How do you assure high profit margins in today’s environment of decreasing sales volume and lower net cash flow? Would you like to increase market awareness and your competitive advantage without a marked increase in your out of pocket costs? The IRS provides a method to help make this a reality.
It’s called COST SEGREGATION and is an IRS approved and guidelined technique that creates an increased net cash flow by accelerating certain depreciation expenses, thereby reducing income taxes.
Normally a property is fully depreciated over 39 years. However, this process breaks out many of the assets in a property into 5, 7 or 15 year depreciable lives. These items, which are often of a specialty or non structural nature, are segregated from the structural aspects of the property and, as such, are allowed to be depreciated more quickly. Simply stated, faster depreciation decreases current income tax liability.
The IRS also allows a “catch up provision” which creates the opportunity to “look back” to the date the property was acquired or placed in service. Let’s say you bought the property in August 2004. You are able to go back to this date, calculate short life depreciation on the appropriate assets and place all of the accumulated depreciation into the current tax year. In certain situations, you may even be able to place those deductions in a prior year and create a refund without having to completely amend your tax return. In any event, the positive impact on your net cash flow could be tremendous.
Interestingly, Cost Segregation is not an aggressive technique or a tax shelter. It simply falls under a different set of rules that were first allowed in the mid 1990s and formalized in 2004. The IRS recommends a fully engineered study be performed to be compliant with their guidelines. They also do not allow a fee for the service to be based on a percentage of savings. As such, fees for the service are set at the time the provider is engaged to complete the study.
If you’re thinking, “Sounds great but I don’t have any net income this year” don’t worry. Recent tax legislation allows the benefit to be applied up to five years prior. Pick a year when you were making a lot of money. You can get a refund without having to amend your tax return. We work with your tax professional to assure your benefit is maximized.
Cost Segregation studies may also be applied to capital projects. It is not uncommon to see up to half of these costs qualify for shorter depreciable lives. By way of example, a $6M renovation could easily yield $1M of tax savings in the ensuing 4 year period. Whether increasing debt coverage ratios in acquisition financing or a re-financing, maximizing current cash flows, or just freeing up cash, Cost Segregation is a way to get money out of your property without increasing debt service.
A no cost, preliminary analysis can be made available to you and your tax adviser within a couple of days based on some pertinent information that can be relayed over the phone or online. The no risk, no obligation analysis will provide you with a snapshot of the expected results of the study and contain a fixed fee quote for the service. The value proposition is quite compelling- you will generally see at least a 15x return on your investment, often substantially higher than that.
As a California CPA Society journal article claims, this is certainly “Money Found.”
Rob Plomgren, CFP, is a partner in CSSI (Cost Segregation Services, Inc)
A national cost segregation engineering firm.
CSSI has completed over 6000 studies since 2001.
Rob can be reached at 858-792-7810 or by email at email@example.com