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?