10A — August 25 - September 14, 2017 — Tax Issues & Accounting — M id A tlantic
Real Estate Journal
T ax I ssues & A ccounting
By Rich Lafferty, Sobel & Co Cost Segregation
ere is a strong sug- gestion to commer- cial property owners:
professionals together early on when acquiring or devel- oping a property you can be confident that an appropriate and cost effective study is conducted. Advantages of a Cost Segregation Study The benefit of obtaining a Cost Segregation study is that it can shorten the useful lives of assets un- der accelerated depreciation methods. By implementing a Cost Segregation strategy the taxpayer reduces current federal taxable income by tak-
ing the maximum deduction permissible under the tax code. While the advantages can be significant, a Cost Seg- regation study should only be prepared by an experienced qualified individual who is- sues a report to support the assumptions used in the clas- sification of assets. Calculations and Processes in a Cost Segregation Study When a commercial prop- erty is placed into service, the general method of deprecia- tion would be over 39.5 years
utilizing the straight line method. However, there are other options. Cost Segregation is a pro- cess of taking the building and breaking down the in- dividual components of the building into four categories which are: (1) personal prop- erty, (2) land improvements (3) building and (4) land. The components that qualify as personal property and land improvements qualify for shorter useful lives under accelerated methods of de- preciation. Tangible personal
property generally falls under five and seven year useful life, while land improvements are classified under 15 year property. Note; It is important to be able to support the study’s results because the determi- nation of what qualifies as tangible personal property and what are the structural components of the building have been challenged under audit and have led to numer- ous tax court cases over the years, along with the issuance of private letter rulings and publications from the Inter- nal Revenue Service. You want to avoid being challenged under audit so you need to consider that the In- ternal Revenue Service (IRS) has trained its agents and has issued guidance to be utilized in audit situations. Auditors are trained to ask for a writ- ten engineering based cost segregation report prepared by an individual with exper- tise and experience. A well designed Cost Segregation report generally includes, but is not limited to. a narrative of the property, a detailed cost analysis of assets qualifying under the four categories listed above, pictures of the property, and a methodology overview for any assumptions used and citing applicable tax law. Conclusion: It is Worth the Effort! Cost Segregation can be one of the most advantageous tax strategies available to property owners. Accelerat- ing depreciation deductions leads to a lowering of taxable income and taxes due. As a result, the owner increases cash flow into the business and reinvests the savings to continue growing the busi- ness. Remember to consult with your CPA before undertaking a study while keeping inmind that this is a Federal tax law and as such some states may not allow this strategy to be implemented. Richard Lafferty, CPA, CIT is the member in charge of Construction Services Group, Sobel & Co., LLC. n
When y ou are acquir- ing or devel- oping a prop- erty, consult w i t h y o u r CPA at the start of the process in order to de-
termine if a Cost Segregation Study is appropriate for you. By bringing your architect/ engineering and accounting
CAPSTAN our strength. your tax savings.
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