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.
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 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 –
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. 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 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
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!
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!
Don't Mess with the IRS!
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:
Here are some examples of 15-year assets:
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?
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.
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.