Cost Segregation Partners

Impact on New Tax Law - 179 and Bonus

2010-10-19T08:56:00.001-07:00

As I am flying 30,000 feet to the west coast on gogo inflight wifi, I am running thru scenarios on how the new Jobs Tax Act recently signed can impact taxpayers in 2010 and 2011. The good news is the 50% bonus depreciation has been extended thru the end of 2010 on new assets purchased. The other important change in terms of depreciation was the increased Section 179 expense, doubling to now $500,000 with a new phase out beginning at $2,000,000 of personal property additions. This can mean a dramatic impact to taxpayers in their fixed asset purchases as the year end fast approaches.

Take the example of a fast food franchisee who constructed 5 new locations with an average construction cost per store of $800,000 (exclusive of equipment package). The in service date in all locations will be December 2010. One may think I just spent $4,000,000 and I will get the full usage of bonus depreciation and possibility of the 179 expense deductions.

Well this can be true but the unfortunate news is if the taxpayer sets up the entire $4,000,000 in construction costs as real property 39 year assets, none of the $4,000,000 is eligible for either the 179 expense or the 50% bonus depreciation. So in doing so of the multi-million dollar investment the taxpayers 2010 recover via depreciation will be a minimal $12,840.

But cost segregation to the rescue! With an professional conducted engineered based cost segregation study, consultants can identify those constructed asssets that can be allocated a shorter depreciable life and thus become eligible for 179 and bonus depreciation. On an average fast food restaurant you can expect 20% of allocation to 15 year land improvements and 20% to 5 year equipment. Based on this reallocation the taxpayer with 179 and 50% bonus depreciation can expect a depreciation write off of over $1,070,000...Over one million dollars more than expected as a result of implementing a cost segregation study on the 5 locations.

The key to remember is the assets reallocated are not your typical equipment assets your CPA would find nor the true equipment items. These assets are ones that are hidden between the walls, under the flooring or above the ceiling tiles amongst many other assets. The substantiation of these assets is critical in setting up and depreciating these assets correctly from the start.

The Top of Orange County III

2010-10-13T09:53:00.000-07:00

Cost Segregation Partners is sponsoring "The Top of Orange County III," on Wednesday, October 20th from 6:00pm to 8:30pm at the Big Canyon Country Club in Newport Beach, CA. I will be there with Mike Rowan, one of Cost Segregation Partners' consultants. He will be speaking on the topic of accelerating real estate assets to create cash flow or tax rebates.

In attendance will be Orange County's top advisors and business consultants. Speakers include:

Mike Rowan, Consultant - Cost Segregation Partners
Jp Gough, CEO - OC Business Bank
Mike Issa, Partner - Ballenger Cleveland Issa
Rick Albrecht, Partner - Albrecht & Barney
Lance Rubachko, Associate Partner - Tax & Financial Group

Looking forward to meeting you all. Send me a note if you are attending. We would love to meet you: grant.keppel@costsegregationpartners.com

2010-10-06T13:35:00.000-07:00

Small Business Jobs Act of 2010

Changes and Likely Impacts of the Legislation
The Small Business Jobs Act of 2010 (SBJA) has just been passed by Congress, and it benefits more than just small businesses. It also provides tax-saving opportunities for larger businesses and individuals — including small-business investors, the self-employed and employees saving for retirement. Take a look at some of the details below and feel free to contact me for more information.

Business Capital Cost Recovery Incentives

Bonus Depreciation Extended
The Act retroactively extends bonus depreciation deductions that were allowed in 2008 and 2009 through 2010 and provides limited additional depreciation in 2011. Bonus depreciation applies to qualified property acquired and placed in service during 2010 or placed in service during 2011 if the property is long production period property1 or is transportation property.2 The additional deduction is equal to 50 percent of the adjusted property basis and is allowed for both regular tax and alternative minimum tax (AMT) purposes but is not allowed for purposes of computing earnings and profits. Qualifying property must be (1) MACRS property with a recovery period of 20 years or less; (2) water utility property; (3) non section 197 computer software; or (4) qualified leasehold improvement property.

The basis of the property and the depreciation allowances for the property must be adjusted to reflect the additional first-year depreciation deduction and regular MACRS depreciation applies to the remaining basis. In addition, there are no adjustments to the allowable amount of depreciation for purposes of computing a taxpayer's alternative minimum taxable income for bonus depreciation property. The amount of the additional depreciation deduction is not affected by a short taxable year. The taxpayer may elect out of additional first-year depreciation for any class of property for any taxable year.

First Year Depreciation Cap for Autos and Trucks Increased
The Act also increases the limitation under section 280F on the amount of depreciation deductions allowed for certain passenger automobiles by $8,000 in the first year from $3,060 for autos and $3,160 for SUVs and minivans. The $8,000 increase is not indexed for inflation.

Application of Bonus Depreciation to Long-Term Contracts
Additionally, the Act provides that for purposes of determining the percentage of completion under section 460(b)(1)(A), the cost of qualified property is taken into account as a cost allocated to the contract as if bonus depreciation had not been enacted, which allows contractors to take advantage of bonus depreciation even if they do not complete their project in 2010. Qualified property is property otherwise eligible for bonus depreciation that has a MACRS recovery period of 7 years or less and that is placed in service in 2010.3

The usefulness of these depreciation provisions will be enhanced by the nontax lending incentives found in the Act that will help to open up credit markets for small business that want to purchase equipment.

Section 179 Expensing
Prior to the Act, a taxpayer could elect under section 179 to expense up to $250,000 of the cost of qualifying property placed into service in 2008 through 2010 rather than to recover such costs through depreciation deductions. The allowable expense amount was phased-out once a taxpayer spent more than $800,000 on qualified property. For 2011, the expense limitation was set to drop to $25,000 and the phase-out was set to drop to $200,000. The Act increases the maximum expense amount for 2010 and 2011 to $500,000 and increases the phase-out threshold amount to $2 million. The Act also temporarily expands the definition of qualified property to include qualified leasehold improvement property, qualified restaurant property, and qualified retail improvement property but sets the maximum that can be expensed at $250,000.

The expense amount may not exceed taxable income for any taxable year. Any amount that is not allowed as a deduction because of the taxable income limitation may be carried forward to succeeding taxable years. No general business credit under section 38 is allowed for any amount expensed under section 179. The Act also permits a taxpayer to elect to exclude real property from the definition of section 179 property, which may prove useful to some business that are close to reaching the $2 million limit. Like the bonus depreciation provisions, the usefulness of this provision will be enhanced by the nontax lending incentives found in the Act.

Increase to Startup Expense Deduction
A taxpayer can currently elect to deduct up to $5,000 of start-up expenditures in the year in which its trade or business begins. The $5,000 deduction is reduced by the amount that start-up expenditures exceed $50,000. For taxable years beginning in 2010, the Act increases the deductible amount to $10,000 and increases the deduction phase-out threshold to $60,000. Start-up expenditures that are not immediately deductible must be amortized over 15-years. Start-up expenditures are amounts that would have been deductible as trade or business expenses had they not been paid or incurred before business began.

Cell Phones Removed from Listed Property Treatment
Property, including cellular telephones and similar telecommunications equipment, used in carrying on a trade or business is subject to the general rules for deducting ordinary and necessary expenses under section 162. In the case of certain listed property, no deduction is allowed unless the taxpayer adequately substantiates the expense and business usage of the property and special depreciation rules apply. The Act removes cell phones from the definition of listed property.

Small Business Tax Relief Provisions
Increase to Capital Gain Exclusion for Small Business Stock
Currently, individuals may exclude 75 percent of the gain from qualified small business stock (“QSBS”) acquired at original issue after February 17, 2009, and before January 1, 2011 and held for at least five years. For QSBS acquired before February 18, 2009 or after 2010, the exclusion rate is 50 percent. The Act increases the exclusion percentage after the enactment date from 75 percent to 100 percent. The amount of gain eligible for the exclusion by an individual with respect to any corporation is the greater of (1) ten times the taxpayer's basis in the stock or (2) $10 million. To qualify as a small business, when the stock is issued, the gross assets of the corporation may not exceed $50 million. The corporation also must meet certain active trade or business requirements.

5 Year Carryback and AMT Offset for Eligible Small Business Credits
The Act extends the carryback period for eligible small businesses to use the general business credit from one to five years. The general business credit generally may not exceed the excess of the taxpayer's net income tax over the greater of the taxpayer's tentative minimum tax or 25 percent of so much of the taxpayer's net regular tax liability as exceeds $25,000. Currently, general business credits in excess of this limitation may be carried back one year and forward up to 20 years. An eligible small business is a corporation (the stock of which is not publicly traded) or a partnership that has no than $50 million in average annual gross receipts for the prior three years. The bill also provides that the tentative minimum tax under the alternative minimum tax is treated as being zero for eligible small business credits. For any taxable year, the general business credit may not exceed the excess of the taxpayer's net income tax over the greater of the taxpayer's tentative minimum tax. Thus, an eligible small business credit may offset both regular and alternative minimum tax liability.

Reduction of S Corporation Built-In Gain Period
The bill also includes a provision that helps S corporations by providing that for taxable years beginning in 2011, for purposes of computing the built-in gains tax that is imposed on an C corporation that converts to an S corporation, the recognition period is the five-year period beginning with the first day of the first taxable year for which the corporation was an S corporation. This should allow more flexibility for these corporations to dispose of assets that either no longer meet business needs or can provide additional capital through sale.

Small Business Lending Provisions
The Act includes a number of important nontax provisions that will open up the credit markets to small businesses so that they can purchase capital and hire employees. To this end, the Act establishes a Small Business Lending Fund of $30 billion to provide capital investments to small community banks to increase small business lending. The fund is limited to banks that hold less than $10 billion in assets. The lending program is performance-based and incentivizes lenders that extend new credit by decreasing the dividend rate that these banks pay as they increase lending. The Act also establishes the State Small Business Credit Initiative to provide $1.5 billion in grants to existing successful state small business programs that help private lenders extend more credit to small businesses.

The Act raises the cap on small business loans to increase lending by $5 billion in the first year after enactment, and refinances commercial real estate debt into long-term, fixed-rate loans, provisions that are expected to be budget neutral and could create or save 200,000 jobs. It also makes changes to the Small Business Administration's (SBA) two largest lending programs and to its microloan program and extends these lending provisions through December 31, 2010. The Act extends the American Recovery and Reinvestment Act small business lending program that eliminates the fees normally charged for loans through the SBA 7(a) and 504 loan programs and increases the government guarantees on 7(a) loans from 75 percent to 90 percent.

Miscellaneous Provisions
The Act also contains various miscellaneous provisions aimed at helping small businesses.

In calculating adjusted gross income for income tax purposes, self-employed individuals may deduct the cost of health insurance for themselves and their spouses, dependents, and any children who have not attained age 27 as of the end of the taxable year. These individuals must also pay Self-Employment Contributions Act (SECA) taxes on their net earnings. The tax is composed of two parts: (1) the old age, survivors, and disability insurance (OASDI) tax – equal to 12.4 percent of income; and (2) the hospital insurance (HI) tax – equal to 2.9 percent of income. The OASDI tax applies to self-employment income up to the Federal Insurance Contributions Act (FICA) taxable wage base ($106,800 in 2010). Prior to the Act, the health insurance deduction was not taken in account in determining an individual's net earnings from self employment for purposes of SECA taxes. Under the Act, the deduction is taken into account for the taxpayer's first taxable year beginning after December 31, 2009, thus reducing the earnings subject to self-employment tax.

The reporting requirements of sections 6011 through 6112 create disclosure obligations for both taxpayers and advisors. Each of these disclosure statutes has a parallel penalty provision that enforces it. Prior to enactment of the American Jobs Creation Act of 2004, no penalty was imposed on taxpayers who failed to disclose participation in transactions subject to section 6011. For disclosures that were due after enactment of that legislation, a strict liability penalty under section 6707A applies to any failure to disclose a reportable transaction. The Act changes the general rule to achieve proportionality between the penalty and the tax savings that were the object of the transaction, retains the current penalty amounts as the maximum penalty that may be imposed, and establishes a minimum penalty. First, the Act provides that a participant in a reportable transaction who fails to disclose the transaction is subject to a penalty equal to 75 percent of the reduction in tax reported as a result of participation in the transaction. Regardless of the amount determined under the general rule, the annual penalty for each failure to disclose is $10,000 in the case of a natural person and $50,000 for all other persons. The maximum annual penalty for listed transaction increases to $100,000 in the case of a natural person and $200,000, for all other persons. The minimum penalty is set at $5,000 for natural persons and $10,000 for all other persons.

The Act authorizes $5,230,000 in additional fund to the United States Trade Representative to analyze and develop opportunities for U.S. businesses to access foreign markets and to enforce trade agreements

Offsets
The Act’s tax benefit provisions are paid for by a number of revenue offsets. The largest of which provides that if a section 401(k) plan, section 403(b) plan, or governmental section 457(b) plan has a qualified designated Roth contribution program, a distribution to an employee (or a surviving spouse) from an account under the plan that is not a designated Roth account is permitted to be rolled over into a designated Roth account under the plan for the individual. In the case of a permitted rollover contribution, the individual must include the distribution in gross income (subject to basis recovery) in the same manner as if the distribution were rolled over into a Roth IRA. The taxpayer is allowed to include the amount in income in equal parts in 2011 and 2012. The special recapture rule for the 10-percent early distribution tax also applies if distributions are made from the designated Roth account in the relevant five year period.

The bill also requires recipients of rental income from real estate generally to adhere to the same information reporting requirements as taxpayers engaged in a trade or business. In particular, rental income recipients making payments of $600 or more to a service provider (such as a plumber, painter, or accountant) in the course of earning rental income are required to provide an information return (typically Form 1099-MISC) to the IRS and to the service provider. Exceptions to this reporting requirement are made for (i) members of the military or employees of the intelligence community who rent their principal residence on a temporary basis, (ii) individuals who receive only minimal amounts of rental income, as determined by the Secretary in accordance with regulations, and (iii) individuals for whom the requirements would cause hardship, as determined by the Secretary in accordance with regulations.

Other offsets include:

Increasing penalties related to information returns and payee statements
Applying continuous levies to tax liabilities of certain Federal contractors
Allowing participants in governmental 457 plans to treat elective deferrals as Roth contributions
Permitting partial annuitization of a nonqualified annuity contract
Making crude tall oil ineligible for cellulosic biofuel producer credit
Adjusting source rules for income on guarantees

The Act also increases the required payment of estimated taxes by corporations with assets of at least $1 billion (determined as of the end of the preceding taxable year) otherwise due in July, August, or September, 2015, by 36 percentage points.

Upcoming Seminars Featuring Cost Segregation Partners

2010-08-04T08:39:00.000-07:00

Chris Frederiksen, CPA, is an internationally known consultant, author and seminar leader working exclusively within the accountancy profession. His experience includes partnership positions with two international accounting firms and building several practices. Together with 2020 Group USA, a leader in Professional Education for practicing accountants, they offer NASBA certified courses in a wide range of disciplines both in person and via the web, including the 2010 seminar series for accountants, "Driving Revenue."

Occuring throughout the remainder of the year, the Cost Segregation Partners team is pleased to announce that we will be taking part in the 2010 seminar series tour to share our knowlege.

We will share important information about working with CPA firms, owners and investors of commercial real estate, and share insight as one of the nation's leading providers of cost segregation and consulting services to real estate owners.

We'll talk about cost segregation, a process to identify personal property assets that often get buried or lumped together within the real property asset, and how many may be eligible for substantial state and federal tax savings.

To learn more about the seminar series check out www.2020groupusa.com/site/seminars/

Speeding up tax depreciation on borrowers’ properties may make their cash flow more attractive to lenders

2010-07-28T11:00:00.000-07:00

Just had an article published in the July issue of the Scotsman Guide.

Summary: With the continuing credit crunch, increasing property foreclosures and tighter mortgage underwriting standards, commercial mortgage brokers often must help their clients find creative ways to meet lenders' requirements and prequalify for loans. One common area of concern for commercial mortgage lenders is borrowers' cash flow - or lack thereof. Brokers can help their clients understand how to increase their property's cash flow - and therefore, their chances of getting a loan through a cost segregation study.

See the rest of my article published in the July issue of the Scotsman Guide:Hustle and Flow: Speeding up tax depreciation on borrowers’ properties may make their cash flow more attractive to lenders

Cost Segregation Study Fees

2010-02-03T19:19:00.000-08:00

As everyday in social media and via the internet there are many ways in researching companies that perform cost segregation studies. Most clients will either ask their CPA about it or solicit them to find someone to assist them by getting a few competitive bids for them. What happens is the CPA firm will either call someone they know or heard about thru their association and do a google search on cost seg companies. What we find is most firms ask the few questions, what is your fee and what about if my client gets audited. Good questions to start but many forget professional services like cost segregation is not a service you can always look for the lowest price with greatest IRS audit support. There are alot of specialty firms doing cost seg that may have just the construction engineering expertise or the CPA expertise but not both on their payroll doing the studies. We have also learned from our research no two cost segregation studies are alike. Some firms are looking at just finding the low hanging fruit as we call it in the industry and basically do a desk type approach with many times not even visiting the facility. What happens in this case as a comprehensive study is not completed and many times it lacks the proper methodologies the IRS would like to see in any cost segregation study. Yes the IRS audit technique guidelines on cost segregation list several methodologies but they do not say they are all valid or bullet proof. For example the IRS has published guidelines which list several methodologies in which cost segregation studies are performed. The fourth one listed in the guidelines speak to a residual estimation approach whereby an abbreviated method in which only the short lived assets are determined. The short lived assets are then added together and then subtracted from the total project cost to determine the "residual" or building (longer lived) assets. While this is simpler and takes less time and firms can charge less professional fees, it can be less accurate. Most often the tangible assets or short lived assets are based on single unit costs for high quality construction while the building is based on gross square footage. So in actuality the results become skewed and thus inflating the valuation of the shorter lived assets in most cases. While the IRS nor any association prescribes a specific methodology, there are certain approaches (e.g. studies based on actual costs or on proper estimation techniques) that produce more accurate and reliable allocations

What we have found in practice and research is that there are no two cost seg studies done the same and no two fees charged the same either. It is the old vantage you get what you pay for. But one important factor is the insurance policy that it was done correctly with the right team of professionals in place. What price tag can one put on the "sleep factor" of not wondering what did I just do on my last years taxes with this accelerated tax benefits. Take an example of a cost seg study of a Hotel with a cost basis of $10 million placed in service in 2005. We have seen ranges for a cost segregation study from $4,000 to $15,000 or higher. How can that be you ask? Well it goes into the fact that different methodologies are in play and some are much more comprehensive in nature than others. So when measuring the cost in a competitive bid in does not always pay to go with the low bid like we would naturally do as consumers in our normal every day lives. We have seen studies performed in the marketplace with a disparity between 5-10% of assets not being allocated to shorter depreciable lives. Using the same example of the $10 million Hotel project the study that was quoted for $4,000 using a residual type methodology or other shortcuts was able to generate first year tax deferred benefits of approximately $489,000. Now compare that to a full comprehensive engineering based study with say a fee quote of $12,500. This study produced 5% more assets to shorter depreciable lives and the outcome produced $664,000 in first year tax deferred benefits. An astounding $175,000 more benefits in the very first year. Would you pay say 3 times more fee to get $175,000 more benefit? You bet!! Plus the added benefit is you know you can sleep at night knowing you have a quality study completed that was comprehensive in nature.

The moral of this story, when your clients ask for competitive bids, don't race to the low cost provider as you can see that the consequences can be enormous. With cost seg being such a time value of money and cash flow acceleration, to miss out on $175,000 (example above) because the fee was the lowest is short sided in comparison to the end result.

Ketchup or Catch Up - The Power of Cost Seg

2010-01-27T17:23:00.000-08:00

In my consulting years with CPA firms and constant changes in the tax law keep us all on our toes. As a practitioner it is vital to stay current and up to speed, isn't that what our clients expect from us? One significant change in the world of depreciation and cost segregation studies that affects our clients everyday is the ability to go back and yes "Catch-Up" (not Ketchup) depreciation deductions that were not claimed. I find many CPAs today in practice are not aware of this change that first was in play in 1996 and currently Revenue Procedure 2008-52 allows us as practitioners to help our clients. The old vantage of allowed or allowable is no longer the case. With the advent of Rev Proc 2008-52 we can now go back after a tax return has been filed and perform a cost segregation study to gain the maximum amount of tax depreciation the taxpayer is entitled to. As most of you are aware, most real estate is held in pass thru entities and may have many or few investors, shareholders or members. Well if not for this Rev Proc 2008-52, there is no longer the need to amend previously filed returns for the entity owning the real estate or its shareholders or members individual tax returns. Any adjustment in depreciation from an engineered based cost segregation study, is allowed to be caught up and taken in the current years tax return in full (100%). This is what is called a Section 481(a) adjustment and would be a Schedule M-1 item on the entities tax return and shown as an additional tax depreciation deduction on Form 4562. This change must be calculated and reported on Form 3115 before the due date including extensions to be effective. So for all those during tax season keep this in mind before paying in those extension payments and quarterly estimates as this can really assist our clients in mitigating their federal and for many state tax liablities.

The other important note is this is an automatic accounting method change and does not require pre-approval by the IRS. There is no user fee and the Form itself needs to be filed separatly to the IRS in Washington DC and a copy attached to the entities current tax return being filed.

My CPA and Cost Seg

2010-01-25T15:35:00.000-08:00

So often in practice in working with clients, I frequently hear the words, my CPA is doing cost segregation for me or I am sure my CPA has done this as they prepare my taxes for me. Often is the case we have found after working with so many CPA firms in developing their cost segregation practice, they are not doing cost segregation in its fullest capacity. It is not that the CPA is doing anything wrong or not a great CPA, but it is not their primary focus. I use the comparison to the healthcare industry in that your family physician is great at what they do in family medicine but if your child hurts his knee and requires surgery they refer you over to an orthopedic surgeon. This is the exact same situation with a complex tax service in cost segregation, your tax professional is the expert in your day to day tax matters but when it comes to cost segregation that is when you look to a cost segregation firm who specializes in this 100% of their time. That is not to say some CPA firms have their internal professionals as some do have the in house expertise. But, according to the IRS in their latest audit technique guidelines on cost segregation, you need to have the full compliment of professionals from the tax CPA to the engineering expertise to properly complete a cost segregation study. The perfect example is does your team know how to read and interpret blueprints? I am a CPA and can tell you I cannot read them let alone understand what they are showing me, but I have experts on my team that can. How many CPAs can read blueprints is not many that I know. So all in all it is getting the right team in place to maximize the benefits for the end client and their depreciation deductions. It is not that the traditional CPA cannot locate or find assets from say a new construction project in the invoice detail and depreciate them to a shorter tax life (ie parking lot or carpeting). But how about an acquisition of a new hotel per say, how then is that same parking lot or carpeting valued? When our firm first began doing cost seg in 1996 we did not have the engineering expertise and we thought we could guide our clients thru this and outsource this to general contractors, but what we found was we did not get the same sense of urgency and we were trying to train a contractor tax rulings in why we were breaking out things a certain way when it did not always make sense why one asset could be depreciated over 7 years and a similar item had to remain at 39 years. (ie why a roof has to remain at 39 year when useful life as we know is less than that)So in summary, some tax services are highly specialized and maybe need that outside firm, other than your CPA to maximize your benefits and more importantly have proper guidance to support the positions taken to accelerate those most important tax deductions.

Cost Seg and NOL

2010-01-22T08:39:00.000-08:00

With the recent changes in the tax law, the new net operating loss provisions now have been extended to include all business without the limitation on revenue. What this means is businesses which have generated a net operating loss in 2009, are able to carryback that loss up to 5 years. The limitation in the first carryback year is 50% of taxable income in that year. In 2008, the IRS had limits on who could use this provision with an average gross revenue of $15mm. This restriction has now been lifted and thus the rise for most business in which economic conditions have pushed small and large businesses into net operating losses, to effectively use the loss in 2009 to free up refunds plus interest on taxes paid in the 5 previous years. There are some exceptions on companies who have received TARP funds in disallowing this 5 year carryback usage. But in preparing for the 2009 tax season for your clients, when they have had taxable income in any of the previous 5 years, do not discount the fact for those owning commercial real estate, the opportunity to have a cost segregation study performed for the 2009 tax year even if your client is in or near an NOL position. If you can effectively create an NOL or push the NOL higher with accelerating depreciation deductions, the taxpayer may be able to use this to offset previous paid taxes and thus free up a refund via NOL carryback claim. It is so easy for us to say my client is losing money and they do not need any more deductions this year, but to the extent they have paid taxes in any of the previous 5 tax years do not discount the power of cost segregation to assist your client in reaping the refund benefits on taxes previously paid.