The benefits of offering Cost Segregation services to your current clients
Offering Cost Segregation services to your clients gives CPAs a competitive advantage over many firms who don’t have a strategic relationship with a firm that specializes in providing engineering based Cost Segregation Studies or a firm that can produce these studies in-house. It allows you to compete on a level at which only larger accounting firms typically can compete. It also puts you and your firm in a better position to retain your more successful and growing clients. As these clients grow, they will inevitably require additional more sophisticated services and one that will top the list is Cost Segregation Services.
There is an excellent article in the Tax Adviser that is beneficial for all commercial property owners that acquire, construct or improve their properties. [link to article: http://www.aicpa.org/publications/taxadviser/2012/september/pages/clinic-story-03.aspx]
It addresses temporary new regulations that came into effect as of January 1, 2012. The article points out that Cost Segregation Studies are in a transition stage, having taken on a whole new level of importance with additional benefits available to property owners through assets that have been “retired”. Clearly, there are additional uses for Cost Segregation Study techniques. A Cost Segregation Study enhanced with additional information regarding the building structure and systems, will assist the taxpayer in evaluating whether future expenditures are deductable repairs and maintenance or capital improvements.
I’d like to comment on the following article in the New York Real Estate Journal, “Cost segregation – wait a minute…Exercise caution and research all scenarios.”
This article addresses some of the pushback engineering based Cost Segregation professionals receive from accountants when approached about this tax planning strategy. I couldn’t agree more with the title of the article – but quite frankly, caution is just a best practice that should be exercised when considering any comprehensive tax planning for a client. A CPA’s decision should always be determined by what is in the best interest for the client and conclusions should be explained to their clients clearly.
For tax practitioners whose clients own commercial and residential properties, this article is worth a read. It suggests testing whether the property qualifies for residential rental or nonresidential property. Residential rental property depreciates at a 30% faster rate so getting it right will make a difference to the client. In either case, the article points out that further benefits can be achieved through the use of a Cost Segregation Study.
We provide professionally prepared independent construction cost estimates for architects/engineers, institutions, governmental agencies and developers/owners. We begin with a conceptual budget that is prepared from very basic programmatic information and project design parameters that we get from either the owner or the architect. Once a project has been approved and goes into the design phase, estimates are typically prepared at the schematic design, design development and construction documents phases. These design phase estimates are used to confirm that the project is on track within the approved project budget. These estimates are also useful in the value engineering process and to assist in the evaluation of design options to maximize the best design solutions for the budget available.
The final design phase estimate is an effective tool that can be used to confirm the completeness and reasonableness of a contractor’s bid proposal.
This blog discusses an article in the AICPA’s Tax Adviser entitled, “Is the Value of Cost Segregation Depreciating?” The title of the article is very misleading, because if you read the article through to the conclusion, it clearly states that there’s still incredible value in cost segregation studies than there were before these cases were decided, not less value. The title really gives the wrong impression.
Two cases are addressed in the article, the first of which is AmeriSouth. That was a situation where the IRS attacked a cost segregation study that was done on several residential apartment units AmeriSouth was trying to reclassify as shorter-life assets that the cost segregation study had identified. The IRS wanted to reclassify them as 27.5-year structural components instead.
A CPA recently asked us why he should consider a Cost Segregation Study for clients when he can simply use Section 179 deductions.
Section 179 refers to a portion of the federal tax code that allows business deductions on equipment purchased within a given tax year, as stated on www.section179.org:
“Essentially, Section 179 of the IRS tax code allows businesses to deduct the full purchase price of qualifying equipment and/or software purchased or financed during the tax year. That means that if you buy (or lease) a piece of qualifying equipment, you can deduct the FULL PURCHASE PRICE from your gross income. It’s an incentive created by theU.S.government to encourage businesses to buy equipment and invest in themselves.”
Section 179 expensing should be used in conjunction with a Cost Segregation Study to determine the maximum benefit. There are limitations to Section 179 such as a maximum deduction of $139,000 in 2012 and the deduction must be taken in the year it was placed into service.
Medical Office New Construction
Before the study, only $2,088,000 was reported in 5 year assets when in fact $6,169,320 was eligible and 15 year assets grew from $626,400 to $892,500. The first year savings for the client totaled $1,007,487 and the cost-benefit of doing the study was 84:1.
In this particular case the difference was accounted for in equipment including structural support, special lighting, specialty HVAC items, plumbing for medical related items (medical gases, operatory sinks, etc.), electrical supplies associated with medical equipment, human safety items (protective walls for x-rays, etc.), carpet and vinyl flooring, cabinetry and vinyl wall coverings.
We often work with accounting firms to help them maximize the benefits to their clients. Teaming up with accountants to provide engineering based Cost Segregation Study works to the advantage of everyone. The client in this case was able to maximize their benefit and the accounting firm retained the status of trusted advisor. This is the third in a series of blog posts covering how we can collaborate to bring the total advantage to the client.
Retail Building New Construction
As part of the review of construction costs, the accounting firm had identified $132,085 as 5-year property and $175,915 as 15-year property. This firm came to us to see if we could identify more. The results of the study proved that this was beneficial for the owner. The end result of the study was a classification of $882,297 as 5-year property and $665,505 as 15-year property. The first year savings for the client totaled $274,908, and the cost-benefit of doing the study was 25:1.
Occasionally we hear from clients that their accountants have already performed a Cost Segregation Study, so they do not need another. In almost every case where the client decides to get a no-cost analysis from us, we are able to find additional benefits by utilizing our unique skills that a CPA just does not have. This is the second in a series of blog posts covering “New Construction” studies.
New Construction – Office Building Before the study, the accountant had identified $95,000 worth of assets as 5-year property and $113,875 as 15-year property. When our engineers completed their study we found that $684,000 was eligible to be classed as 5-year and $684,000 as 15-year property. The first year savings for the client totaled $49,015, and the cost-benefit of doing the study was 4:1.