemeier on 12/8/15 8:58 AM

A quality cost segregation study begins with the building plans. A quality cost segregation practice begins with this 5-step plan.

5-StepsWe spend a lot of our time at accounting and tax events talking to professionals about cost segregation. Our discussions often focus on growing their practices. We’ve found that CPAs and tax advisors tend to focus on organic growth in existing service areas or growth through acquisition. When we offer a third alternative, growing the practice by adding cost segregation as a new service line, many express concern that the effort involved in such a task would be better spent on growth in existing service areas. Whenever we hear someone raise that issue, we point out that there are 5 relatively easy steps to getting a cost seg practice up and running at a firm. As we explain those steps, we’ve noticed that a lot of heads start to nod “yes.”

  1. Get Partner Buy-In. We don’t have to tell you that any new offering at your firm will go nowhere until a significant number of partners get on board. The arguments that tend to win them over are an increased revenue stream from existing clients and staying ahead of competitors who might offer this service to your clients. The good news is if you contract with a quality cost seg provider, it’s not unusual for a study to bring in an additional $2,000 per study in revenue from existing real estate clients with little work on the firm’s part. The bad news is that with numbers like that, it’s not hard to imagine that your competitors might gain a foothold with your clients if you don’t offer the service first.
  2. Selecting a Provider. The IRS notes in its “Cost Segregation Audit Technique Guide” that the preparation of a cost seg study requires knowledge of both the construction process and the relevant tax law. Unless your firm has a partner or manager who spent significant time as a construction engineer, you will probably see your ROI on this new service line ramp up much more quickly if you contract with a cost seg provider to do the studies.
  3. Educating Your Staff. Like any new service, your staff needs to understand what it is and how to identify clients who can benefit from it. This is another advantage in hiring a quality provider of cost seg services—a provider will often have CPE prepared for the key individuals at the firm who will speak with clients and targets about the product.
  4. Identifying Clients Who Can Benefit. This topic could be an entire blog post unto itself, and in fact we will be posting a blog to that effect in the near future. The short version is that the information you need to identify existing clients who could benefit from cost seg probably already exists in your system. Most of the information you need to assess the value of a cost seg engagement to your clients is found on their depreciation schedules and Form 4562, Depreciation and Amortization, in Part III. If you have their tax return, you probably have all you need to figure out if the service makes sense for them.
  5. Marketing the New Service to Clients. Once your people know what the service is and how it can help clients, the next step is to tell your clients about it. You need to have quality marketing materials to support the effort, and you need to be ready to answer questions like, “Why isn’t this service included in my return prep fee?” and “How come you didn’t bring this up sooner?” If you build the practice in-house, you need to make sure your people are ready for these questions before they talk to clients. If you contract with a provider, you should expect that provider to deliver customizable marketing materials and training support to make sure the people who sell the new service do so effectively.

Cost Segregation Partnership Opportunity New service lines can be a challenge for any accounting or tax practice. When it comes to cost segregation, these 5 steps can make that challenge much more manageable and help your firm see the return on its investment sooner.

Tags: cost segregation, Jennifer Birkemeier

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

3 Steps to Help Clients Understand 179D

Posted by Jennifer Birkemeier on 10/28/15 9:22 AM

How to give clients enough information that they understand the value of the deduction without getting too deep into the weeds.

179D_deduction_weedsThe Section 179D deduction for energy efficient construction and improvements to commercial buildings provides a great opportunity for commercial real estate owners to convert 39-year property into a deduction. Some clients will be perfectly happy to hear from you that a new election or credit will reduce their tax liability and that you are confident they can legally claim it on their return. Others, often newer clients or leads that you are trying to convert into clients, might want you to explain more about the opportunity in order to help them understand exactly what it is and how it relates to them. There’s always a fine line to walk with these folks, since they want to understand the value of what you’re doing for them but they don’t necessarily want to become experts on the topic.

A Trio of 3’s

The quickest way to remember the information that can help a client or potential client understand the value of Section 179D is the trio of 3’s:

  1. 3 Types of Construction Qualify:
    • Interior lighting systems.
    • HVAC systems.
    • Building envelope systems.
  2. 3 Levels of Qualification:
    • Level 1: To qualify for a $0.30-$0.60 deduction per square foot, an energy improvement must be made to the building’s interior lighting systems and improve energy use by 25%-40% or more. HVAC and building envelope improvements that meet the energy improvement threshold will qualify for $0.60 deduction per square foot.
    • Level 2: To qualify for a $1.20 deduction per square foot, an energy improvement must be made in two of the three types and improve the energy use by an aggregate of 33 1/3% or more.
    • Level 3: To qualify for a $1.80 deduction per square foot, an energy improvement must be made in all 3 types and improve the energy use by an aggregate of 50% or more.
  3. Not Just 3 Years of Amended Returns: The deduction is claimed via a change in accounting method for property owners, so it can be taken for construction or improvements as far back as 2006, the year the deduction was enacted.  

With government buildings, these benefits go to the primary designer (architects, engineers, lighting designers) of the energy efficient improvement since the government cannot use tax deductions. However, the primary designer must amend prior year tax returns to claim the deduction. Examples of government owned buildings are as follows:

  • Federal: offices, military bases, courthouses, post office, labs, etc.
  • State: offices, transportation facilities, state universities, courthouses, etc.
  • County, city, town, village, etc.: offices, schools, town halls, police, fire, libraries, airports, parking garages, etc.

Extender Status

One drawback to this deduction is that it is included in the package of tax rules commonly referred to as “extenders.” These provisions are not permanent. At this time, they have been extended through the end of 2014 and discussions are underway about extending them to the end of 2015 and beyond. So far, Congress and the President have found a way to extend this tax break every time it has neared expiration (or expired), but it’s hard to guarantee that will always be the case.

Support from a Strategic Partner

179D-customizable-sell-sheet Given the engineering expertise needed to verify the energy improvement, most accounting firms seek out a strategic partner to provide the studies that make it possible for a real estate owner to take this deduction. One thing to look for when evaluating a strategic partner is the level of support that firm will provide to you in your efforts to market this service. It’s reasonable to expect that a qualified partner should be able to provide printed and electronic materials that will help you sell this service to your clients and contacts. It’s much easier to explain the value of the service when you work with a partner that focuses exclusively on these types of deductions.

 

Tags: Section 179D, Jennifer Birkemeier, Energy efficiency tax deduction

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