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?
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.
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?
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 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 –
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!
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.
Buying your first real estate property, whether it’s a residential or commercial property, is a major milestone in life. Also, you’ve probably allocated a fortune for this big move, which means you wouldn’t want to lose any of your hard-earned cash.
To make sure you are making the right decision, here are important tips to follow:
1. Determine how much to spend for your purchase.
Wise buyers always know what they want, specifically the size, type and cost of the property they want to invest in. To avoid going overboard with your budget, plan out how much you’re willing to shell out for the property. Think about how much you can compromise or negotiate before taking the big leap.
2.Seek help from a real estate agent.
If you think you can’t handle the whole buying process on your own, it’s better to work closely with a real estate agent. A real estate agent can help you choose the right property, especially in consideration of the location, neighbourhood, and house plans.
3. Research, research, research.
Although you may have enlisted the help of an agent, it’s still a good move to do your own research. Search online for the best locations. iBuildNew is the site you might like to visit if you’re looking to just buy a piece of lot and build a home after. iBuildNew is Australia’s leading provider of home designs and prototypes. The company’s comprehensive array of models might serve as your inspiration in choosing your kind of home, property or land.
4. Get the right financing.
Money is a crucial part of buying a property. To get this off your table, try talking with a lot of banks and financing providers. Negotiate the credit limit you’re allowed to borrow to purchase your dream real estate property.
5. Partner with cost-segregation specialists.
Property tax and mortgage is one of the hidden devils of purchasing a property. Fail to consider this and you’ll spend the rest of your life paying off excessive tax. Good thing Segregation Holdings LLC (SHL) is here to the rescue.
SHL can help you audit and analyse the cost of each aspect of your property from the cost of the structure, the land and any other parts profitable for agribusiness. Remember, the role of a cost segregation specialist is very different from that of a CPA. While the latter audits and balances your books, the former makes sure that you’ll be able to separate your profitable properties from those for residential purposes. This will matter a lot during the calculation of your tax remittances and other government mandated fees for property owners.
6. Ask guidance from a reliable real estate lawyer.
Land ownership transfer and titling are merely two of the main process you need to prepare by the time you’ve successfully bought the property. However, these two tasks can become very taxing and time-consuming if you don’t know what to do and where to start. Hence, enlisting the help of a real estate lawyer can be a great help to ensure you’re newly purchased commercial or residential space is under your name. A good lawyer can speed up the transfer process, and, at the same time, guide you through the fine print. With his or her help, you’ll know whether you’re about to pay for additional, hidden fees or not.
Purchasing a real estate property might be an exciting one, but it is also a decision that needs thorough contemplation. Fail even slightly and you’re bound to spend your succeeding paychecks on hidden charges, too-steep mortgage, and unnecessary taxes. With the steps mentioned above, rest assured that you have the basics on real estate buying covered.
The goal of tax planning is to arrange your financial affairs so as to minimize your taxes. There are three basic ways to reduce your taxes.
Does Section 1245 Property Include Real Property?
Section 1245 property does include personal property. Assets such as computers, desks, chairs, copiers, etc. are all personal property falling under Section 1245. However, Internal Revenue Code Section 1245 does include real property assets. Let's have a look.
Section 1245 Property as Real Property
The property must be depreciable or amortizable in nature. It can be personal or real, tangible or intangible.
Although most real property is Section 1250 property, there are certain types of real property that qualify as Section 1245 property. Section 1245 real property is:
Cost Segregation Identifies Qualifying Section 1245 Property
When cost segregation is applied to a real property asset, commonly considered Section 1250 property, it reallocates qualifying building components into Section 1245, Section 1250 Land Improvements and Section 1250 Real Property.
Learn how to avoid double taxation and lower your employment tax liability by forming an S corporation.
What Is the IRS Depreciation Schedule for Commercial Real Estate?
Commercial real estate is an asset qualifying for depreciation. It cannot be expensed as an ordinary method of write-off. However, in 2011, the US Congress passed legislation that allowed for 100% bonus depreciation on commercial real estate. In effect, this allowed for full expensing of the commercial real estate as an asset.
One way to accelerate your depreciation is through cost segregation. This allows you to reclassify your building into it's individual building components, some of which have a life that is much shorter than 40 years. For example, if your building has a computerized security system, you could depreciate the computers in the security system over a five-year period. This moves a lot of your depreciation to the front of the depreciation schedule -- earlier in your ownership of the building -- and saves you money in the beginning. No doubt you have heard your CPA mention "time-value of money"! But by taking more depreciation up front, you have less depreciation to claim in the future. Of course, the dollar is worth more today than tomorrow, so that's fine.
Donor advised funds (DAFs) provide an immediate income tax deduction as well as four other tax benefits.