COST SEGREGATION: A SMART TAX STRATEGY THAT IS OFTEN OVERLOOKED

Presented By: Brendan Walsh

QUESTIONS How to ask questions during today’s webinar:

• Use the “Chat” or “Question” feature on the GoToWebinar panel.

• You can also email Dennis Keller at djkeller@cshco.com.

• Questions will be addressed at the end of the webinar.

LET’S GET STARTED

• Brendan Walsh, Tax Manager, leads the CSH Cost Segregation Practice

• Brendan has earned his designation as a Certified Cost Segregation Professional, as authorized by the American Society of Cost Segregation Professionals

• Three in the state of Ohio

COST SEGREGATION: A SMART TAX STRATEGY THAT IS OFTEN OVERLOOKED

Presented By: Brendan Walsh

ON TAP FOR TODAY

• What is cost segregation? • How organizations could benefit from a cost segregation study • How to identify projects that would qualify for this service • How a cost segregation study is conducted • Common questions and misconceptions • How to choose a cost segregation provider • Current cost segregation market issues and trends • Resources

WHAT IS COST SEGREGATION? • A tax planning technique that separates real property into various

depreciable categories

• Allows taxpayers to depreciate property over much shorter periods of time than the typical 39 year (or 27.5 year) period

• The cost of a building can be segregated into 5, 7, 15, and 39 year categories

• A Cost Segregation Study determines how much of the building cost goes into each category, and provides documentation and support for that determination

HOW CAN ORGANIZATIONS BENEFIT FROM A COST SEGREGATION STUDY?

• Increased depreciation in the first years of building ownership

• Increased cash flow

• Time value of money

• Bonus depreciation

PRIOR YEAR PURCHASES • Even if you purchased a building in a prior tax year, cost

segregation is available

• Catch up on missed depreciation

• No amended returns required

• File Form 3115 (Change in Accounting Method) and attach to federal return

• Potential benefits are significant

HOW TO IDENTIFY ACTIVITIES THAT QUALIFY FOR THIS SERVICE?

• Purchases

• New construction

• Renovations

• Additions

• Owner/tenant

• Examples

HOW A COST SEGREGATION STUDY IS CONDUCTED

• Cost seg studies come in many shapes and sizes

• Different methods can be used to perform a study

• IRS standard – Detailed Engineering Approach

• Cost seg report must connect the dots and provide support for asset classifications

ELEMENTS OF A QUALITY COST SEGREGATION REPORT

• Summary letter/executive summary

• Narrative report

• Schedule of assets

• Schedule of direct and indirect costs

• Schedule of property units and costs

• Engineering procedures

• Statement of assumptions and limiting conditions

• Certification

• Exhibits

ELEMENTS OF A QUALITY COST SEGREGATION STUDY

• Preparation by an individual with expertise & experience

• Detailed description of methodology

• Use of appropriate documentation

• Site visit

• Interviews conducted with appropriate parties

• Use of a common nomenclature

• Use of a standard numbering system

• Explanation of legal analysis

• Determination of unit costs and engineering “take-offs”

ELEMENTS OF A QUALITY COST SEGREGATION STUDY (cont.)

• Organization of assets into lists or groups

• Reconciliation of total allocated costs to total actual costs

• Explanation of the treatment of indirect costs

• Identification and listing of §1245 property

• Consideration of related aspects – i.e. repair regulations

INFORMATION REQUIRED FOR COST SEGREGATION STUDY

• New Construction – Proposal phase o Construction cost o Square footage of new space o Use of new space (e.g., manufacturing, retail,

warehouse, etc.) o Date the facility will be placed in service

INFORMATION REQUIRED FOR COST SEGREGATION STUDY (cont.)

• New Construction – Study phase o Architectural drawings o Construction contract o Construction budget for the project (if not included with the

contract) o Contractor’s payment applications throughout the project o Change orders o Contractor’s final application for payment o Final project costs breakdown

INFORMATION REQUIRED FOR COST SEGREGATION STUDY (cont.)

• Acquired Properties – Proposal phase o Tax depreciation schedule o Use of the building (e.g., office, retail, mixed-use, etc.) o Square footage of the building

• Acquired Properties – Study phase o Available construction documents (e.g., drawings, contract, etc.) o Offering Memorandum o Appraisal o Site visit is critical!

COST SEGREGATION PROCESS

• Contact cost segregation provider to prepare proposal

• Provide necessary documents

• Proposal will estimate depreciation benefit and ROI

• Quality proposal will include Net Present Value estimate

• Some industries can benefit from cost seg more than others

INDUSTRY EXAMPLES

Property Type

Typical % of project cost reclassified

Increased depreciation years 1-5 for

$1,000,000 project

Present value tax benefit for

$1,000,000 project Heavy Mfg/Processing 30-60% $162,000-$324,000 $51,000-$102,000

Car Dealerships 25-40% $135,000-$216,000 $42,500-$68,000

Offices 15-25% $81,000-$135,000 $25,500-$42,500

Restaurants 20-40% $108,000-$216,000 $34,000-$68,000

Apartments 20-35% $108,000-$189,000 $34,000-$59,500

Retail 20-30% $108,000-$162,000 $34,000-$51,000

EXAMPLES OF PERSONAL PROPERTY

• 15-year – parking lots, fences, etc.

• 7-year – office furniture, desks, safes, etc.

• 5-year – dedicated electrical, shelves, signs, etc.

COMMON QUESTIONS/MISCONCEPTIONS

• Doesn’t cost segregation only work on new construction?

• Is there a minimum building cost to be eligible for cost segregation?

• Isn’t this really just a timing difference?

• When should a cost seg study be done?

• How long does it take to complete a study?

• How much does it cost?

• What is the risk of doing a cost segregation study?

HOW TO CHOOSE A COST SEGREGATION PROVIDER

• Experience – construction and tax law/compliance

• Ethics – no contingency fees

• Adherence to standards set forth in IRS Cost Segregation Audit Techniques Guide

• Audit support

• Credentials – American Society of Cost Segregation Professionals (i.e., CCSP)

CURRENT MARKET ISSUES AND TRENDS

• Tangible Property Regulations

• Qualified Improvement Property

• Potential tax code changes in 2017

RESOURCES • American Society of Cost Segregation Professionals

(www.ascsp.org) o National organization for cost segregation providers o Mission is to create and maintain minimum quality

standards and a code of ethics for cost seg providers to adhere to

• Clark Schaefer Hackett (www.cshco.com)

QUESTIONS?

CONTACT

Brendan Walsh, JD, MBA, CCSP Tax Manager (513) 338-0908 bjwalsh@cshco.com