1	Tax Saving Strategies Cost Segregation Studies for Clients with Commercial and Residential Rental Properties – Benefits Include: Substantial Reduction in Federal Taxes Real Estate Property Tax Audits and Reclassifications for lower annual property taxes Annual Commercial Property Insurance Premium Savings
2	Cost Segregation is about Seizing Tax Savings for Clients per the IRS Audit Technique Guidelines Seizing Tax Savings per the IRS Audit Technique Guidelines Identify and reclassify the parts of a building that qualify as personal property and depreciating these parts separately from the real property in accordance with the IRS Audit Technique Guidelines Goal = to identify all construction-related costs that can be depreciated over 5, 7 and 15 years and reclassified from 39, 31.5 and 27.5 years Reducing tax lives results in accelerated depreciation deductions, a reduced tax liability, and increased cash flow
3	What Are The Major Benefits? Generates lower federal taxes for clients and immediate increase in cash flow through properly reclassified depreciation deductions Reduces real estate property taxes Section 179 Benefits and Bonus depreciation Provides an easy opportunity to claim “catch up” depreciation on previously misclassified assets Provides an independent third-party analysis that will withstand IRS review Reduced Insurance premiums
4	Who Can Benefit? Laboratory/Research Facilities – 31.2% Manufacturing and Processing Facilities – 17.9% Marinas – 24% Medical/Surgical Facilities 28.9% Nursing Homes/Assisted Living Facilities – 31.5% Office Buildings – 25% Post Office – 24.2% Resorts – 27.6% Restaurants – 33.8% Shopping Center – 21.4% Warehouses – 26.5% Airport Hangars -18% Apartment Buildings – 22% Automobile Dealerships – 26% Automobile Service Centers – 23% Banks – 31% Day Care Centers – 26.5% Department Stores – 24.6% Distribution Centers – 18.2% Fitness Centers – 24.7% Industrial – 18.9% Hospitals – 26.8% Hotels – 33.2%
5	Client Example Study Findings
6	Case Studies Project: 25 Apartment Complexes Cost: $188,100,000.00 Tax Savings: $10,585,222 Project: Assisted Living Facility Cost: $5,234,125 Tax Savings: $625,678 Project: Hotel Cost: $7,123,456 Tax Savings: $812,145
7	Additional Benefits from CSS Property Tax Savings Property taxes are calculated as a percentage of the building costs. In any real estate investment, personal property should be accurately removed from the cost of structural components and not to be recorded as part of the property tax. This provides an ongoing benefit as personal property taxes will annually be reduced while real property taxes will continue to rise. CSS will demonstrate that the investment property value is lower than what the assessor has recorded and that based on our study show that the client may have been overpaying property taxes. We assist in filing for a restatement and if applicable, a refund.
8	Additional Benefits from CSS Savings in Pre-Construction Planning Pre-Construction Planning: In the design phase, QEA can help make the building more tax efficient by identifying business components from the structural components. Example: Law firm uses hinges for $1MM decorative library shelving versus attaching shelving with a permanent adhesive. Total property is able to be moved from 39 year depreciation to 5 year depreciation for a tremendous savings Example: Hospital installs $1.8MM floating floor system versus permanent attached flooring. Structurally as sound, cash savings from more attractive depreciation schedule substantial.
9	Additional Benefits from CSS Insurance Premium Savings Insurance Savings: Identify the cost of non insured properties, and therefore reflect more accurately of the insurance covered properties and reduce the insurance cost. CSS highlights assets insured on a facility which are not actually needed. Many insurance policies exclude from coverage or reduce coverage for building components at or below ground level, such as underground utilities, foundations, site preparation, off-site costs, and parking lots. Cost segregation can identify those components of a facility that are subject to reduced or no insurance coverage. With cost segregation, clients can identify unnecessary insurance while avoiding excess insurance costs. Many site improvements including parking lots and sidewalks and underground assets don’t burn or become affected by storm so their values can be established and taken off the fire insurance policy and/or general liability policy.
10	Items To Be Accelerated Site Improvements (landscaping/parking) Light Fixtures Branch wiring Potential Plumbing Flooring Millwork Millwork Window Coverings Partition Walls Cabinetry Furnishings Shelving Wall Coverings Irrigation Systems
11	CSS Brief History Cost segregation studies began during the 1980's as a means to help developers of new property obtain special investment tax credits for personal property contained in the buildings In 1997, the US Tax Court ruled in favor of Hospital Corporation of America (HCA), that property qualifying as tangible personal property under the former ITC rules would also qualify for purposes of federal income tax depreciation. HCA is considered a landmark decision for owners of commercial properties In 1999, the IRS released Legal Memorandum 19921045 in which the IRS agreed not to contest the (HCA) reclassification of building costs into different asset categories that result in shorter depreciation lives This legal memorandum directs agents to verify that an engineering or architectural study has been done to identify portions of the building's system not related to the operation and maintenance of the building. Without these detailed studies, IRS agents are advised NOT to accept the reclassifications
12	Do I Qualify? You would benefit from a cost segregation study if you… Constructed your buildings and facilities since 1986 Acquired your buildings and facilities that were constructed before 1986, but acquired in a taxable transaction after 1986 Renovated your building after 1986 Made additions to your buildings after 1986
13	CSS History 1959 Shainberg vs. Commissioner: The courts ruled (and the IRS subsequently agreed) on the validity of segregating costs for tax depreciation on buildings 1973Revenue Ruling 73-410 clarified that a taxpayer may separately depreciate parts of used property if a qualified appraiser ‘properly allocates the costs between non-depreciable land and depreciable building components as of the date of purchase.’ 1975Whiteco Industries, Inc. vs. Commissioner: The Tax Court, based on an analysis of judicial precedent, developed six questions designed to ascertain whether a particular asset qualifies as tangible personal property. 1986Investment Tax Credit (ITC) is repealed and the new MACRS recovery periods for building depreciation are increased dramatically for property placed in service after 1986. Residential property: increased to 27 1/2 years Commercial Property: increased to 31 1/2 years and increased again to 39 years in 1993
14	CSS History 1987 Revenue Procedure 87-56. The wide gap in MACRS recovery periods provides a strong incentive to reallocate costs of buildings placed in service as far back as 1/1/1987. Revenue Procedure 87-56 provides class lives and recovery periods for assets. 1997-1999Hospital Corporation of America vs. Commissioner (HCA): The most recent landmark case that provides legal support to use Cost Segregation Studies for computing depreciation. 1999In Action on Decision (AOD) #CC-1999-008, the IRS acquiesced to the application of ITC principles in the HCA case. Later that year, the IRS Chief Counsel issued further guidance (CCA 19992145) supporting the use of Cost Segregation Studies. 2004 IRS issues Audit Techniques guide: Outlines the criteria of a quality Cost Segregation Study and provides direction to IRS field agents when reviewing a report that does not employ the methods suggested in the Audit Techniques Guide
15	IRS - Audit Technique Guide Issued in April 2004 Developed to assist Field Examiners “WHY” are cost segregation studies performed? “HOW” are they prepared? “WHAT” to review and look for?
16	Chief Counsel Guidance Memorandum – May 28, 1999 Whether an asset is a structural component or tangible personal property is “facts and circumstances” assessment The use of cost segregation studies must be specifically applied by the taxpayer Allocations must be made on a “logical and objective” measure of that portion of the equipment that constitutes Sec 1245 property An accurate cost segregation study may not be based on non-contemporaneous records, reconstructed data or taxpayer’s estimates or assumptions that have no supporting records. Cost segregation studies must be closely scrutinized by the field A change in depreciation method is a change in method of accounting
17	Detailed Engineering Approach “It is the most methodical and accurate approach” IRS Audit Technique Guidelines Identify the specific project/assets that will be analyzed Obtain a complete listing of all project costs and substantiate the total project costs Inspect the facility to determine the nature of the project and its intended use Photograph specific property items for reference. Review “as-built” prints, specifications, contracts, bid documents, contractor invoices and other construction documentation. Identify and assign specific project ite4ms to property classes Prepare quantitative take-offs for all materials and payment records to compute actual unit costs Apply unit costs to each project component to determine total cost and reconcile the “take-off” costs to actual costs Allocate indirect costs (new construction) to appropriate assets Group project items with similar class lives and placed-in-service dates to compute depreciation.
18	Summary Dramatic reduction in taxable income Increased cash flow for investment opportunities and business expansion Property tax savings Insurance savings Tax Credit Opportunities Reduce dividend distribution, retain cash
19	Thank You Siegelaub, Golding, Feller & Hill, P.A. Certified Public Accountants & Associates 2801 N. University Drive Suite 301 Coral Springs, FL 33065 PH:(954) 753-2222 Fax:(954) 753-1123 info@siegelaub.com