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Do You Have Hidden Cash In Your Building?

By Pam Duggar

200398520-001The new tax increases have pushed engineered cost segregation studies onto the center stage for commercial property owners. Increased expenditures and depreciation combat higher taxes. This is a well-vetted deferral strategy. Current governor of Florida, Rick Scott, opened the doorway for engineered cost segregation studies benefits to all taxpayers when his company won the landmark Hospital Corporation of America vs. IRS in 1997.

During March of 2012, Revenue Procedures 2012-19 and 2012-20 were published as a guide for implementing temporary regulations through the Change in Accounting Form 3115. These regulations offer commercial property owners tax benefits through favorable rulings on building improvement and repairs, and building component dispositions. A cost segregation study may be the key to unlocking these new tax benefits.

The Practicing CPA describes the process, noting that a cost segregation specialist can perform a nonintrusive, yet detailed engineering study of a building’s walls, flooring, and ceilings, as well as its plumbing, electrical, lighting, telecommunications, heating, and cooling systems. An engineering study can unlock a building’s maximum deductions by identifying and properly classifying building components. When an engineering based study is applied, the change approval is automatic, so there is no risk in utilizing this application. Form 3115, Change in Accounting Method, is filed with the IRS for approval.

The following are examples of tax savings by engineered cost segregation studies:

 

Property Type

Total Property Cost

Five Year Cash Flow From Tax Savings

Leasehold Improvements

$224 Thousand

$24,608

Dental Office

$556 Thousand

$55,450

Office Condo

$575 Thousand

$37,084

Retail Strip Center

$843 Thousand

$63,877

Medical Facility

$1.4 Million

$88,459

 

Does Your Building Have Ghost Assets?

rsz_82090134If your depreciation schedule on the books includes demolished parts of your commercial or residential rental building, you have “ghosts.” Whether it’s a replaced roof, HVAC equipment, walls, doors, windows, flooring, a showroom remodel, or a whole new front of the building—the new IRS Tangible Property Regulations now allow you to “exorcise” retired building parts from your depreciation schedule and write them down to produce a big tax deduction in the current year.

IRS Tangible Property Regulations state that this change allows a taxpayer to recognize a loss on the disposition of a structural component of a building. You no longer need to continue to depreciate amounts to structural components that are no longer in service over the long drawn out 39 years. The temporary regulations, therefore, mean that a taxpayer is not required to capitalize and depreciate—simultaneously—amounts paid for both the removed and the replacement properties. As a property owner, what you may find yourself asking is, “What was the removed roof, wall, flooring, etc. worth?”

It is never easy to value removed structural components. So, how does it happen? Contact a cost segregation firm who will provide you, the property owner, with a Cost Valuation and Asset Valuation Analysis. To produce this valuation, the firm will study past and present construction plans, invoices, photos, and conduct interviews and onsite building inspections. They will then provide you with a preliminary analysis of an estimate in the amount of tax deductions to be unlocked, and the study fee.

Your CPA needs to provide an accurate updated depreciation schedule. After the conclusion of the study, the assets are adjusted to reflect the acceleration of depreciation from 39 years to 5, 7, and 15-year categories. This results in more and accelerated depreciation expenses for tax purposes. The end result is a decrease in tax liability. Be aware that you are getting your tax savings up front and there is less depreciation to take in future years. These tax breaks can free up money for future purchases of income-producing property.

rob campbellIn the absence of real cost data, the IRS’s only suggestion is that an engineering-based cost segregation study is acceptable. As Rob Campbell  of Cost Segregation Services, Inc. (CSSI) says, “You can’t write down what you can’t value. You can’t value what you can’t document.”

 

For more information regarding CSSI and a Cost Segregation Study, contact Robert Campbell, MBA.
Phone: (386) 466-4997
Fax: (386) 719-4788
Email: rcampbell@uscostsegregation.com
Office: 344 NW Spring Hollow Blvd., Lake City, FL 32055
Website: www.costsegserve.com

 

PamBy Pam Duggar

Pamela Duggar graduated from the University of Wisconsin with a BA degree and obtained another 30 credits from Florida Southern University in accounting. She has been in public accounting for 33 years, and involved with the partnership of Duggar and Traylor, LLC for the past fifteen years. Additionally, she served as the Administrative Director for 22 cardiologists at St. Vincent’s hospital in Jacksonville, Florida for four years. She can be reached at pduggar@duggarandtraylor.com

 

 

 

 


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