Cost Segregation: A Smart Tax Strategy that is Often Overlooked

Presented by: Brendan Walsh

Let’s get started

• Brendan Walsh, Tax Manager, leads the CSH Cost Segregation Practice

• Brendan has earned his designation as a Senior Cost Segregation Professional, as authorized by the American Society of Cost Segregation Professionals

• Two in the state of Ohio

On tap for today

• What is cost segregation? • How organizations could benefit from a

cost segregation study • How to identify projects that would

qualify for this service • How a cost segregation study is

conducted • Common questions and misconceptions • How to choose a cost seg provider • Current cost segregation market issues

and trends • Resources

What is cost segregation?

• A tax planning technique that separates real property into various depreciable categories

• Allows taxpayers to depreciate property over much shorter periods of time than the typical 39 year (or 27.5 year) period

• The cost of a building can be segregated into 5, 7, 15, and 39 year categories

• A Cost Segregation Study determines how much of the building cost goes into each category, and provides documentation and support for that determination

How can organizations benefit from a cost segregation study?

• Increased depreciation in the first years of building ownership

• Increased cash flow

• Time value of money

• Bonus depreciation

Prior year purchases

• Even if you purchased a building in a prior tax year, cost segregation is available

• Catch up on missed depreciation

• No amended returns required

• File Form 3115 (Change in Accounting Method) and attach to federal return

• Potential benefits are significant

How to identify activities that qualify for this service?

• Purchases

• New construction

• Renovations

• Additions

• Owner/tenant

• Examples

How a cost segregation study is conducted

• Cost seg studies come in many shapes and sizes

• Different methods can be used to perform a study

• IRS standard – Detailed Engineering Approach

• Cost seg report must connect the dots and provide support for asset classifications

Elements of a quality cost segregation report

• Summary letter/executive summary • Narrative report • Schedule of assets • Schedule of direct and indirect costs • Schedule of property units and costs • Engineering procedures • Statement of assumptions and limiting conditions • Certification • Exhibits

Elements of a quality cost segregation study

• Preparation by an individual with expertise & experience • Detailed description of methodology • Use of appropriate documentation • Site visit • Interviews conducted with appropriate parties • Use of a common nomenclature • Use of a standard numbering system • Explanation of legal analysis • Determination of unit costs and engineering “take-offs” • Organization of assets into lists or groups • Reconciliation of total allocated costs to total actual costs • Explanation of the treatment of indirect costs • Identification and listing of §1245 property • Consideration of related aspects – i.e. repair regulations

Information required for cost segregation study

• New Construction – Proposal phase ₋ Construction cost ₋ Square footage of new space ₋ Use of new space (i.e. manufacturing, retail, warehouse, etc.) ₋ Date the facility will be placed in service

• New Construction – Study phase ₋ Architectural drawings ₋ Construction contract ₋ Construction budget for the project (if not included with the contract) ₋ Contractor’s payment applications throughout the project ₋ Change orders ₋ Contractor’s final application for payment ₋ Final project costs breakdown

Information required for cost segregation study

• Acquired Properties – Proposal phase ₋ Tax depreciation schedule ₋ Use of the building (i.e. office, retail, mixed-use, etc.) ₋ Square footage of the building

• Acquired Properties – Study phase ₋ Available construction documents (i.e. drawings, contract, etc.) ₋ Site visit is critical!

Cost segregation process

• Contact cost seg provider to prepare proposal

• Provide necessary documents

• Proposal will estimate depreciation benefit and ROI

• Quality proposal will include Net Present Value estimate

• Some industries can benefit from cost seg more than others

Industry examples

Property Type

Typical % of project cost reclassified

Increased depreciation years 1-5 for

$1,000,000 project

Present value tax benefit for

$1,000,000 project Heavy Mfg/Processing 30-60% $162,000-$324,000 $51,000-$102,000 Car Dealerships 25-40% $135,000-$216,000 $42,500-$68,000 Offices 15-25% $81,000-$135,000 $25,500-$42,500 Restaurants 20-40% $108,000-$216,000 $34,000-$68,000 Apartments 20-35% $108,000-$189,000 $34,000-$59,500 Retail 20-30% $108,000-$162,000 $34,000-$51,000

Examples of personal property

• 15-year – parking lots, fences, etc.

• 7-year – office furniture, desks, safes, etc.

• 5-year – dedicated electrical, shelves, signs, etc.

Common questions/ misconceptions

• Doesn’t cost segregation only work on new construction?

• Is there a minimum building cost to be eligible for cost segregation?

• Isn’t this really just a timing difference?

• When should a cost seg study be done?

• How long does it take to complete a study?

• How much does it cost?

• What is the risk of doing a cost segregation study?

How to choose a cost seg provider

• Experience – construction and tax law/compliance

• Ethics – no contingency fees

• Adherence to standards set forth in IRS Cost Segregation Audit Techniques Guide

• Audit support

• Credentials – American Society of Cost Segregation Professionals (i.e. CCSP or SCSP)

Current market issues and trends

• Tax extenders

• Tangible Property Regulations

• Peco Foods case

Resources

• American Society of Cost Segregation Professionals (www.ascsp.org)

• National organization for cost seg providers

• Mission is to create and maintain minimum quality standards and a code of ethics for cost seg providers to adhere to

• Clark Schaefer Hackett (www.cshco.com)

Questions?

Brendan Walsh, JD, MBA, SCSP Tax Manager (513) 338-0908 bjwalsh@cshco.com