cost seg training 10 2010

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Cost Segregation Studies

Grant Keppel, CPA

National Director


Cost Segregation Studies (CSS)

What are they?

• Comprehensive analysis of hidden personal

or tangible property for commercial

buildings.

• Analyze cost data including the contractor’s

application of payments (AIA), change

orders, owner incurred costs, and indirect

disbursements.

• CSS is not a component study.



What are they?

• Analyze purchase price of property to

segregate assets from the building cost

• Generally 15-50% of costs can be

segregated to shorter lived assets

• Allows indirect costs to be allocated to

various depreciable lives.


• New buildings under construction

• Existing buildings undergoing renovation

or expansion

• Office leasehold improvements and

“fit-outs”


Applies to What?


• Purchases of existing properties.

• All post - 1986 real estate construction,

building acquisitions or improvements.


Applies to What?


The Evolution of CSS’s

• Pre TRA-86 CSS undertaken to take

advantage of ITC which was only available

on personal and other tangible property

• ITC issues were resolved through IRS

rulings and the courts

• At least 100 IRS rulings/cases on the

subject

• New Ruling in 2008


Benefits of Cost Segregation

Studies

• Increased depreciation

in earlier years and/or

one time catch up in

one year

– results in less federal

and state income taxes

– results in increased

cash flow


HCA Case (109 TC 21 (1997))

• Old ITC case law can be used in

determination of structural component vs.

personal property for purposes of

MACRS.

• Reaffirmed by IRS on its acquiescence.


IRS Revenue Procedure 2008-52

• Allows a one year catch up on missed

depreciation deductions.

• Provides one year “windfall” for those who

where in error the first time

• Generally for buildings purchased or

constructed subsequent to 1986



• No need to amend returns previously filed.

• Automatic Accounting Method Change with

no fee for filing Form 3115.

• Form 3115 must be filed by the tax return

due date including extensions.



• Can provide cash flow windfall even

though the statute of limitations is closed

on the property construction or acquisition

year.

• Two tax years must be filed before

utilization of procedure – No longer.


Bonus Depreciation

• Contracts in 2008 - 2010

• In service in 2008-2010

• 50% in year one – assets with class life of 20

years or less


Major Areas of Cost Allocation

• Electrical

• Plumbing

• Site Work

• HVAC


• Finished

Carpentry

• Indirect or Soft

Costs

• Owner Incurred

Costs Paid

Outside of

General Contract

Major Areas of Cost Allocation


Electrical


Interior Electrical for Machinery

and Equipment


Plumbing


Plumbing

Trench Drains


Plumbing

Interior Kitchen Equipment


Plumbing

Grease Interceptors


Site Work


Who Benefits????


Manufacturing


Special Use Building


Car Dealerships


Hotels & Motels


Medical Office Building


Financial Institution


Nursing Homes


Fast Food Restaurants


Office Buildings


All Other Buildings


Case Study


Case Study

• $2.7 Million Ambulatory Surgical

Center

• Engineering Analysis

• $170,000 – 15 yr. 6.2%

• $1.3 Million – 5 yr. 48%


Case Study

• 71.4% of plumbing was process (medical)

• 56% of HVAC was process (medical)

• 73.5% of electrical was process (medical)

Additional depreciation Yr. 1 $230,000

Additional depreciation Yrs. 2-4 $745,000


Common Questions/Concerns:

• IRS Audit Experience?


Potential of Reclassification

Type of Structure Percentage Misclassified

1. Retail 10-40%

2. Grocery Stores 15-40%

3. Office Building 10-15%

4. Hotels 20-40%

5. Warehouses 8-12%

6. Light Mfg 15-40%

7. Heavy Mfg 25-70%

8. Processing Plants 60-90%

9. Nursing Homes 15-30%

10.Restaurants 15-40%


Connecticut, Prime High-rise

A 92 mil, 15 story office with a separate parking

garage and plaza wherein we located over 230

qualified assets. The results were 8.36 mil in 15-yr,

4.08 in 7-yr, and over 1.83 mil in 5-yr.

Alabama, Office Building

A 400,000 sq.ft. building leased to the U S

Government. In the 31 mil purchase price, we

located 4.35 mil in 15-yr, 2.6 mil in 7-yr, and 1.22

mil in 5-yr assets.

Case Studies


Factors To Consider

• Profitability

• Partners / Shareholders of Pass-Thru

Entities

• Mid Quarter Convention

• Other Depreciation Elections

Previously Made on Tax Returns

• Like Kind Exchanges


Factors To Consider

• Passive Loss Rules

• Early Disposition

• Alternative Minimum

Tax

• Estate Planning


QUESTIONS??

cost seg training 10 2010

Technology

cost data

irs revenue procedure

personal property

property construction

year results

year windfall

irs rulingscases

acquisition year