Tax Planning and Tax Savings Using Cost Segregation
Initial steps in tax planning using cost segregation include preparation of a Feasiblity/Benefit Analysis, which is a pro bono document evaluating the property by date of service, usage and tax basis (purchase or construction cost less land). This analysis allows the taxpayer and consultant to evaluate the potential benefits of a cost segregation study. The Benefit Analysis identifies the estimated percentage of reclassification of assets, the first year tax saving benefit, the five year tax saving benefits and the Net Present Value of those savings.
In order to develop the Cost Segregation Benefit Analysis, the following information is needed for review:
- Properties Under Construction – construction budget and percentages of building usage
- Newly Acquired Properties – settlement statement with land cost allocation
- Properties owned for over one year – depreciation schedules
Further steps in tax planning using cost segregation involve review of all plans, specifications, remodel/rehab plans to identify assets that may be substituted with lives shorter than 39 years and 27 ½ years. Additionally, it is important to ensure that the way in which assets are affixed preserves them as “Tangible Personal Property” instead of long-lived “Real Property”.
Cost Segregation Study Process
The following is an overview of what to expect during CRG’s comprehensive cost segregation study process:
- Feasibility/Benefit Analysis provided per the above.
- Proposal presented with Letter of Engagement
- Authorization of Letter of Engagement and deposit
- Client (or designee) identifies contact person for project (facilities manager, management firm, superintendent, etc).
- Letters are distributed to contact person so that tenants and departments may be aware that engineers will be on site. Letters will specify dates and times.
- Blueprints/plans must be made available (if not available a minimum charge to create plans is assessed). Plans may be secured typically at the county/city, original architect or fire department.
- Engineers coordinate with facility manager and usually will be on site within ten working days from receipt of Letter of Engagement and deposit.
- Engineers visit site – typically less than one day.
- Project is in engineering from two weeks to four weeks.
- Project then goes to accounting for another one to three weeks.
- Draft Report is forwarded to tax advisor/designated consultant/owner for preliminary review. This is an electronic data transfer.
- Once approved the “Final” is delivered/accepted. If a Form 3115 is necessary – a sample/dummy 3115 is forwarded with the necessary 481(a) adjustment calculations for the tax advisor.
- The balance for the Cost Segregation Study payment is then due.
Pre-Planning for New Builds & Purchases for Cost Segregation
The ideal time to begin a cost segregation study is when planning construction of a new investment property, remodel or expansion of an existing building. A cost segregation specialist can then identify, segregate and reclassify the project-related costs that qualify for a shorter depreciable life as they are incurred, instead of waiting until the project is completed. For capital construction projects and newly acquired buildings, an accurate assignment of costs will allow a taxpayer to “front load” cost recovery and cash flow, maximizing them in the immediate years following the construction of purchase.