Maximize Cash Flow and Reduce Tax Payments: Putting Money Back in Your Pocket, Not That of the IRS

Cost segregation is an effective strategy to reduce immediate tax payments and improve cash flow. For income tax purposes, most commercial real estate is subject to a 39-year recovery period and a straight-line depreciation method. A cost segregation study (CSS) is an IRS-accepted engineering-based procedure that reallocates a large portion of 39-year property to 15, 7 and 5-year property.

Examples of assets that may be eligible include select wall and floor coverings, nonstructural millwork, special lighting and certain land improvements – irrigation systems, retention ponds, paving, curbing and exterior lighting. Other assets that may not be as obvious include portions of the electrical, plumbing and mechanical systems and soft costs – permits, architectural/engineering services and contractor fees. Once used only by big corporations, this practice has become routine for commercial property owners and tenants of almost every size, such as veterinary clinics, manufacturing facilities, distribution centers, and automobile dealerships

What does this mean for the taxpayer? The results of a CSS will result in enhanced cash flow and tax reductions. In most cases, a CSS will provide over $100,000 in immediate tax - cash flow savings. It is not uncommon for savings to be much higher, even in the millions for some cases. On average between 35-60 percent of the costs for medical facilities may be reclassified to shorter recovery periods.

DOES MY PROPERTY QUALIFY?

A CSS can be performed on a newly acquired or constructed property (new buildings, additions, renovations and leasehold improvements) as well as properties placed in service as far back as 1987. Taxpayers have the benefit of claiming accelerated depreciation on a retroactive basis, by filing IRS Form 3115 (Change in Accounting Method), without the need to file amended federal tax returns. This enables the taxpayer to take all the depreciation he would have been entitled to, as far back as 1987, and claim the "catch up" adjustment (IRC • 481(a)) in one year! **Properties constructed or renovated between 2001-2012 may be eligible for additional benefits.

THE PROCESS

It is essential that a qualified third party cost segregation consultant perform the CSS. The consultant should have a significant engineering, construction, and tax background. It is imperative that the taxpayer's CPA be involved with the process as well. An engineering-based approach is the only way that a CSS will withstand IRS scrutiny in the unlikely event of an audit. The process involves the review of relevant property information such as cost data and building plans. Next, the engineers will "dissect" the building costs to reclassify the property into 39, 15, 7 and 5-year categories. Generally, the entire process takes 30-45 days and the findings are then integrated with current accounting and tax information.

AN EXAMPLE

To illustrate the impact, a CSS was performed on a 10,700 square foot, veterinary hospital that was newly constructed in August 2008 at a cost of $2.5 M. The CSS rescheduled $908K (36.1%) of the assets to 5- and 15-year property. As a result, the property owner saved over $37,000 in tax payments for the current tax year and will realize over $160,000 in 10-year (net present value) tax savings.

It is important to note that a cost segregation study does not increase depreciation, it accelerates it. The bottom line is the taxpayer benefits from having more cash in hand now that can be put to work in other ways. A dollar today is worth much more than it will be 10 years from now. It's the taxpayer's money, can you think of any reason not to go after it?

For more information on cost segregation, visit www.bedfordcostseg.com or contact Debbie Rodkin at This e-mail address is being protected from spambots. You need JavaScript enabled to view it or 678.205.4770. Bedford Cost Segregation is one of the largest firms dedicated entirely to cost segregation services, performing over 5,500 studies since 2002.

Debbie Rodkin is a Trusted Advisor of the BUSINESS HOUSE, inc.^SM

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