Cost Saving Strategies: Cost Segregation Your Competitive Advantage

The medical industry is dealing with some significant obstacles right now with the latest regulations from Obama Care.  Fortunately, there still does exist a legitimate investment strategy, fully supported and validated by Congress, which the Treasury Department states should be considered for every taxpayer who owns or is constructing, renovating, acquiring or even leasing a commercial property. This often overlooked and misunderstood opportunity is available now utilizing a unique IRS approved tax program called Cost Segregation.

Cost-Segregation studies allow taxpayers to write off a much greater percentage of their buildings (and tenant improvements) over a shorter time period.  More specifically, the IRS code (Rev. Proc. 96-13, Rev. Proc. 2002-19, 2004-11) is designed to encourage business investment, by allowing building owners to reallocate Real property to Personal property, which increases depreciation deductions, thereby reducing the owner’s tax burden and increasing cash flow.

“In some cases, rather than renting space, a business owner may purchase the buildings in which they operate their companies.

Many CPAs who work with these types of business owners feel their clients are passive investors and cannot take advantage of cost segregation. In reality, many of these property owners can benefit from cost segregation tax savings if the accountant knows what to look for.” http://www.accountingtoday.com

Utilized properly by the Medical Industry, the FEACSA© (Fully Engineered and Accounted Cost Segregation Analysis Study) employed by cost-segregation specialists can be vital to a business owner’s bottom line.  It allows the taxpayer to reclassify as much as 25 percent to 50 percent of a medical building into the shorter-lived personal property asset classes than traditional “accounting method” used by CPA firms.  Just when you thought it couldn’t get better there can be additional benefits found in “looking back” in the past to reclaim unrecognized depreciation deductions.  Amended tax returns are not required; instead, a “catch-up” depreciation can be taken in one year by filing IRS Federal Form 3115 Change in Accounting Method, with IRS consent granted automatically.

HOW THE TECHNIQUE WORKS

The process of cost segregation begins at the time of purchase or construction.  Accounting professionals should advise clients or employers buying real estate to use an engineering report to segregate assets into four categories:

Personal property.
Land improvements.
Buildings (which should be further broken down into component parts).
Land.

Each of these categories has a unique depreciation recovery period under the Modified Accelerated Cost Recovery System (MACRS). The IRS rulings and court cases support the idea that systems which directly serve equipment that qualifies for accelerated depreciation, also qualifies for accelerated treatment.  The proper documentation using the engineering approach is required to justify what is claimed.

THE BOTTOM LINE $$$

An example of a fully engineered cost segregation applied to a medical building:

Medical Building Value                      $1,580,000

Cost Segregation Tax Savings            $   553,000

Net Cash Benefit to Owners             $   193,550

Most CPAs and accountants are familiar with MACRS but may not be aware of the benefits of a full engineering based study. Also they typically do not have the experienced manpower needed to perform an engineering based examination of the medical building. In order to properly classify the items within the building, an engineering-based segregation by qualified individuals is required to create an in-depth analysis.  These individuals need to be skilled in engineering, construction and taxation for the purpose of identifying the individual building assets, their associated costs and appropriate recovery period classification for federal, state and property taxation.

CONCLUSION

The Journal of Tax Accountancy has stated that …without a doubt, a cost segregation study is among the most valuable tax strategies available to owners of commercial real estate.  The sooner the medical community becomes educated; the sooner owners can begin to realize substantial increases in cash flow, which in turn encourages additional business spending and investment.

 

Article Contributed By:

Frank A Buonemani
Partner

ELB Consulting, Inc.

(O) 888-796-2112 (X100)

(C) 727-504-6579

www.elbcostseg.com

Receive your complimentary cost segregation feasibility assessment today! frank@elbcostseg.com

 

Lease vs Buy- What’s the right choice?

Office Space: Lease vs. Buy

Many businesses, especially in today’s market ,wonder whether it’s better to lease or buy office space. Every business is different but the considerations below are generally applicable to all business debating the lease vs buy question.  These considerations can help you down the path to determining what the best solution for your company would be.

1.            Cash Outlay – Typically if you are planning to purchase an office, you can expect to make a down payment of between 10% and 25% of the purchase price, depending on the lender and your credit. When you lease office space you won’t need to put down nearly as much. With good credit, the typical outlay is the first and last months rent which is only about 10% to 15% of the cash outlay required when purchasing office space.

2.            Opportunity Cost – With the large outlay of cash required to purchase office space, the opportunity cost of that money needs to be taken into consideration.  What return would you expect to receive on that money compared to the return you would expect to receive if you invested the money back into your business or into other investments?

3.            Fixed vs. Variable Cost – When you buy office space, you have a good idea what your costs will be over the long term. This is especially true if you have a long term fixed rate mortgage. If you lease office space, the market will dictate what you will end up paying for rent over the long run.

4.            Growth Considerations – The growth phase of your business should be a major consideration in making the lease vs. buy decision.  If your company is relatively new and/or in a high growth mode, leasing would allow more flexibility and fewer constraints to that growth.  On the other hand, if your company is mature and stable, buying office space is great way to meet your future office space needs.

5.            Tax Factors –When considering the tax factors it is always very important to consult with your attorney and tax professional about the legal and financial considerations to owning office space.

6.            Cash Flow Analysis – The devil’s in the details.  In order to really understand the financial aspect of purchasing office space, you need to prepare a detailed comparative net present value cash flow analysis which takes into consideration your predictions on the future including holding period, anticipated appreciation vs. rental increase, interest rates, and cost of expenses increases. It is a good idea to do three different analyses, optimistic, realistic and pessimistic, to help determine your margin of error. It seems like a daunting task, but there some good programs available to help you do this analysis including:

Lease / Purchase – a sophisticated Lease vs. Buy Analysis

7.            Your exit plan Selling a business and real estate together may be more difficult. One will have a diminished outcome.

8.            Business vs. real estate needsBusiness owners often make real estate buying decisions based upon the needs of their business rather than the real estate market. The best time to liquidate real estate may not coincide with the time to sell the business.

The next Step…

Deciding and analyzing the details to determine whether a lease or purchase is best for your business can be overwhelming.   Obtaining assistance from a commercial real estate professional can help walk you through the process and simply the results.  Providing you with the best possible solution to your situation.

Cost Segregation

It’s never too early to think about your taxes and ways to save money. One items mostly overlooked is the depreciation of the construction of your building.

A simple cost segregation analysis can help you determine if you are getting the most savings possible. Cost segregation is the process of identifying, segregating, and reclassifying components of commercial property into shorter depreciable tax lives. The core benefit of a cost segregation study is the additional cash flow that is created by reducing an owner’s current taxable income. For all practical intents, a cost segregation study can be viewed as a long-term no-interest loan from the federal government. What’s more, the cost of the study is a deductible business expense.

 Who can benefit from a cost segregation study?

A good cost/benefit analysis begins with answering these key preliminary questions:

Does the property qualify for these tax benefits?

 What is the owner’s tax status?

How long does the owner plan on owning the building?

Want to know more? Contact us today

 Carleton Compton ccompton@equity.net or Jason Scott jscott@equity.net

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