Cost Segregation delivers results every time it's applied!

Tax deadline is approaching quickly!

Posted on September 04, 2019 by Jeff Hobbs

Tax deadline is approaching quickly!

Do you own commercial real estate of ANY kind? Do you own residential rental property of ANY kind, size or cost-basis? Do you lease your business office or building? If the answer to any of these questions is YES, then we can help you mitigate or eliminate your federal and/or state income tax burden. GUARANTEED!

There are some who read that and say, bull****. So, let me elaborate on that word - GUARANTEED. Here is my "disclosure" regarding this guarantee.

  • You are profitable AND paying taxes
  • You do not have a "not for profit" tenant occuping more than 50% of leaseable floor space
  • You are not a "tax-free" entity
  • You are not a "tax-free" REIT

If you are one of the above categories, the guarantee doesn't apply to you. Otherwise, you do. 

I have a question for you. If you have a choice between paying the IRS your hard-earned money or KEEPING your hard-earned money, which would you choose? If the latter, then keep on reading. If not, God bless you.

The Internal Revenue Service requires owners of commercial real estate (includes residential rentals) to use the MACRS method of depreciation - REQUIRES. However, your CPA is in a dilemma because he or she is unable to comply because they do not meet the IRS guidelines for education in building-related disciplines (aka Architect, engineer, builder, contractor, etc.). So what do you do?

That's where we come in. As a forensic engineering firm focused exclusively on the Internal Revenue Code, Sections 167 and 168, we meet these requirements. These are the two code sections addressing depreciation and it's proper application to buildings. We work hand-in-hand with your CPA or accounting professional to apply the results to your personal and/or business tax returns.

This means you now have the ability to reduce or eliminate your income tax burden related to your depreciable real estate assets. It is a decision that is yours to make. You own the property. You are paying the taxes. It comes down to "who" you want to pay - the IRS or yourself! What could you do with an extra $10,000, $20,000, $50,000 or more? Why not find out how much you can "pay yourself" this year and complete our simple cost/benefit questionnaire at "Get Your Refund!" This will allow us to answer your top two questions: 1) what's in it for me, and 2) how much does it cost me?

Hey, it's your money, why wait!?

Cost Segregation Cost

Posted on August 06, 2019 by Jeff Hobbs

Cost segregation costs are all over the board. There are those online advertising DIY cost segregation from $2500 to $1500 to $499, and even as low as $299! There are companies advertising that you can complete an online questionnaire and have a full cost segregation study spit out in minutes. Some of these companies are quite large. Some have years in the business. All claim to have staff engineers.

I have a question. IF anyone can go online and fill out a form and get a cost segregation study for $299, why go anywhere else? Heck, $499 or $1500? Seriously! Why waste time looking at companies that charge more? There must be a reason!

Here is a direct quote from the IRS –

  1. Preparation By An Individual With Expertise And Experience

    The preparation of cost segregation studies requires knowledge of both the construction process and the tax law involving property classifications for depreciation purposes. Unfortunately, there are no prescribed qualifications for cost segregation preparers. However, a preparer’s credentials and level of expertise may have a bearing on the overall accuracy and quality of a study. <italics emphasis added>

    In general, a study by a construction Engineer is more reliable than one conducted by someone with no engineering or construction background.  However, the possession of specific construction knowledge is not the only criterion.  Experience in cost estimating and allocation, as well as knowledge of the applicable tax law are also important criteria.

    A quality study identifies the preparer and always references their credentials, experience and expertise in the cost segregation area.

This is found in the Cost Segregation Audit Technique Guide, Chapter 4 (CSATG). I have another question. Why would the Service prepare a thousand-page document (CSATG) discussing how a cost segregation study should be prepared? I mean, they are the final arbiter of whether they will accept your study or not. Unless, of course, you want to go through an audit and, possibly, court to make them accept your findings…assuming you win. Now, with that said, does it make sense that a “study” can be produced online in minutes for less than you paid for your appraisal? Or less than you paid your architect in design fees? Or for your engineer to produce your construction drawings?

A cost segregation study requires “building knowledge” as well as, “experience in cost estimating and allocation, as well as knowledge of the applicable tax law…” Would you suppose that an individual with this kind of knowledge and training might be more expensive than your architect or engineer? Someone with architectural engineering knowledge AND knowledge of tax law? The average architect charges $2 to $5 per square foot (8% to 15% of total cost) to design and produce architectural drawings. The average construction engineer charges $1 to $4 per square foot to produce construction drawings including Mechanical, Electrical and Plumbing. That means if you have a small, 5,000 square foot office building, you will spend $10,000 to $25,000 for the design and $5,000 to $20,000 for your construction drawings. Mind you now, these are the average costs. You may choose to hire someone with no experience and pay less. You may choose to hire the best and pay more. The average works out to $15,000 to $45,000 before the shovel hits the dirt. Yet, many will opt to pay $299 from a “cost segregation” website to circumvent the recommendations of the IRS. Does this make sense? Especially dealing with an entity that can make your life hell on earth?

The reality is that cost segregation services is a commodity like all other services. Fees are as low or high as you can find. The real issue you should consider is the quality, time and experience of the people behind the firm. Do they know tax law? Are they architects or engineers who also have IRS tax knowledge? Does the firm perform field surveys as recommended by the Service? Are engineering guidelines applied and proper documentation, including tax code, used to support asset allocation? Is IRS audit protection included? All of these processes take time. Time is money. People with these qualifications and expertise are hard to find and costly. The typical cost segregation engineer salary is $150,000 to $300,000 per year.

Look at it this way. You are told you have a brain tumor requiring surgery to remove it. Do you want the surgeon who graduated last in the class or first? Which one charges more? My guess is you go with the best regardless of the cost. You want to live.

When dealing with the Internal Revenue Service, it is smart to go with the best! That would be Segregation Holding LLC – the only firm in America that includes 3 additional years of ongoing cost segregation work at no charge after the initial fee for the original study. This keeps the client in full compliance with the Internal Revenue Code – which is where you want to be.

Cost Segregation Studies are not all the same!

Posted on June 06, 2019 by Jeff Hobbs

Cost segregation studies are not all the same. For the purposes of this article, we will focus on acquired property, new construction and renovations or improvements.

Ideally, these cost segregation studies combine forensic engineering and accounting techniques to identify building costs that are properly allocable to tangible personal property (Section 1245) rather than real property (Section 1250). This could potentially allow you to accelerate depreciation deductions which reduce taxes and boosts cash flow considerably.

With the new rules and limitations for depreciation and expensing under the Trump-era Tax Cuts and Jobs Act (TCJA), the potential benefits are now much greater.

IRS rules generally allow businesses to depreciate commercial buildings over 39½ years or 27½ years for residential properties. Most often, a business will depreciate all of a building’s structural components like doors, walls, windows, HVAC, electrical, plumbing, and roofing as well as the whole building itself.

Personal business property such as furniture, fixtures and equipment (FF&E) is also eligible for accelerated depreciation, but usually over five or seven years. Land improvements including sidewalks, curbs, monument signage, fences, outdoor lighting and parking lots are depreciable over 15 years.

It is not unusual for businesses to classify most, if not all, of a building’s acquisition or construction costs to real property. They often overlook the opportunities to allocate costs to shorter-lived personal property or land improvements. As an example, computers and carpeting have obvious distinctions between real and personal property, but often the line between the two is less clear. Assets that appear to be part of a building may be personal property, like floor coverings, movable partitions, awnings and canopies, dedicated electrical or plumbing systems, window treatments, and decorative lighting to name a few.

There are some cases where real property serves more of a business function than a structural purpose and it may indeed qualify as personal property. These are considering “process-related” systems. These include reinforced flooring to support heavy manufacturing equipment, electrical or plumbing installations required to operate specialized equipment or dedicated A/C systems for telecommunication rooms or computer closets.

Although the relative costs and benefits of a cost segregation study are “facts and circumstances” based, it can be a valuable investment. Consider this - a business acquires an office building for $1,000,000 five years ago. If the entire purchase price is allocated to 39.5-year real property, the business is entitled to claim $24,610 (2.461% of the $1,000,000) in depreciation deductions the first year. However, a forensic cost segregation study may reallocate about 25% to five- & 15-year property (accelerated depreciation). This effectively increases the total available depreciation deductions to $147,142 in the current year because you receive 200%DB depreciation on the short-lived assets in addition to the straight-line depreciation from the building itself!

A cost segregation study can assist you in making partial asset disposition elections and deducting removal costs under the recently issued final tangible property regulations too!

Tax Reform and Cost Segregation

The Tax Cuts and Jobs Act (TCJA) enhanced certain depreciation-related tax breaks which may also enhance the benefits of a cost segregation study. Among other things, the TCJA permanently increased limits on Section 179 expensing. Section 179 allows you to immediately deduct the entire cost of qualifying equipment or other fixed assets up to specified thresholds.

Under Section 179 expensing, taxpayers can take a current deduction for the cost of qualified new or used business property placed in service in the tax year, though there are limitations. For 2018, the TCJA doubled the maximum Section 179 deduction, to $1 million, with a phaseout threshold of $2.5 million. For 2019, the deduction limit increases 2% to $1.02 million and the phaseout threshold rises to $2.55 million. Adjustments for inflation in future years are part of the TCJA.

The TCJA expanded 15-year-property treatment to apply to qualified improvement property. Previously, this tax break was limited to qualified leasehold-improvement, retail-improvement, and restaurant property. It also temporarily increased first-year bonus depreciation to 100% (from 50%).

If your business invested in depreciable buildings or improvements in previous years, it’s not too late to take advantage of a cost segregation study. A “look-back” cost segregation study allows you to claim missed deductions back to 1987. This can be a “cash” windfall!

To claim these tax benefits, a business must file IRS Form 3115, “Application for Change in Accounting Method,” with the IRS and claim a one-time IRC 481(a) “catch-up” deduction in the current tax year. Amended returns are NOT required.

Property Tax and Sales & Use Tax Implications

In most circumstances, a cost segregation study can be used to document the cost of tax-exempt property. This would be helpful, say, for manufacturers since many states exempt property used in manufacturing.

If your business decides to make changes based on a cost segregation study, please note that certain property may be treated differently for income tax and property tax purposes, and reporting mistakes can lead to double taxation. To avoid double taxation, be sure you have systems in place to track the costs of these items separately for income tax and property tax purposes.

Forensically prepared cost segregation studies will always yield substantial benefits when applied properly. This requires quality information at the beginning from the client and their tax advisors. Remember, garbage in – garbage out.

To find out whether a forensic cost segregation study will work for you, just share a little information with us and a cost seg specialist will prepare your personalized benchmark analysis of benefits. Click here.

Dentists use Cost Segregation for enhanced cash flow!

Posted on May 20, 2019 by Jeff Hobbs

Dentists are turning to cost segregation as a means to tap cash flow from their dental practice. More and more dental professionals realize how easy the process is to take advantage of their dental office when cash flow is tight. Dentists, like other medical professionals, are affected by the ebb and flow of our economy. As more people move from job to job there are less who have dental insurance because they don’t see the need. No dental insurance means there are fewer people getting their six-month check-ups. Children aren't getting braces. Of course, this all translates to less income.

To add insult to injury, many of those patients who do come in are cash payers seeking huge discounts, again, due to the lack of insurance.

For those who have dental insurance, the dentist knows the collection process may take weeks or months before getting paid. Again, that puts you, the dental professional, in a tight cash position many times. It makes you feel like a bank or credit union with customers behind on their payments.

The answer many dentists are turning to today is cost segregation. Cost segregation is the process of identifying building components that are considered "tangible personal property" or "land improvements" under the federal tax code. This method of depreciation is called Modified Accelerated Cost Recovery System (MACRS). The primary goal of a cost segregation study is to identify all construction-related costs that can be depreciated over a shorter tax life (typically 5, 7 and 15 years) than the building (39 years for non-residential real property). If the property is a leasehold (or tenant) improvement, depending upon the lease date, it’s depreciable life is 15 years rather than 39.

Tangible personal property assets found in a cost segregation study generally include items that are affixed to the building but do not relate to the overall operation and maintenance of the building. Examples would include your dental operatory, lab, x-ray, dental sinks, specialty plumbing, secondary lighting, specialty electrical, cabinetry, security system, cable/internet system, and more.

Land Improvements generally include items located outside a building that are affixed to the land and do not relate to the overall operation and maintenance of a building. Examples would include signage, landscaping, sidewalks, curb, parking, drainage, fencing, and much more.

Cost segregation-reduced tax lives results in accelerated depreciation deductions, a reduced tax liability, and increased cash flow. Cost segregation also reduces real estate taxes, use taxes, and property insurance premiums. The reason is simple - personal property is assessed at a lower tax rate than real property.

So, when dentists use cost segregation to accelerate depreciation on their facility, they effectively receive a tax-free raise in income. Tax-free because it is actually a tax credit or tax refund, depending on how you want to take it. Here’s an example: Let’s say you are a new dentist with a new practice. You have 1,200 square feet as a tenant in a mixed-use retail complex. You spent $100,000 to complete the build-out. Yes, this is a small example, but it’s a reality for many dentists just starting out. Cost segregation would typically reclassify about 40% of a dental office. Therefore, $40,000 would be accelerated into the 5-year tax life. If you are in the 37% federal tax bracket that would give you $14,800 in income tax credits. A cost segregation study of this size would cost about $3,000 depending on the specifics. Would you invest $3,000 to receive $14,800?

If you are a seasoned dentist who owns your own building and invested $1.5 million, for example, your benefit is much more. A well-designed and attractive dental office will normally realize 45% to 55% in accelerated depreciation. At 45%, you would realize an additional $256,250 in income tax credits. If you have owned your building 5 to 7 years or so, you could qualify to receive about 50% of this as an income tax refund in the current tax year. Of course, your personal tax situation will impact your savings. (Always consult with your CPA or tax attorney as how best to apply the results of a cost segregation study.)

If you, as the DDS, DMD, or any other dental professional want to learn more about applying cost segregation to your specific circumstance; contact us. We provide a free benchmark analysis of your facility detailing the short life assets and how you will specifically benefit.

Cost segregation works every time it's applied.

Contributed by Jeffrey M. Hobbs, Director
Segregation Holding

Info@SegregationHolding.com
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95% of All Dental Practices Due Big Tax Refund

Posted on April 12, 2019 by Jeff Hobbs

Most dentists are great at their profession. Virtually all, however, are paying more income taxes than they legally should. While the mention of the name, "Internal Revenue Service," instills fear, there is no need to fear them. Embrace them as your ally, and you will find there are actually some tax codes that work in your favor. Let's explore one of the most under-utilized and recent one of these, Modified Accelerated Cost Recovery, generally referred to as "cost segregation."

Cost segregation is quite simply the identification of assets that meet IRS guidelines for accelerated depreciation in your dentist office. Most dentists’ offices have at least 35% of the interior build-out that qualifies for 5-year depreciation. Take a look at your depreciation schedule; what does it show… 39.5 years? 31 years? 27.5 years 15 years?

All dental offices are full of building components that qualify for 5-year depreciation? Virtually 100% of what you see qualifies!

Dental Operatory
Dental Reception
Dental Lab

Why let the IRS hold on to your money when it’s yours? The IRS doesn’t pay you interest on over-paid income taxes, but they sure charge you interest if you under-pay, don’t they!?

What we do is simple, though the process of cost segregation is highly technical, requiring architectural and engineering professionals. In fact, the IRS Chief Counsel actually said, “…cost segregation, for it to be properly applied, had to involve those with competencies in architecture, engineering, or construction and/or construction techniques, in order for personal property assets to be accurately identified and segregated.” Is your CPA also an architect or engineer? Most likely not.

So, how does cost segregation actually affect me and my dentist office? Good question Did you pull your depreciation schedule to see how your assets are currently being depreciated? Please do! However, let’s be conservative and say that 30% of the cost of your build-out is all that qualifies for 5-year depreciation, and furthermore that you spent $150,000 to complete your dentist office. Well, 30% of $150,000 is $45,000 in depreciation. If you are in the maximum tax bracket, that means you have about $16,000 in over-paid federal income taxes, if you have been in your building or leasehold space for 5 years. You are due a $16,000 income tax refund! If you own your own commercial office space, your refund may be significantly larger. If you own other commercial property, including rental houses, you most likely have refunds coming there as well.

It doesn’t matter if you have been there longer or for a shorter period of time, what matters is that you are due a refund, or tax credit if you choose. Either way, the IRS is holding your money when it should be in your pocket! Time-value of money - think about it - a dollar is always worth more today than it is tomorrow!

Knowledge is power when you apply it. Get with your local forensic cost segregation engineering firm today! It’s your money, why wait!

95% of Funeral Home Owners Miss Out on This Tax Benefit

Posted on April 10, 2019 by Jeff Hobbs
An often over-looked industry for Federal tax incentives is Funeral Homes. This is an industry that is more-often-than-not “family-owned” and has passed from generation to generation. As a result, most Federal and/or state tax incentives are rarely - if ever - investigated. Fortunately, however, for Funeral Home owners, there is a significant tax benefit waiting for you. Most funeral homes have been purchased or constructed with a cost-basis of at least $1,000,000. Additionally, the business is generally paying taxes at the highest tax bracket and are, therefore, ideal candidates for a forensic cost segregation engineered study - and as times continue to change, and the pressure to “keep up with the Jones’s” mounts, many funeral homes across the nation have also invested in significant renovations and improvements - another tax benefit for you. The IRS says you can go back as far as 1987 to reclaim all of that unclaimed tax depreciation and take it all today. These changes are typically in areas where cost segregation has the greatest impact. Assets like carpeting, decorative millwork (crown molding, chair rails, wainscoting, and baseboards), chandeliers, decorative lighting and wall sconces, sound, camera, security systems, prep rooms, kitchens, cabinetry, and much more are all considered “tangible personal property” and qualify for 5-year depreciation - not the 39.5-year they are typically set up on. Further, much of the exterior qualifies for 15-year depreciation - things like landscaping, site features (flag pole, site lighting, water fountain, monument signage, parking, sidewalks, landscaping, and more). Funeral Homes and Mortuaries will average a much higher percentage of qualifying “short-life” assets than most commercial buildings. In order to apply MACRS (Modified Accelerated Cost Recovery System) to your property, the IRS states that only someone with competencies in architecture, engineering, or construction and/or construction techniques, is required in order for personal property assets to be accurately identified and segregated. This is not your CPA. Therefore, it is important to choose and engage the right cost segregation firm. Cost segregation providers are not all the same. Many offer “basic” or “desktop” services but do not deliver on all possible areas of benefits or meet IRS requirements. For example, the average cost segregation firm only investigates 17 divisions of the building code. There are 32. Why only 17 then? Simple. It saves time, and therefore, money to their firm. Of course, this “savings” will “cost” you money. If 15 divisions of the building code are not researched, then there will be assets not included in their cost segregation “study.” Those assets equal more money to you, the funeral home owner. Always seek out one of the fourteen “forensic” cost segregation engineering firms in America, like Segregation Holding. We have signed a commitment to utilize all 32 primary divisions of the building code 100% of the time, regardless of the size of the building, and they will always perform on-site inspections of your property. In doing so, you guarantee yourself the maximum available tax benefits under the Internal Revenue Code. Cost segregation is an engineering tool you can utilize that will reduce your taxes and increase your profitability. Getting the process started is easy. To learn exactly how much you are due, free and at no obligation, simply complete and submit our Client Questionnaire, or contact Jeff Hobbs, Segregation Holding, a true forensic cost segregation engineering firm based in Texas and serving all fifty states, with over 17,000 forensic studies completed.

Don’t Mess with the IRS! MACRS

Posted on September 24, 2018 by Jeff Hobbs

Don't Mess with the IRS!

IRS MACRS

Who would, right? The sad truth is that most do!

Here's what I mean. If you own commercial real estate or residential rental property, you are REQUIRED to use MACRS depreciation. No doubt you are scratching your head right now. What is MACRS? It's an acronym for Modified Accelerated Cost Recovery System. The IRS Chief Counsel says if you, as the owner, have "contemporaneous records" you are required to use MACRS depreciation. That means if you have a deed and depreciation schedule you meet the requirement.

My CPA knows what he's doing...

Okay. We are not impugning your accounting or tax professional. On the contrary, they are your most important business partner - seriously. You should have such a close relationship with him or her that you become close friends. However, any competent accounting professional will honestly tell you that they don't "know it all." Depreciation is one of those areas that on the service seems quite simple. Honestly, it is, when only the straight-line depreciation model is used. Here is what I mean.

Commercial real estate is depreciated over 39.5 years. If you paid $39,500 for the building, you divide that by 39.5 years and get $1,000 in annual depreciation deduction. See, it's that simple! But wait, how does this compare to the MACRS depreciation mentioned earlier? MACRS requires knowledge of building componentry and how it is all constructed. Is your accounting professional also an architect, engineer or builder?

IRS MACRS - Modified Accelerated Cost Recovery System

Allow me to ask you a question. When you talk with your CPA, EA or tax professional, do you ask them to find ways for you to pay MORE federal income taxes? I'm guessing not. Most likely you beg them to find ways to cut your taxes as much as legally possible! MACRS is the answer. MACRS uses multiple asset lifelines for depreciating the building and land. Again, to simplify, there are four basic asset lives you can use to depreciate the building and land. 5 years. 7 years. 15 years. 39.5 years. (If you own any kind of residential real estate, then it is 27.5 years)

Here are some examples of 5- and 7-year assets:

  • carpeting, vinyl flooring, millwork or casework, cabinetry, decorative features like lighting & wall sconces & ceiling fans, process-related electrical systems or plumbing systems or mechanical systems, and much more.

Here are some examples of 15-year assets:

  • landscaping, parking, sidewalk, curbs, fencing, site lighting, security system, drainage ditches and collection basins, monuments, signage, and much more.

Why can't my CPA do this?

As I briefly mentioned above, the IRS prefers for those who have knowledge of building construction to identify the assets that qualify. In a word, can my CPA do this? Yes. Remember though, do you want to mess with the IRS? The IRS, an entity that can summarily shut your business down? If you frequent Vegas, I guess I know your answer. However, for the rest of us sane individuals, we will choose to err on the side of caution.

Work with tax-trained engineering professionals

Cost segregation forensic tax engineering professionals have dual training in taxes and building knowledge. They are highly trained specialists in a boutique industry. These pros understand the nuances of the Internal Revenue Code. Forensic tax engineers know the difference in a GFCI circuit and a GFPE circuit. Cost segregation professionals know what the "permanency test" means in relation to how building components are joined. There are literally thousands of "tests" to apply to a building and grounds to determine when the asset qualifies for "accelerated" depreciation. You want to be as accurate as you can be when dealing with the IRS.

Seek out a cost segregation forensic engineer. Start legally cutting your federal income taxes today. It's your money, why wait?

IRS 10/15 Tax Deadline & Tax Planning

Posted on September 19, 2018 by Jeff Hobbs
IRS Another 10/15 IRS tax deadline is upon us and like every year, way too many taxpayers are still scrambling to find ways to cut their taxes. Proper tax planning in advance avoids this "wait to the last minute" mentality. So why wait? Procrastination is normal for most but it shouldn't enter into the realm of tax planning. While there are some "rare birds" out there who don't mind overpaying their taxes, most taxpayers tell their accountant, enrolled agent or bookkeeper to find as many deductions as they can. Why? Obviously to pay as little in taxes as they legally can! Right! I mean, who calls their CPA and says, "hey CPA, please help me pay as much in federal income taxes as you can possibly find!"? Do you tell your EA, hey, I'm not paying enough taxes, can you help me pay more? Of course, this is absurd. Listen, here's the point. 10/15 doesn't have to be the date you put off planning for just because you know that's the last day you can write that darn check to the IRS. Get with your CPA, EA, accountant, bookkeeper, tax attorney - heck, your mother or whoever you use to do your taxes - and plan now for 2018. NOW! In fact, here's a tip for those of you who own commercial real estate or residential rental property. Mitigate your IRS taxes! There are parts of your building or rental house that are called "tangible personal property" under the Internal Revenue Code. It is under IRS Sec. 1245 of the IRC. Some of these parts, or assets, are building components like carpet, vinyl flooring, cabinetry, millwork, casework, decorative lighting, internet or phone cabling, security system, process-related electrical-mechanical-plumbing systems, and much more. Outside the building are land improvements under IRS IRC Sec. 1250. They include landscaping, parking lot or driveway, sidewalks, drainage and collection basins, fencing, signage, monuments, and more.

Reduce your Tax Burden!

These assets and more qualify for 5-, 7- and 15-year depreciation periods. These assets are always set up on 39.5 years for commercial and 27.5 years for residential. The reason is simple. The accounting industry as a whole are not architects or engineers or even builders. That is important to note because the IRS says "...it requires those who have knowledge of, or training in, construction and/or construction techniques." How many CPAs, EAs, bookkeepers, or tax attorneys do you know who is also an architect or engineer? Can I use my CPA or EA? Glad you asked! Since the IRS says you should use architects or engineers with special knowledge, do so! Search for the best to do this specialized work. You are dealing with the IRS, an entity with almost unlimited power. Do you want to risk using unqualified people to do work for you that goes to the IRS? Do you want to risk using your CPA or EA who are not qualified, especially when the IRS Chief Counsel wrote a memo saying so? Who should I use per the IRS?

IRS Forensic Engineer

Forensic cost segregation engineers are the only ones who are sufficiently qualified. The reason is simple. They always use all 32 primary divisions of the building code. Why is that important? Think about it. If you have a jigsaw puzzle with a thousand pieces but only use 800 or so to build the puzzle, will it look like the picture on the box? Of course not! That is why you want to use a forensic cost segregation engineer. They don't leave any puzzle pieces on the table. They take every single little building component down to the nuts, bolts and screws. You may ask yourself, but won't that cost too much? Will it make financial sense to use such highly professional people? In a word - yes. While forensic engineers are more expensive, they will always return tens to hundreds of times their fee in tax savings. Don't settle for less than the best. Remember, you are dealing with the IRS. Don't scrimp or cut corners. Get started today for 2018! The IRS hopes you don't!

Cost Segregation, Cannabis & IRC 280E

Posted on September 04, 2018 by Jeff Hobbs
Cost segregation, Cannabis and IRC 280E – how are they related and why does it matter? First of all, any one of these subjects is a challenge to navigate on it’s own merits. I am about to deal with all three as they relate to each other. What is cost segregation? What is cost segregation? It is the process of identifying personal property assets that are grouped with real property assets and then reallocating those personal property assets for federal tax reporting purposes. This comes under MACRS – Modified Accelerated Cost Recovery System. So, why does this matter, you may ask? Simple. When you talk with your accountant, CPA or tax professional, do you ask them to find ways for you to pay MORE federal income taxes? Of course not – how ridiculous! You, like 99.9% of others, beg your tax professional to find every available tax deduction they can find. By the way, here is another important point to consider. Proper allocation requires engineering expertise to pass IRS scrutiny. What I mean is this – do you go to your family doctor to have your cancer status evaluated? NO, you go to your Oncologist. So why go to your accountant to have engineering work done? In fact, the primary accounting professionals publication penned an article on cost segregation. The Journal of Accountancy states, “Cost segregation [studies] can provide real estate purchasers with tremendous tax benefits. Buyers of real estate should obtain an engineering report that segregates assets into four categories: personal property, land improvements, building components, and land.” Cost segregation & the Cannabis Industry Cost segregation is a complex tool that can be applied to any commercial real estate, especially the Cannabis industry. Here’s why. All Cannabis commercial real estate entities operating under the guidance of IRC Sec. 280E, in states where it is legal, qualify for accelerated depreciation treatment. That means assets that your CPA would properly book in at 39.5 years on your depreciation schedule (fixed asset schedule - FAS) would actually qualify for 5-year, 7-year and 15-year depreciation. Now, here are some examples of building components that might be identified as 5-year personal property versus 39.5-year building property: they include task-specific lighting (grow-lights to include LEDs), dedicated electrical/mechanical/plumbing systems supporting Cannabis propagation/growth, specialty mechanical systems used to climate-control “grow facilities”, removable floor coverings, hydroponics systems & irrigation systems, security systems, low-voltage data wiring, and much more. Furthermore, many land improvements including a parking lot, sidewalks, curbing, landscaping, fencing, site lighting, security system, fencing, stormwater management (drainage and collection basins), decorative site features like ponds, flag poles, and monuments, qualify for 15-year accelerated depreciation treatment. All of the above are in addition to the normal Fixtures, Furniture and Equipment (FF&E) your accountant books as 3-year, 5-year or 7-year assets – as well as Machinery and Equipment (M&E) for those same periods. By way of example, a typical Cannabis facility with the necessary infrastructure, process-related systems and building envelope, will have approximately 18% to 30% of the entire project reclassified to 3-, 5-, 7-, and 15-year asset lives. That means $180,000 to $300,000 in additional depreciation per million dollars invested in the project – minus land cost. If you have a $3,000,000 facility (minus land), that’s $540,000 to $900,000 in additional depreciation in the early years of ownership. Imagine what that does for your cash flow. If you are in the 30% federal income tax bracket and 5% state income tax bracket (total 35%), that equates to $189,000 to $315,000 in tax deferral/savings. It’s your money. Why give it to the IRS if you can keep it? New construction vs New acquisitions Furthermore, cost segregation can be applied to both “new construction” and “new acquisitions” of older facilities regardless of when they were constructed. That’s correct. The IRS allows cost segregation to be applied to assets acquired as far back as January 1, 1987. The Internal Revenue Code allows a change in accounting method under (IRC) Sec. 481(a) and it is known as the “catch-up” provision of the tax code. What this means to you is now is the time to use cost segregation to mitigate, and perhaps eliminate, your federal and state income taxes to the extent allowed by the Internal Revenue Service tax law. Internal Revenue Code Sec. 280E Of course, as a Cannabis owner, you need to work within the law as written and as adjudicated under Sec. 280E. Let’s define it under the Controlled Substances Act. It forbids businesses from deducting otherwise ordinary business expenses from gross income associated with the “trafficking” of Schedule I or II substances. Cannabis - “marijuana” – is a Schedule I substance as applied to state-legal Cannabis businesses. Hey, don’t shoot the messenger here. I’m merely reminding you of what we are facing in the industry. Other than it being a pain in the rear, how do we work with what we’ve got? Well, we have the CHAMP v Commissioner case that facilitates how to navigate this business. However, it is not all-encompassing nor is it all-inclusive, at least when it comes to states without legalization. What types of business expenses are scrutinized under 280E anyway? Well, here’s a list, though not all-inclusive –
  • Employee salaries
  • Utility costs like electricity, internet and phone service
  • Health insurance premiums
  • Marketing and advertising costs
  • Repairs and maintenance
  • Rental fees for facilities
  • Routine repair and maintenance
  • Payments to contractors
Cannabis businesses that are “state legal” are allowed to deduct the Cost of Goods Sold (COGS) on their taxes. Additionally, Cannabis owners have made deductions of their non-Cannabis business activities. It is important to note that Cannabis owners have also followed guidance from Sec. 263A of the IRC, allowing the business to capitalize on indirect costs such as administration and inventory. This, in addition to the amount paid in state excise taxes. Employ Qualified Tax Professionals It is highly recommended that you consult with a tax professional who is exceptionally trained and knowledgeable in the Cannabis industry. This is NOT an easy, nor fully legal in all states, business to “play chicken” with the IRS over. Hire a professional tax person, CPA – tax attorney – Enrolled Agent, with direct Cannabis industry knowledge and who has successfully defended his work with the IRS. The key to understanding and applying the benefits of cost segregation to your Cannabis facility is to engage professionals in their specific areas of expertise. Doing so will save you, not only money and headaches but also will help you avoid a wrong turn with an entity (IRS) who has no problem putting you out of business. Capiche? So, the moral of the story is… Don’t go to your dentist to get your prostate examined! Otherwise, you will!

Cost Segregation and Its Benefits to Real Estate Investors

Posted on April 09, 2018 by Jeff Hobbs

A responsible investor makes sure that they are on top of their tax obligations. If you have real estate properties, it’s important that you identify assets and costs to be able to classify assets for tax purposes. This is called cost segregation.

What is cost segregation?

According to experts, cost segregation is a crucial tax strategy that could generate cash-flow in real estate investing. What this process does is to look at a depreciable real estate property as land improvements and personal property elements, not only as a building and land.

Before 1981, real estate investors were allowed by the IRS (Internal Revenue Service) to break their depreciable assets into components. This “componentization study” is for investors to qualify for a credit known as the “investment tax credit,” which is defined in Section 38 of the Internal Revenue Code. During that time, it was a common practice to identify the personal property that was built into or attached to a depreciable property.

How does cost segregation benefit real estate investors?

Nowadays, a cost segregation study is crucial as it helps investors in real estate to determine the assets in a building’s acquisition or construction with a depreciable life that can be lessened to 5, 7, or 15 years.

Once the assets are identified, the cost associated with them are then classified to help the owner accelerate the depreciation of the property in question for tax purposes.

Rather than wait until a real property reaches its depreciable life, which is 39 years, depreciation can happen sooner by segregating the cost of the four components, namely, personal property, building, land, and land improvements, and accelerate depreciation on part. This allows taxpayers to have cash flow savings simply through decreased distributions, which are essential in covering investors’ income tax liabilities.

For example, if an asset has a value of $400,000, each $100,000 of that asset can be reclassified to a 5-year recovery period, instead of the 39-year recovery period. Assuming a 5% discount rate and a 35% marginal tax rate, there will be a net-present-value savings of $16,000.

Aside from decreasing the depreciable life of an asset, the double-declining balance method may also be used for personal property, generating the most tax benefits. This method takes into account carpeting, furniture pieces, fixtures, equipment, and window treatments, to name a few.

On the other hand, sidewalks, fences, landscaping, and paving are used in the land improvement category. All land improvements will have a 15-year recovery period on the 150% declining balance method. Using the straight-line method, all costs associated with the building structure will have a depreciable life of at least 39 years.

How to find the best cost segregation specialist?

A cost segregation study is no walk in the park. For this reason, it’s recommended that a taxpayer who is into real estate investing looks for an expert should they want to enjoy the benefits of segregating costs.

Here are some tips to help you find the best candidate.

1. Conduct a thorough search.
To find a qualified cost segregation specialist, you must know where to look.

First, search the internet for local agencies that provide such service. But make sure you are not talking to a middleman. Second, find out how long they have been in the business of providing cost segregation studies. How many studies have they delivered successfully?

2. Find out if they employ engineers.
Cost segregation involves classifying components of real estate properties. Because of this, a cost segregation study would only be legitimate if the provider works with licensed engineers who are experts in construction, engineering, and cost estimation.

3. Ask if they have tax experts.
Accountants with enough experience in taxation and accounting are also essential in this project. To produce quality output, the cost segregation expert will need to employ accountants and tax experts to ensure that they are on top of the ever-changing tax rules and precedents.

4. Ask for work samples.
Cost segregation reports need to be detailed for you to understand how they have come up with such computations. Reports should also conform to the IRS’ requirements should you be audited. See to it that the sample works shown to you by the cost segregation specialist is as detailed as possible.

5. Know about their fees.
There’s no standard rate for cost segregation fees. Make sure you compare fees from at least three different agencies. However, don’t settle for the cheapest one. Be sure to compare the quality of their services to know which one is the best.

Final tips

Contact Segregation Holding to get to know more about a company that has dedicated its time and resources to providing top-notch cost segregation services. We have 59 well-trained engineers and architects who will help ensure that they deliver according to or even exceeding client expectations.

We also have staff members who are experts in construction, civil engineering, and architecture, as well as accounting. Give us a call today at 972-865-9050.