Cost Segregation Studies

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Cost Segregation Studies
Prepared by GOLDSTEIN LEWIN CO. 1900 NW
Corporate Blvd. Boca Raton, FL 33431
Telephone [phone] Miami-Dade
[phone] Fax (561)
241-0071 Palm Beach [phone]
Broward [phone] www.goldsteinlewin.c
om
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Cost Segregation Studies
Prepared by
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What Are Cost Segregation Studies?
Cost segregation is the process of separating the
costs of tangible personal property, other
tangible property, indirect costs and land
improvements from building and improvement
costs.
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Why Do a Cost Segregation Study?

• Current tax law dictates utilizing depreciable
  lives of 39 years for commercial real estate
  and 27 ½ years for residential real estate.
• A cost segregation study allows taxpayers to
  pull out different components of total
  building cost which will enable them to
  utilize much shorter depreciable lives as
  follows
• Land Improvements 15 yr
• Furniture and Fixtures 7 yr
• Machinery Equipment 5 yr

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Does the Building Need to be New in Order to Do a
Study?
No, a cost segregation study could be performed
on a building acquired after 1986 which is when
the Tax Reform Act of 1986 changed depreciable
lives on real property.
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If the Building Was Placed in Service in the
Past, How do You Change Prior Years Depreciation?
The correction of depreciation qualifies as a
change in accounting method for IRS purposes. In
addition to changing the depreciation on a go
forward basis, on the next tax return filed, you
can take the deduction for prior years in 1 year.
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If It Is a New Building, What Is the Process?
A coordination of effort with the client, the
general contractor and the architect. ?
Plans and blueprints are reviewed to highlight
specific areas for considerations. ?
Cost budget sheets are reviewed and
reconciled to actual amounts spent.
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If It Is a New Building, What Is the Process
(continued)
? A physical walk through of the property
during construction helps document
specific items to be considered. ?
Cost allocation of indirect costs such as labor
and general conditions.
CLIENT CPA GENERAL CONTRACTOR
ARCHITECT
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The Hospital Corporation of America Challenges
the IRS
In this 1997 case, the Tax Court concluded ?
Certain assets in the hospital facilities could
be considered personal property and
depreciated over a 5-year period.
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The IRS Response tothe HCA Ruling

• Action on Decision (September 3, 1999)
• We acquiesce in this decision.The issue as
  to whether the various disputed items are
  structural components or tangible personal
  property is a factual question.
• 2. Memorandum (April 1, 1999)
• the use of cost segregation studies must
  bespecifically applied by the taxpayer.

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Different Types of Property AreDepreciated at
Different Rates
Type of Property Depreciation
Rate Commercial 39 years Residential 27.5
years Land Improvements 15 years Tangible
Personal 5 or 7 years
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Which Properties Are Candidates for Cost
Segregation Studies?
Commercial properties (offices, retail,
warehouses) or apartment buildings with
construction cost or purchase price over 1
million New construction Remodels/rehabilit
ations after 1986 Purchase of existing facility
after 1986
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Which Properties Are Not Candidates for Cost
Segregation?
? Properties that will be sold within two
years ? Properties with construction cost or
purchase price below 1 million ? Properties
owned by entities that do not have taxable
income
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Types of Facilities That Can Benefit from Cost
Segregation Studies

• Warehouses ? Grocery Stores
• Retail ? Banks
• Restaurants ? Apartments
• ? Offices ? Hospitals
• ? Manufacturing ? Sports/Recreation
• ? Hotels ? Leaseholds

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Average Percentage of Reclassified Costs
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What Are the Benefits of Cost Segregation
Studies?

• Cost segregation studies enable owners to
• ? Increase cash flow through a reduction in
  federal income tax liability
• ? Justify accelerated depreciation of
  certain improvements
• ? Write off the amount of allowable past
  accelerated depreciation over 1 year by
  filing Form 3115

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How Much Have Local PropertyOwners Saved?

• Representative recent studies
• 
  Cumulative
• Facility Cost
  Present Value
• Office Building 5.1 million
  150,000
• Retail Center 18.0 million
  1,200,000
• Art Gallery 3.0 million
  90,829
• The average return is approximately 11 for every
  1 invested in a study.

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Bonus Depreciation MeansGreater Savings

• 50 of the cost of qualifying assets purchased
  after May 6, 2003 and placed in service before
  2005 can be depreciated in the first year.
• 30 of the cost of qualifying assets placed in
  service between September 10, 2001 and May 5,
  2003 can be depreciated in the first year.
• Qualifying assets are generally assets with a
  depreciable life of 20 years or less. Bonus
  depreciation applies only to original use of the
  asset.

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Cumulative Present Value of Tax Savings
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Cumulative Present Value of Tax Savings
(continued)
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Year 1 Revised Depreciation
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Which Elements Are Considered Structural?

• Walls, partitions, floors, ceilings
• Windows and doors
• Central air conditioning and heating units
• Plumbing and plumbing fixtures
• Electrical wiring and fixtures
• Chimneys
• Stairs, escalators, and elevators
• Sprinkler systems, fire escapes
• Other components relating to building
  maintenance

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Personal Property Must MeetSpecific Criteria
? Is the property capable of being moved, and
has it in fact been moved? ? Is the property
designed or constructed to remain permanently in
place? ? Are there circumstances which tend to
show that the property may or will have to be
moved?
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Personal Property Must Meet Specific Criteria
(continued)

• ? How substantial a job is removal of the
  property and how time consuming is it?
• ? How much damage will the property sustain
  upon its removal?
• What is the manner of affixation of the
  property to the land?
• Source Hospital Corporation of America
  v. Commissioner

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What Are Some Examplesof Personal Property?
Following are some examples of allowable personal
property ? Architectural millwork ?
Carpeting and padding ? Electrical wiring
to personal property ? Plumbing service to
personal property ? Moveable partitions
? Security systems ? Exhaust equipment
? Decorative lighting ? Emergency
generators ? Land improvements ?
Signage ? Wall coverings and window
treatments
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The Methodology IsCrucial to IRS Acceptance
In its memorandum of April 1, 1999 regarding the
HCA case, the IRS notes An accurate cost
segregation study may not be based on
non-contemporaneous records, reconstructed
data, or taxpayers estimates or assumptions
that have no supporting records. Thus cost
segregation studies should be closely
scrutinized by the field.
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What Qualifications Are Neededto Prepare a
Supportable Study?
The cost segregation study preparer must ?
Understand applicable Internal Revenue Code,
Tax Court rulings, IRS Actions on Decisions,
Chief Counsels Advisories, Technical Action
Memoranda, and other documents relating to
depreciation of personal and real property
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What Qualifications Are Needed toPrepare a
Supportable Study (cont)
? Understand the procedures necessary to
develop a report that can withstand IRS
scrutiny ? Understand architectural documents ?
Understand construction methods and materials
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Why Select Goldstein Lewin Co. for Cost
Segregation Studies
?We have performed over 60 cost segregation
studies for properties ranging in value from
600,000 to over 50 million, saving a total
of over 15 million in cumulative present
value for our clients. ? Our client base includes
a broad spectrum of industries that can
benefit from these studies ? We have personnel
who understand construction methods and
documents