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20C — September 30 - October 13, 2016 — Fall Preview — M id A tlantic
Real Estate Journal
T ax S olutions
By Terri S. Johnson, CRE, Capstan Tax Strategies Cost Segregation reduces tax burden on industrial facilities
T
he cost segregation pro- cess can be performed on almost any type of
ture of industrial facilities, these types of properties are among the best candidates
to machines, thicker concrete slabs, reinforced flooring, and dedicated specialized HVAC
results in a need for frequent facility upgrades and renova- tion. This constant turnover
balance of the replaced asset via partial asset disposition. Many facility owners are under the mistaken impres- sion that a cost segregation study must be performed in the year the facility was con- structed or acquired. While it is certainly wise to perform a study in year one, if pos- sible, “look-back” studies can be performed on any facility placed in service since 1987, and the resulting “catch-up” depreciation may be tremen- dous. Industrial facility compo- nents are initially classified as 39-year assets. In a typical cost segregation study, the Capstan team is able to ac- celerate anywhere between 5-50% into 7-year and 10-15% into 15-year (land improve- ments.) The variability in the range is due to the vari- ability in the industry. Some facilities have a tremendous amount of infrastructure supporting special purpose equipment – refrigerated warehouses, food processors, clean rooms, laboratories, data centers -- and this re- sults in an extremely success- ful study. Some facilities in other sectors may not be as specialized, which impacts howmuch acceleration is pos- sible. For example, consider Man- ufacturing Facility XYZ, ac- quired and placed-in-service 6/1/16 at a cost of $15M. After deducting 20% of the acquisi- tion costs to account for land, the property basis became $12M. Cost segregation engi- neers were able to accelerate 1% to 5-year, 20% to 7-year, and 12% to 15-year, result- ing in an additional first year cash flow of $153,551, and a 10 Year Net Present value (NPV) of $921,250. If Facility XYZ had been newly constructed in 2016, it would have been eligible for Bonus Depreciation, and the results would have been even better, with an additional first year cash flow of $857,759 and a 10 Year Net Present value (NPV) of $1,090,620. The highly specialized and rapidly evolving nature of the industrial sector makes it a perfect source of candidates for cost segregation and re- lated studies. Terri S. Johnson, CRE, is a co-founder and man- aging partner at Capstan Tax Strategies . n
building. By rec lass i fy- ing commer- cial assets into shorter M A C R S class-lives, cost segrega- tion acceler- ates depre-
“Due to the highly specialized nature of industrial facilities, these types of properties are among the best candidates for a successful cost segregation study. The high level of customization required in a manufacturing or distributing facility results in a large amount of acceleratable assets.”
for a successful cost segrega- tion study. The high level of customization required in a manufacturing or dis- tributing facility results in a large amount of accelerat- able assets. Electrical runs
systems are all examples of assets commonly found in industrial facilities that can be reallocated to shorter class lives. The rapidly evolving tech- nology of certain industries
also contributes to the util- ity of cost segregation in the industrial sector, as engi- neers can identify and remove “ghost assets” from deprecia- tion schedules, often writing off the remaining depreciable
Terri Johnson
ciation, increases cash flow, and reduces the overall tax burden in virtually every situation. However, due to the highly specialized na-
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