11/5/2014 DEFERRING TAX THROUGH COST SEGREGATION. Business Development Executive BKD, LLP

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1 DEFERRING TAX THROUGH COST SEGREGATION Jason Jobgen Business Development Executive BKD, LLP Shelly Reyna Director BKD, LLP October 15,

2 TO RECEIVE CPE CREDIT Participate in entire webinar Answer polls when provided If you are viewing this webinar in a group Complete group attendance form with Title & date of live webinar Your company name Your printed name, signature & address All group attendance sheets must be submitted to training@bkd.com within 24 hours of live webinar Answer polls provided If all eligibility requirements are met, each participant will be ed their CPE certificates within 15 business days of live webinar COST SEGREGATION DEFINED Tax service performed by engineers Identifies assets embedded in building s cost that can be depreciated for tax purposes over five, seven or 15 years rather than standard 27.5 or 39 years Results in accelerated tax depreciation of assets & net present value tax benefit 2

3 PROPERTIES & TAXPAYERS ELIGIBLE Owner & related investors (in flow through entity) should be in position to take advantage of accelerated tax deduction Special attention should be paid to net operating losses & passive losses Current year tax benefit should be considered PROPERTIES & TAXPAYERS ELIGIBLE Typical minimum investment of $1 million (some exceptions) Applicable to any industry where property owner can take advantage of accelerated deductions Investment may be in New construction Acquisition of existing property Building improvements Tenant improvements on behalf of tenant or landlord Step up in tax basis through estate or other transaction 3

4 Building Use Heavy Manufacturing Typical Present-Value Tax Benefit Per $1 million invested $80,000 to $120,000 Hospital, Surgery Center Light Manufacturing $45,000 to $70,000 Auto Dealer, Grocery, Restaurant $40,000 to $60,000 Office, Retail, Multi-family $25,000 to $50,000 BENEFITS FROM PRIOR YEAR TRANSACTIONS For transactions that took place in prior year & no cost segregation study has been performed Taxpayer is allowed to perform cost segregation study & catch up missed depreciation expenses in current year Taxpayer files form 3115 Change of accounting method with next federal return no amended returns Current year tax benefit can be significant 4

5 REAL VS. PERSONAL PROPERTY Real Property [Section 1250 Property] Land (non-depreciable) Land Improvements - 15 year life, 150% Declining Balance Building (Residential & Non-Residential) & Structural Components 27.5 or 39 year life, straight line Personal Property [Section 1245 Property] Tangible Personal Property (TPP) & Other Tangible Property (OTP) - 5 or 7 year life, 200% Double Declining Balance Classify Cost under Modified Accelerated Cost Recovery System (MACRS) IRS POSITION Guidance provided through IRS notices, tax court rulings & IRS Audit Technique Guides IRS Audit Technique Guide detailed engineering approach from actual cost records, or detailed cost approach, uses costs from contemporaneous construction & accounting records In general, its most methodical & accurate approach 5

6 COST SEGREGATION METHODOLOGIES Detailed Engineering Approach from actual cost records Detailed Engineering Cost Estimate Approach Survey or Letter Approach Residual Estimation Approach Sampling or Modeling Approach Rule of Thumb Approach BACKGROUND & REQUIRED TRAINING Preparation of cost segregation study requires knowledge of both construction process & tax law Understand general construction process Have in-depth knowledge of tax law Individual with expertise & experience 6

7 CONDUCTING A STUDY New construction Analysis of blueprints & cost detail to identify costs of shorter life assets Purchase of existing property Re cost building on replacement cost new basis then segregate cost of shorter life assets When should a study be performed? CS ANALYSIS FOR NEW CONSTRUCTION TYPICALLY INCLUDES Performing site inspection (a quality study includes a site visit) Analyzing construction cost documents Contractor s Application for Payment typically in form of AIA G702 & G703 Drawings & specifications Performing engineering estimates (quantify & price) Reconciling total allocated costs to total actual costs Proper allocation of indirect costs 7

8 CS ANALYSIS FOR PURCHASED PROPERTIES TYPICALLY INCLUDES Review of all documentation available (pre & post) Performing site inspection (a quality study includes a site visit) Analyzing depreciable basis Estimation of Replacement Cost New (RCN) Using drawings & specifications (when available) to perform engineering estimates (quantify & price) for each identified asset Adjustment to estimated RCN for losses in value Allocation of Depreciable Basis (on a pro-rata basis) to depreciated RCN of each identified asset Assign Depreciable Life & Property Units PROPERTY INFORMATION REQUIRED Proposal stage Confirm prospect can benefit from CS study Purchase or new construction (define ownership) Type of property/industry Scope (location, lot size, building size, space allocation) Total depreciable basis If retroactive analysis, request depreciation schedule (showing current treatment of assets) Analysis stage New construction Change of ownership 8

9 TYPES OF PERSONAL PROPERTY IDENTIFIED IN A STUDY 002 Site work 003 Concrete 005 Metals 006 Woods & Plastics 008 Doors & Windows 009 Finishes 010 Specialties 011 & 012 Equipment & Furnishings 015 & 016 Plumbing & HVAC, Electrical Uniform Construction Index (UCI) SITE WORK 9

10 CONCRETE & MASONRY CARPENTRY/WOODWORK 10

11 DOORS & WINDOWS SPECIALTIES 11

12 PLUMBING ELECTRICAL & LIGHTING 12

13 HEATING, VENTILATING & AIR CONDITIONING INDUSTRY - QUALIFYING PROPERTY Auto Dealerships Apartments/Assisted Living (Residential) Banking Broadcasting - Radio/TV Distribution - Warehousing Entertainment Bowling Alleys Movie Theaters Hospitals Hotels Manufacturing Office Restaurant Fast Food Sit-down Retail Shopping Center Grocery Store Sport Stadiums Golf Courses Wineries Threshold typically $1M 13

14 BANKING HOSPITALITY 14

15 RESTAURANT SPORTS FACILITIES 15

16 GOLF COURSES WINERIES 16

17 CS HISTORY & NEW DEVELOPMENTS COST SEGREGATION & TANGIBLE PROPERTY REGULATIONS Final Tangible Property Regulations Partial Disposition Analysis Units of Property Schedule Use of cost segregation report in treatment of future improvements, repair & maintenance 17

18 ELEMENTS OF QUALITY CS REPORT Summary Letter/Executive Summary Narrative Report Schedule of Assets Schedule of Direct & Indirect Costs Schedule of Property Units & Costs Engineering Procedures Statement of Assumptions & Limiting Conditions Certificate Exhibits QUESTIONS? FOR MORE INFORMATION 18

19 CONTINUING PROFESSIONAL EDUCATION (CPE) CREDITS BKD, LLP is registered with the National Association of State Boards of Accountancy (NASBA) as a sponsor of continuing professional education on the National Registry of CPE Sponsors. State boards of accountancy have final authority on the acceptance of individual courses for CPE credit. Complaints regarding registered sponsors may be submitted to the National Registry of CPE Sponsors through its website: The information in BKD webinars is presented by BKD professionals, but applying specific information to your situation requires careful consideration of facts & circumstances. Consult your BKD advisor before acting on any matters covered in these webinars. CPE CREDIT CPE credit will be awarded upon verification of participant attendance For questions, concerns or comments regarding CPE credit, please BKD Learning & Development Department at training@bkd.com 19

20 THANK YOU! FOR MORE INFORMATION 20