IRC Section 1245 Definition:
A portion of the Internal Revenue Code states that depreciable property that has been sold at a price in excess of it's depreciated or salvage value may qualify for favorable capital-gains tax treatment.To find out more, go to...
What is accelerated depreciation?
Well, in layman's terms, it is the depreciation of fixed assets at a faster rate early in their useful lives. Accelerated depreciation reduces the amount of taxable income in the early stages of asset life. The result is, tax liabilities are deferred. The net effect of accelerated depreciation is the company pays more taxes in later years. Time-value of money proves our dollar is worth more today than tomorrow.
Are there different methods of accelerated depreciation?
There are several calculations available for accelerated depreciation. One is the double-declining balance method...another is the sum of the year digits method. For our purposes, we will discuss the double-declining balance method of accelerated depreciation. This method of accelerated depreciation is applied when cost segregation has been employed to allocate building components according to the Internal Revenue Code. Accelerated depreciation, using this double-declining balance method, is applied under Modified Accelerated Cost Recovery System (aka, MACRS). MACRS uses 5 basic depreciable periods (5, 7, 15, 27.5, & 39.5 years) as applied to building components. Under special circumstances, these periods can vary. For example, in Oklahoma, much of the state is designated as Qualified Indian Reservation Property. As a result, these depreciable periods change to 3, 5, 9, 20, and 22 years.
What does accelerated depreciation do for me?
Simple. Accelerated depreciation does these things:
Does applying accelerated depreciation make sense for me?
CPA is ecstatic with cost segregation results for her office!
After providing the CPAs with our free benchmark estimate, our analysis showed about $20,000 in federal income tax credit. The results of our study provided them with almost $24,000, a 20% increase in benefits...wow! That gave them a 600% return on investment!
Cost segregation is the term coined by the IRS when applying MACRS depreciation to building components. MACRS is an acronym for Modified Accelerated Cost Recovery System. This is the method of depreciation all commercial property is supposed to use. However, 95% of commercial real estate is set up on the 39.5 year straight line method. Why? This is a good question considering the IRS requires MACRS when contemporaneous records are available.
We are a pure engineering firm that partners with accounting firms. We partner with CPAs and accountants to give their CRE clients huge income tax refunds.
Listen, if a CPA believes in cost segregation enough to apply it to their own building, doesn't that tell you it's something you should apply?
For a free estimate of benefits, go to www.GetYourTaxRefund.us and complete the brief questionnaire. Let the real numbers decide if it makes sense.
Cost segregation and the IRS are likened to your hand fitting into your glove...snugly.
Cost segregation actually came about as a result of Hospital Corporation of America suing the IRS...and winning! The Supreme Court of the United States heard arguments from opposing counsel and ruled that there are building components qualifying for shorter depreciation periods...5-years, 7-years and 15-years. This is simple mathematics. Time-value of money says that a dollar is worth more today than it is tomorrow.
Segregation Holding is a forensic engineering firm that applies all of the Internal Revenue Code to the advantage of the commercial property owner. Specifically, we use IRC § 481(a), the "catch-up" provision. This little section of the tax code allows us to give any commercial property owner a windfall tax refund. Without amending a single tax return, we can go back to January 1, 1987 and get your overpaid taxes paid to you in the current tax year. The IRS grants what is called "automatic consent." For you, the taxpaying property owner, it means the IRS gives you all of those overpaid taxes simply by filing Form 3115. Segregation Holding provides that form as part of our deliverable at no additional charge.
So, if you own or lease commercial real estate of any kind, we can help. Our team of forensic engineers are highly trained in building componentization and applying the tax code to those components.
Feel free to contact us today through our website at www.SegregationHolding.com or you can request a free estimate of benefits by completing our client questionnaire at www.GetYourTaxRefund.us.
Ranch buying in the Rockies (Rocky Mountain West) and building it into your dream property is a wonderful experience. Knowing a few things up front can make creating your vision even more enjoyable. I have found that many of my clients are surprised by the cost to build on a ranch, so I would like to explain the primary factors that drive these costs and provide a brief explanation for each of them. The primary factors are remote locations, engineering considerations, extreme temperatures, and necessary professionals.
Building up a quality ranch in the Rocky Mountain West requires pulling from a workforce that is most often far from the location of the building site. I have seen cases where the general contractor traveled as far as 250 miles to build on a ranch. This is often necessary to find a company that possesses the business infrastructure, workforce and full understanding of all that a complex, multi-million dollar project entails. Using a workforce that is far from their home office adds cost because it requires housing, meals, transportation and increased wages for the workers. This is money well spent when you are getting a company that understands what it takes to do a remote ranch project properly.
Much of the Rocky Mountain West is located in the Intermountain Seismic Belt. The potential for earthquakes requires extra structural measures to be taken. Montana, for example, has recorded an earthquake with a magnitude of 7.5. Though this magnitude is rare, many smaller quakes occur each year, giving cause for ranch structures to be designed and inspected by a professional engineer. Many structural elements are required that hide within the floors, walls and ceilings and add cost, though they go unseen.
Considering the fact that some areas in the Rocky Mountains receive over 400 inches of snowfall annually, a ranch's roof structures must be designed very precisely. Calculations must be made and engineered specifications given for each structural component that goes into the roof system, often times requiring expensive steel I-beams and structural lumber to be utilized.
Wind is a defining part of the Western landscape, with gusts recorded over 100 mph. It blows through the valleys and makes it way up to the peaks. This becomes a very relevant concern when it comes time to build. Think about those long-abandoned barns and houses that dot the landscape of the West. They all lean with the prevailing wind. This is why modern building practices incorporate specified structural elements to hold the buildings upright and intact. These elements, though hidden, add cost.
When building on a mountainside, there must be geotechnical testing performed. This will give an analysis of the sub-surface conditions and let you know if the soil is suitable for a building site. Sometimes the soil is structurally sound. However, the soil on mountains can tend to shift, so this will require specified action to be taken in order to build a proper foundation that will hold the structure in place. In some cases, the existing soil must be removed, down to the depth determined by the engineer, and then replaced by structural soil. In other cases, the engineer will decide to leave the soil in place and do a micropile foundation. This is where many structural steel tubes are drilled into the ground until they hit bedrock, then they are filled with grout. The traditional concrete foundation is then built on these micropiles. This allows the soil under the structure to shift, while holding the structure in place. Either of these foundational elements adds to the cost.
The temperatures in the Rocky Mountains will range from sub-zero to over 100 degrees. It is common to have significant swings in temperature over short amounts of time, the ground freezes as deep as 60 inches, there’s high wind, heavy snowfall, and spring melting causes the streams and rivers to flood and all of these factors require that buildings are constructed to the highest, most modern standards available. Considerations such as waterproofing, insulation, cold roof systems, smart framing, ventilation, humidification, flood control, soil erosion control, waterway protection and road placement are just some of the countless things to consider. These factors are in addition to what a normal building project would require and consequently increase the cost.
The common progression when realizing ones dream of owning a ranch is to contact an attorney, buy the land, hire an architect, hire a land and stream consultant, and finally hire a general contractor. However, this system is flawed in many ways. This line of thinking requires the buyer to have time to focus all of their energy on their ranch project. It assumes the buyer is fully up to date and educated on everything from soil conditions, to grazing right leases, to best construction practices, and the list goes on. The buyer is often wrapped up in “learning as they go” and find themselves frustrated at how all-consuming the actual work of realizing their dream of owning a ranch quickly becomes. The best way to maintain control of the project is to bring in all of the required professionals from day one. Much of the team should be assembled before or at least in conjunction with the ranch going under contract. This is necessary to help the buyer understand the viability of their project and if the land is suited to fully meet their requirements. A full team of professionals should include a ranch broker, land attorney, CPA, tax attorney, cost segregation engineer, agriculture and livestock consultant, environmental engineer, land and stream consultant, architect, general contractor, and an owner’s rep/program manager to oversee the entire process. At first this long list of professionals may seem like added cost, but at the end of the day, these professionals are focused on minimizing the cost of the ranch in both the short and long term through income taxes, real estate taxes, construction costs, and general overhead of the ranch operation.
The best way I can put it is that you have to look at the life cost when you are buying and building a ranch in the Rockies. This is not the kind of place where you can just throw together a simple building. You should assemble a team that has experience in this type of climate. Find resources that will provide you with detailed questions to ask each of them. Have them walk you through their quality assurance process and ask them to tell you some things they learned from the last house they built or designed that will make your project be their best one yet. Finally, ask them why they live in the Rocky Mountain West. Your team has to not only understand, but share your passion, or they will never be looking out for your best interest.
Austin Rector, President
Can cost segregation help list and sell more commercial property? Yes!
Commercial property owners can employ cost segregation as a tool to help sell their properties. By offering the property with an engineered cost segregation study they do these things:
2) Reduces real estate transfer taxes
Section 1245 property assessed as FF&E which has lower valuation
Escrow requirement is correspondingly reduced which positively affects monthly operating expenses (FF&E…Furniture, Fixtures & Equipment)
3) Reduces Property & Casualty premiums (depending upon the jurisdiction)
Again, Section 1245 property is assessed like FF&E which has a lower premium>
Again, reducing escrow requirements
4) Debt-service coverage is increased allowing for a negotiated reduction in mortgage rate
This happens from the reduced income tax burden in the critical first five years of ownership
In addition to the reduction in operating expenses from real estate taxes and insurance
5) These reasons allow the “seller” to advertise their property with “cash” at closing which differentiates their property from the competition
Yes, the seller pays our fixed fee but they are buying huge benefits at pennies on the dollar
And yes, our fee is fully expensable and can be rolled into the price of the property
6) All of these areas addressed is sufficient to engage cost segregation
Cost segregation is an increasingly used tool to mitigate income taxes. Now, with the advent of the finalized “repair” regulations, cost segregation is virtually required by the IRS. In fact, how else can a commercial property meet the IRS regulations without it?
For the commercial real estate professional, cost segregation is “the” way to differentiate yourself from competition. You will list more property and sell more property. How could you not?
For more details, contact us at…
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Last fall we had the privilege of meeting with the owners of DFW favorite, BoomerJacks restaurants. Well known in the Dallas/Fort Worth area, BoomerJacks are known for their amazing wings and chicken fingers.
On this fine, fall day, we met with Brent and Randy. We shared what cost segregation could do for their cash flow. Cost segregation simply identifies assets that qualify for accelerated depreciation. Some examples include cabinetry, millwork, dedicated plumbing (like in the bar area), and dedicated electrical (like in the kitchen). Other examples are decorative lighting, those “Big Ass Fans,” the fire pit on their deck, landscaping, parking lot, curbs, sidewalks, and more. BoomerJacks is loaded with all of the above.
The questions that arose next? What does accelerated depreciation do for us? And how does the IRS look at it? First, accelerated depreciation is the result of reclassifying assets. For BoomerJacks that meant from 39 years to 5 years inside. Outside BoomerJacks it meant from 39 years to 15 years. So, assets inside are called “tangible personal property.” Exterior assets are called “land improvements.” The IRS calls this application of accelerated depreciation, Modified Accelerated Cost Recovery System (MACRS).
Next? What does do for us, bottom line? I love that question!!! In the case for BoomerJacks, our initial benchmark estimate showed over $370,000 in accelerated depreciation for 2013. That equates to over $140,000 in federal income tax benefits. After we completed our site surveys and “crunched” the numbers, we delivered almost $1 MILLION in accelerated depreciation. That means almost $400,000 in federal income tax benefits! Wow! BoomerJacks owners pocketed some cool cash!
Do you own a restaurant? Are you in need of reducing or eliminating your income tax burden this year? Would you like a free benchmark estimate? It’s simple. Go to www.SegregationHoldingLimited.com. Complete the simple client questionnaire. Click submit. That’s it. Within 24 to 48 hours you will learn how much you qualify for. That’s correct. You will find out how much of an income tax credit or refund you can get. You will also see our fixed fee for service. In most instances, the tax refund is 10 times more than our fee. Sometimes even more!
Cost segregation delivers results every time Segregation Holding LLC applies it!
Questions? Give us a call at 972-865-9050 or 972-897-8019!
Today more than ever, CPAs are in need of a good, quality cost segregation firm. The reasons are many...
Cost segregation firms that are engineering-based make excellent partner firms to CPA firms. We are not in competition, rather we serve the same clientele. It makes sense in today's competitive environment for the CPA to team with a quality engineering firm.
What should the CPA look for in partnering with a cost segregation firm?
The CPA is a trusted partner to most commercial property owners. Since the CPA has a fiduciary responsibility to the client, it makes sense to use all available tools. Cost segregation is one of them best suited to reducing the income tax burden. When the CPA is proactive in sharing such a tax-savings tool, they increase their client's confidence in them. Additionally, the CPA would have an engineering partner for quick consultation on CRE matters.
In all aspects the CPA becomes the hero to their client. Why not reach out to a quality cost segregation engineering firm today? Your clients will be glad you did. You, as their CPA, will too!
Follow our tweets at Twitter. “Like” us on Facebook! Connect with the owner, Jeff Hobbs, on LinkedIn. Want to learn more? See our recent continuing education presentation for the TACPA in Austin, Texas.
Want your questions answered now? Call us at 972-865-9050 or 972-897-8019.
We’re here to help you acquire and retain quality clients!
Section 752 introduces new proposed regulations.
On January 30, 2014, the Treasury Department issued proposed regulations under Section 752 of the Internal Revenue Code addressing partnership liabilities and under Section 707 of the Code relating to disguised sales of property.
The proposed section 752 regulations provide new guidance on classifying and allocating partnership liabilities. The new section 752 regulations fundamentally alter the way economic risk of loss is determined with the goal that only “commercial” guarantees will be afforded recourse treatment, and thus be allocated to the guaranteeing partner, for income tax purposes. All other guarantees – in particular “bottom dollar” guarantees – will be ignored. The proposed section 752 regulations also modify the allocation of excess non-recourse liabilities among partners.
The proposed section 752 regulations on both recourse and non-recourse liabilities generally will apply only to liabilities incurred or assumed by a partnership, and to payment obligations entered into by a partner, on or after the date of enactment of final regulations. However, under a special transition rule, for seven years following the date of enactment of final regulations, a partnership may continue to apply the existing regulations to treat an existing partner as recourse in respect of indebtedness in an amount equal to the excess of the existing partner’s recourse liabilities over the existing partner’s adjusted basis in its partnership interest, in each case immediately prior to the effective date of the final regulations, subject to certain limitations.
Contributed by:Goodwin Proctor LLP