An engineering based Cost Segregation Study identifies and reclassifies personal property assets from a standard depreciation period of 39 years to a shorter life class such as 5, 7 or 15 years. The purpose of this reclassification is to reduce a property owner’s tax liability and therefore increase their cash flow. We use an engineering based approach to perform a Cost Segregation study. New construction, tenant improvements, existing buildings owned for a period of time and current year acquisitions are all types of property that can take advantage of the benefits of a Cost Segregation study.
The IRS explicitly states that “…Cost Segregation Studies should be performed by qualified individuals or firms such as those employing personnel competent in design, construction, auditing, and estimating procedures relating to building construction.” (PLR 9741002)
This means that to do a complete and accurate Cost Segregation Study, the IRS requires that it be performed by someone who is familiar with cost estimating as well as building construction.
Accountants wishing to take full advantage of a study for their customers would need to either employ engineers or cost estimators as part of their staff or go to a group such as The Concord Group to provide these services.
If you are an accountant and your approach to providing a Cost Segregation Study has historically been to review or ask contractors to provide cost breakouts, you are not maximizing the benefits available to your clients and are taking on liabilities for your client associated with providing non-qualified cost segregation studies in the eyes of the IRS.
If you are an accountant who simply doesn’t utilize a Cost Segregation Studies for your clients, you are running the risk of having someone else approach them about the service and losing some of that trusted advisor status.
Let’s take a restaurant as a case study. An example of the detail that is provided in our study is the review of a prep sink in the kitchen. Included in the accelerated costs from 39-year property to 5-year property is the sink itself, the cost of the water lines running to it, insulation for those lines, the floor drain and the cost of the sewer line running from it to the main drain. This is the level of detail that we at The Concord Group will go into a level of benefit that cannot be obtained without an engineering based study.
Because The Concord Group has the largest number of Cost Estimators under one roof in the Midwest, we can help you identify all the assets eligible for accelerated depreciation.
Cost Segregation is a no brainer for someone who has a building and has an income from that business. A dollar today is worth a lot more than a dollar in forty years time. A Cost Segregation Study accelerates the depreciation associated with different asset classes into earlier years and provides a net present value associated with the savings. The benefits for a Cost Segregation Study, even in the first year, normally far outweigh the cost of the study. The benefit-to-cost ratios range from 3 to 1 to as much as 100 to 1 in the first year alone. Therefore, the study can normally be paid for when the next quarterly tax payment is due.
We offer a no-cost, no-obligation proposal detailing both a conservative and optimistic range of benefits. We will also outline a flat-rate fee so the client has all the information up front to make an informed decision on whether this is the right strategy for their investment.
Accountants tend to be very conservative. There is always the question of whether the Cost Segregation Study will be audited in the future. The Concord Group backs up our studies 100% through an audit.. There is also the question of whether a Cost Segregation study increases the chance of audit. In our experience, the audit risk has been the same as the standard audit rate of 1.5-2%.
We are a fully integrated firm of engineers and cost estimators and we have the approved skills the IRS suggests to complete these studies and maximize the benefits for your clients taking the risk out of your hands. In addition, all studies that we are prepare, are reviewed by an accountant experienced in Cost Segregation studies.
To quote one CPA, Jim Chakires, CEO of Apex CPAs, “The numbers in a Cost Segregation Studies are the most backed up of any numbers ever submitted to the IRS”.
The bottom line: As profits return to many sectors and clients’ marginal tax brackets return to pre-recession levels, now is the time to help clients increase their cash flow with a Cost Segregation Study.
The purpose of this blog is to share the insights and experiences of our firm along with CPA firms regarding Cost Segregation Studies. We look forward to hearing from you!