- My accountant probably did one. In the case of purchased buildings, if you do not have a specific appraiser’s report or a professional who has construction cost estimating expertise using national industry costing manuals such as RS Means or Marshall and Swift breaking out the various building components, then you definitely did not have a cost segregation study performed on the building.
- I don’t want to file an amended return. An amended return is not required. When a cost segregation study is prepared on a property purchased, acquired or improved in a previous tax year, you are allowed to “catch up” on all depreciation that would have been taken as if the cost segregation study was prepared at the date the property was placed in service. All of the “catch up” depreciation can be taken in the current tax year, without having to file an amended return.
- A cost segregation study won’t save any money. If the entity or pass thru entity is currently losing money the taxpayer may decide to either carry back or carry forward the losses generated. Thanks to H.R. 3548, that passed on November 6, 2009, you can carryback net operating losses for up to 5 years. The savings generally range from 35% to 46% of the additional depreciation generated from the study. For example, if a cost segregation study results in additional depreciation of $1,000,000, then a taxpayer in the 46% (federal plus state) tax bracket would save $460,000 in federal and state taxes over four years.
- We don’t have any assets to reclassify. Generally, 20-55% of building costs can be reclassified to shorter depreciable lives.
- Our chances of being audited will increase. Not according to the IRS. You are filing an automatic change in accounting method which the IRS has pre-approved. In addition, the IRS has issued a publication to follow in order to properly record the changes in depreciable lives. Keep in mind that you are going from an incorrect method to a correct method and the changes made are generally black and white issues within the tax code.
- There is no support if the IRS does perform an audit. There are hundreds of IRS rulings, procedures and court cases which allow for cost segregation studies. The report we provide details out every change with applicable support and documentation. Our firm has spent over 1,000 hours on researching cost segregation studies and performed thousands of such studies.
- We will get the deduction in the future anyway. Yes this is true, but not having a cost segregation study performed in effect gives the federal and state government an interest free loan for the first 15 years of the assets’ life. Who do you want holding your money? There are also advantages to doing a study if the building is going to be sold or upon the death of a building owner.
- We are in an alternative minimum tax (AMT) situation and/or the cost segregation study will put us in one. Congratulations! You are probably flush with cash. If this does occur, the savings will be at the 28% federal tax rate and not the 35% tax rate. Of course the amounts are large enough so it shouldn’t matter. In addition, the AMT taxes can be used against regular taxes in future years.
- My CPA has segregated percentages of construction costs based on invoices or contractors application for payment, so our company is already benefiting. Without the contractor/engineer expertise coupled with the tax law guidance, there will likely be valuable tax benefits left on the table. More importantly, this methodology will not withstand IRS scrutiny.
- There is no negative impact to not performing a cost segregation study. This is an incorrect assumption. IRS regulations require that a taxpayer compute depreciation on what is allowed or allowable. Therefore, if you improperly depreciate a 7-year asset over 39 years, the IRS could disallow the depreciation on the asset beginning in year 8. In addition, if the building is sold the IRS could increase the gain by reducing the basis in the building by the depreciation that should have been taken in prior years, but was not.
It’s no surprise our clients are focused on other things besides the next deal. The aggressive desire for new deals has been replaced with laser focus on the core business economics of their existing holdings. Read the rest of this entry »
Have you or your clients constructed, purchased, expanded or remodeled any kind of commercial real estate in the last 10 years? If so, cost segregation is a strategic tax deferral tool that allows companies and individuals to increase cash flow by accelerating depreciation deductions on their buildings. Read the rest of this entry »
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