Presented by:

Jeff Hobbs

It is the process of identifying property components that are considered "personal property" or "land improvements" under the federal tax code. It identifies and reclassifies personal property assets to shorten the depreciation time for taxation purposes, which reduces current income tax obligations.

The US Treasury Department States:

“Cost segregation is a lucrative tax strategy that should be used in almost every major purchase of commercial real estate.”

Wall Street Journal – June 2003

• 1997 - HCA sued the IRS and won $800,000,000+

• IRS Chief Counsel : Requires Cost Segregation Study be based on contemporaneous records & be fact-based*

• IRS Revenue Procedure 98-60

• IRS Rev. Proc. 99-49/IRC 481/4 Years

• IRS Announcement 2002-37

• IRS Rev. Proc. 2002-9

• IRS Rev. Proc. 2002-18

• IRS Rev. Proc. 2002-19/IRC 481(a)

• Actual Case : Chief Counsel Advice 1999-21945, 5/28/99, IRS Announcement 99-82

• *http://www.irs.gov/Businesses/Cost-Segregation-Audit-Techniques-Guide---Chapter-2---Legal-Framework#18

• 2002 –IRS consents to changes in the method of

depreciation via Form 3115, filed in the year the change is

elected. Taxpayers permitted to catch up on all deductions

from previous years. No amended returns required.

– This “catch-up” is via IRS §481(a) and the adjustment is granted

“automatic consent” by IRS Chief Counsel.

• 2004 – IRS releases Cost Segregation Audit Technique Guide

(CSATG).

• 2006 – The IRS starts to crack down on non-engineering

based study-providers and audits them more frequently.

• 2011 – Economic Stimulus Plan – 100% Bonus Depreciation

• 2014 – Bonus Depreciation expired, §179 reverts to $25,000

• The wide gap in MACRS recovery

periods provides a strong incentive for

taxpayers to allocate or reallocate

costs of long-lived property to short-

lived property, wherever possible.

– http://www.irs.gov/Businesses/Cost-

Segregation-Audit-Techniques-Guide---

Chapter-2---Legal-Framework#6

The IRS Chief Counsel wrote a memo saying,

". . . Cost Segregation, for it to be properly

applied, had to involve those with

competencies in architecture, engineering

or construction and/or construction

techniques, in order for personal property

assets to be accurately identified and

segregated.”

Technically there are no qualifications

required in order to conduct a study. The IRS,

as previously shown, prefers “professionally”

based studies but makes no requirements for

such. This is why it is highly important that a

professional accounting firm of CPAs partner

with an engineering firm in order to deliver a

defensible report. This also insulates the CPA

from professional liability.

• Construction drawings

• Construction invoices

• AIA G702 & G703

– Master & itemized sub-contractor’s invoices

• Closing documents or lease agreement

– Appraisal to be included

• General Ledger Account Summary

• Current Fixed Asset Schedule

• At a minimum we need the FAS

– A CSS is more expensive with no documentation

• Cost segregation can be performed at any stage of ownership, whether purchased, constructed or leased…

– Design phase

– Pre-construction

– Under construction

– Current occupancy back to January 1, 1987

• The best time is prior to construction because our recommendations will increase the short-lived asset basis.

• IRS Form 3115, Application for Change in

Accounting Method

– Unless asset has not been placed in service

then normal initial filing procedures

• You, as the CPA, or SHL completes the

3115 for the client to file with the IRS

• §§ 167, 168

– Depreciation rules, GDS, ADS, ACRS, MACRS

• §§ 1245, 1250

– Tangible personal property & real property

• Dozens of Revenue Procedures & Rulings

• Dozens of PLRs

• Publication 946

• Multiple AODs

• QLIs (Qualified Leasehold Improvements) will

generally qualify at $100,000+

• QRPs (Qualified Restaurant Property) will

generally qualify at $75,000+

• Office condos typically qualify at $150,000

• Free-standing buildings will vary wildly due

to the industry and build-out variances, but

generally $150,000+/- will work.

Early – Often – Always!

• Is your client paying income taxes?

– If so, what tax bracket? Subject to AMT?

• Will your client own/lease at least 3 years?

• Is there a NPO occupying 50.1% or more of

the building? If so, it doesn’t qualify.

• Do they meet the minimum asset values?

– $75k - $100k QRPs/QLIs or $150k for buildings

• Short answer…YES!– New acquisitions or construction

– Building expansion

– Capital improvements

• In summary, cost segregation studies will be

more relevant than before because a CSS will

now provide a two-fold benefit…accelerated

depreciation and componentization to meet

the new regulatory requirements.– A side benefit is the detailed substantiation for

insurance claims due to fire, water damage, etc.

• Engage a reputable Cost Segregation firm

• The engineer determines what documents are available

& what must be recreated

• Time is scheduled into the Cost Segregation process for

document recreation

• The engineer then sets a schedule for surveying the

subject property

• The site survey is executed and completed

• The number crunching process begins

• A review committee then examines the results of the analysis

• The study results are compiled into a final report and issued

• Start to finish…4 to 6 weeks

•Does the Cost Seg firm use the accounting based

approach, the engineering based approach or a

combination of both?1

•Construction experience?2

•Cost Segregation experience?3

•Estimating experience?4

• Project complexity.5

• IRS Cost Segregation Audit Techniques Guide.6

• IRS audit track record.7

•Bonus Depreciation/QLI/QRP knowledge and

experience.8

• It can reveal opportunities to reduce real estate tax liabilities and identify certain sales and use tax savings opportunities.

– Personal property assessed at a lower rate

– Some states grant “sales & use tax” deductions

• Maximize tax savings by adjusting the timing of deductions.

• Create an audit trail documenting cost and asset classifications.

• Capture retroactive savings with § 481(a).

• Determine…is the client profitable and

paying federal income taxes; if so…

• Be proactive…ask your client a stupid but

necessary question…

– Do you want to me to minimize your taxes as

much as possible…legally of course?

• Share the current FAS with your cost

segregation partner for a benchmark

analysis. SHL provides them for free and

GUARANTEES the results.

• Reputable firms bill on a fixed fee basis based

on complexity, asset size, industry, available

documentation, and location.

– Example: A 100,000sf warehouse would be

considerably cheaper than a 100,000sf

telecommunications center.

– Most collect ½ of the fee at engagement and the

remainder at delivery of the final report results.

– Beware any mention of contingency as this is

covered under Circular 230 and all those

practicing before the IRS are banned from it.

• Cost segregation is a tool that accomplishes

many things…

– Increased cash flow for your clients

– Operating budget reduction = higher profitability

– Places client in IRC Tax Compliance

– Adds tremendous value to your services

– Gives you a competitive edge over competition

– Happier clients remain your clients

• Client retention vs. Client acquisition

2150 S. Central Expy, Ste. 200, McKinney, TX 75070

www.SegregationHolding.com

www.SegregationHoldingLimited.com

972-865-9050 Office / 972-865-9626 Facsimile

972-897-8019 Jeff’s Cell

JHobbs@SegregationHolding.com

269-303-0810 Brian’s Cell

BMitrzyk@SegregationHolding.com

• MACRS = http://www.irs.gov/Businesses/Cost-Segregation-Audit-Techniques-Guide---Chapter-2---Legal-Framework#6

• Section 1245 & 1250 = http://www.irs.gov/Businesses/Cost-Segregation-Audit-Techniques-Guide---Chapter-2---Legal-Framework#12

• What is tangible personal property? = http://www.irs.gov/Businesses/Cost-Segregation-Audit-Techniques-Guide---Chapter-2---Legal-Framework#8

• Tangible Personal Property = http://www.irs.gov/Businesses/Cost-Segregation-Audit-Techniques-Guide---Chapter-2---Legal-Framework#10

• What is the Investment Tax Credit §68? = http://www.irs.gov/Businesses/Cost-Segregation-Audit-Techniques-Guide---Chapter-2---Legal-Framework#9

• Building Structural Components = http://www.irs.gov/Businesses/Cost-Segregation-Audit-Techniques-Guide---Chapter-2---Legal-Framework#11

• HCA Ruling = http://www.irs.gov/Businesses/Cost-Segregation-Audit-Techniques-Guide---Chapter-2---Legal-Framework#16

• Chief Counsel Guidance = http://www.irs.gov/Businesses/Cost-Segregation-Audit-Techniques-Guide---Chapter-2---Legal-Framework#18

• No Bright-Line Test = http://www.irs.gov/Businesses/Cost-Segregation-Audit-Techniques-Guide---Chapter-2---Legal-Framework#19

• Component Depreciation = http://www.irs.gov/Businesses/Cost-Segregation-Audit-Techniques-Guide---Chapter-2---Legal-Framework#3

• Bonus Depreciation 2008 = http://www.irs.gov/Businesses/Cost-Segregation-Audit-Techniques-Guide---Chapter-2---Legal-Framework#7

• Change in Accounting Method = http://www.irs.gov/Businesses/Cost-Segregation-ATG---Chapter-6.2-Change-in-Accounting-Method

• Cost Segregation Methodologies = http://www.irs.gov/Businesses/Cost-Segregation-Audit-Techniques-Guide---Chapter-3---Cost-Segregation-Methodologies

• Detailed Engineering Approach = http://www.irs.gov/Businesses/Cost-Segregation-Audit-Techniques-Guide---Chapter-3---Cost-Segregation-Methodologies#5

• What Methodology is Required by the IRS? = http://www.irs.gov/Businesses/Cost-Segregation-Audit-Techniques-Guide---Chapter-3---Cost-Segregation-Methodologies#11

• Principal Elements of a Quality CSS = http://www.irs.gov/Businesses/Cost-Segregation-Audit-Technique-Guide---Chapter-4---Principal-Elements-of-a-Quality-Cost-Segregation-

Study-and-Report

• Preparation by an industry expert = http://www.irs.gov/Businesses/Cost-Segregation-Audit-Technique-Guide---Chapter-4---Principal-Elements-of-a-Quality-Cost-Segregation-

Study-and-Report#4

• What is a quality cost segregation report? = http://www.irs.gov/Businesses/Cost-Segregation-Audit-Technique-Guide---Chapter-4---Principal-Elements-of-a-Quality-Cost-

Segregation-Study-and-Report#2

• Repeal of ITC & Component Depreciation = http://www.irs.gov/Businesses/Cost-Segregation-Audit-Techniques-Guide---Chapter-2---Legal-Framework#15

• Depreciation Overview Chapter 6.3 = http://www.irs.gov/Businesses/Cost-Segregation-ATG---Chapter-6.3-Depreciation-Overview

• IRC Section 481(a) = http://www.journalofaccountancy.com/Issues/1998/Apr/grimes.htm

• Rec. Proc. 2004-11 (Automatic Consent Procedure) = http://www.irs.gov/irb/2004-03_IRB/ar11.html

• CSATG = http://www.irs.gov/Businesses/Cost-Segregation-Audit-Techniques-Guide---Table-of-Contents

• Depreciation Recapture = http://www.irs.gov/publications/p544/ch03.html#en_US_publink100072560

• Form 3115 = https://www.dropbox.com/s/13kl2n2dxvgd5yl/IRS%20Form%203115.pdf

• IRS Case Studies = http://www.irs.gov/Businesses/Cost-Segregation-ATG---Chapter-6.4-Relevant-Court-Cases

• Residential Rental Property Depreciation = http://www.irs.gov/publications/p527/ch02.html#en_US_2012_publink1000219045

• How to determine which MACRS method applies = http://www.irs.gov/publications/p527/ch02.html#en_US_2012_publink1000219071

• Publication 527 (2012), Residential Rental Property = http://www.irs.gov/publications/p527/index.html

• ERTA 1981 = http://en.wikipedia.org/wiki/Economic_Recovery_Tax_Act_of_1981

• Cost Segregation Relevant Court Cases = http://www.irs.gov/Businesses/Cost-Segregation-ATG---Chapter-6.4-Relevant-Court-Cases

• Depreciation Overview = http://www.irs.gov/Businesses/Cost-Segregation-ATG---Chapter-6.3-Depreciation-Overview

• CSS Specific Guidance for Restaurants = http://www.irs.gov/Businesses/Cost-Segregation-Guide---Chapter-7.2-Industry-Specific-Guidance---Restaurants

• IRS Form 3115 = https://www.dropbox.com/s/qpyfwx1n941nsn3/IRS%20Form%203115.pdf

• Publication 946 – Bonus Depreciation = www.irs.gov/publications/p946/ch03.html

• Repairs & Capitalization = http://www.irs.gov/irb/2012-14_IRB/ar05.html

• Baker Tilly Presentation in PDF = https://www.dropbox.com/s/dso1dsfsydve6jx/Baker%20Tilly%20Repair%20%26%20Maintenance%20Tax%20Webinar.pdf