| Cost Segregation Studies could save Sacramento | | | | Change in Accounting Method (IRC 481(a) |
| and Northern California business owners | | | | adjustment) and increased tax deductions are |
| thousands, even hundreds of thousand of dollars | | | | made in one year without amending prior year |
| in taxes if they own their facilities. Most of these | | | | returns. Studies can reach back to 1987 and prior |
| business owners, however, don't seem to know | | | | returns are not amended. A Cost Segregation |
| about these studies. Why do I say that? Because | | | | Study can be performed on any property |
| every time I mention the advantages of a Cost | | | | constructed, acquired or remodeled since January |
| Segregation Study to an owner of | | | | 1, 1986. Even if you no longer own the facility. |
| income-producing facilities, whether in Sacramento, | | | | Think about that for a minute... |
| Stockton, San Francisco or Yuba City, I get a | | | | Generally, 20% to 55% of building costs can be |
| puzzled look, the same look you might get if you | | | | reclassified to shorter depreciable lives. The key |
| asked for a "pop" in San Francisco. Or sometimes | | | | for a solid Cost Segregation Study that your CPA |
| I get that other puzzled look, the one that means, | | | | / Tax Preparer and the IRS will accept is that an |
| "I think I've heard of that... but I'm not sure what | | | | Engineering Study must be included, which any |
| it is... and I'm not sure it's a good idea for my | | | | reputable CSS preparer will be sure to do. Make |
| facility." | | | | sure this a part of any agreement you might sign. |
| I'm here to tell you, folks: In most cases, a Cost | | | | But how, exactly, you may still be wondering, |
| Segregation Study, or CSS, is a good idea for | | | | does a Cost Segregation Study work? |
| your facility. | | | | A CCS analyzes property costs to segregate |
| Have you, at any time since 1986 constructed, | | | | allowable short life assets from longer life Real |
| purchased, expanded, or remodeled any kind of | | | | Property costs. It's an IRS-approved method of |
| income-producing real estate, such as such as | | | | re-classifying certain components and |
| manufacturing, industrial, research labs, financial | | | | improvements of a commercial building from real |
| institutions, office buildings, hotels, retail stores, | | | | to personal property. This process allows the |
| apartment complexes and shopping centers-even | | | | assets to be depreciated on a five-, seven- or |
| a single family rental unit? Yes? Yes! Then you | | | | 15-year schedule instead of the traditional 27.5- or |
| could benefit. | | | | 39-year depreciation schedule of real property. |
| The Journal of Accountancy will only go so far as | | | | A CSS can also provide other benefits, such as |
| to say that CPAs should routinely recommend | | | | the ability to write off the entire remaining tax |
| CSS to their clients "whenever the expenditures | | | | basis of a building component upon replacement. |
| for an acquisition, including leasehold | | | | An article in the Journal of Accountancy gives this |
| improvements, equal or exceed $750,000," but | | | | example: |
| the fact is that a lot of folks who have spent | | | | "... Suppose a cost segregation study showed the |
| considerably less can also benefit. | | | | initial value of a roof to be $500,000. Two years |
| Why, just last summer, I worked up a Cost | | | | later, when the roof has an adjusted tax basis of |
| Segregation Study for a friend of mine in Yolo | | | | $480,000, it needs to be replaced. The taxpayer |
| County who had purchased a little beach rental in | | | | could deduct a $480,000 loss. Had the taxpayer |
| 1997. We uncovered about $30,000 in unused | | | | not done the cost segregation study, the |
| depreciation. He told me later that his CPA / Tax | | | | outcome would have been vastly different; no |
| Preparer converted the data into about $7,000 in | | | | loss could be taken because the roof's tax basis |
| tax savings-for the current year! And his condo | | | | and the basis of the building would remain |
| did not cost him nearly $750,000. | | | | intertwined." |
| In another instance, I did the math for a | | | | Cost segregation is a tax-planning tool that all |
| Sacramento area office complex in which the | | | | owners of income producing properties should be |
| Cost Basis was $831,000. We moved about | | | | using. Sure, back in the beginning, only multi-million |
| $200,000 of that to short lived depreciation. At a | | | | dollar companies could afford them, but that's not |
| 30% tax rate that is $60,000 in tax saving! This | | | | true anymore. Studies are now so affordable that |
| smart businessman used the CSS as part of the | | | | they make smart business sense for almost |
| cost benefit analysis to determine whether buying | | | | everyone--even folks who own only one |
| the complex would actually pencil out as a profit. | | | | single-family rental. |
| By now I hope you're asking yourself, "What is | | | | Oh, yes, it's true that even without CSS, facility |
| this marvelous tax-savings tool called Cost | | | | owners would eventually benefit from the |
| Segregation Study and how can it help me | | | | depreciation, after a few decades, assuming the |
| increase my cash flow through accelerating | | | | building is not sold and that the owner doesn't die. |
| depreciation?" | | | | Well, it happens. But why wait? A Cost |
| Here's the short story: While it's best to complete | | | | Segregation Study NOW could give you an |
| a CSS in the year the building or improvements | | | | interest-free loan from the government for the |
| are placed in service, these studies can also be | | | | first 15 years, which you will then repay |
| done retroactively, just as we did on the beach | | | | interest-free over the remaining 25 years. If you |
| condo mentioned above. The IRS calls this a | | | | like the sound of that, talk to your CPA. |