By Lance Winslow
Have you considered doing a complete analysis of your commercial property to determine whether each component has been placed in the correct asset category to maximize depreciation?
Applying the Cost Segregation Depreciation Method utilizing an on-site engineering-based study to accomplish this objective can ensure that property, renovations, and improvements are put into the most appropriate and most advantageous tax category. Maybe you and your CPA ought to have a look at such a strategy.
Yes, we are talking about a tax deferral strategy, which will decrease your current taxable income. If you are planning on keeping your properties for a long time, this might very well make a lot of sense for you. In some ways this is the same strategy as folks use when funding an IRA. Let’s talk about this a bit, and then you can ask your CPA to consider your situation.
To take full advantage of your commercial property cost segregation strategy and accelerated depreciation, you first need to separate out your land, building and improvements. There are eight points you must satisfy per the IRS Tax Code, which you can find on the IRS Website in an 80-page set of sub-codes (dry and boring reading) explaining what these eight points are.
What you need is a engineering-based cost segregation study, which your CPA can feel confident about to make sure all the T’s have been crossed and the I’s have been dotted. In this personalized report the on-site engineering firm will review all the real property, improvements, renovations, and buildings and then place these components into shorter depreciation categories where appropriate and allowable. Often companies can substantially decrease their taxes in the current year. You like it so far—I thought you would.
For a company that owns multiple c-store properties, this could be an excellent windfall. Even for single properties of $500,000 in value, it can make sense. And for new properties you can maximize your depreciation under IRS section 179.
Supreme Court Justice Learned Hand once said; “Anyone may arrange his affairs so that his taxes shall be as low as possible; he is not bound to choose that pattern which best pays the treasury. There is not even a patriotic duty to increase one’s taxes. Over and over again the courts have said that there is nothing sinister in so arranging affairs as to keep taxes as low as possible. Everyone does it, rich and poor alike and all do right, for nobody owes any public duty to pay more than the law demands.”
In 1999 there was a Supreme Court Case in which Hospital Corporation of America had its day in court with the IRS. They won and from that case was born the validity of the commercial property cost segregation strategy. If your c-store, car wash or product vendor company is not taking advantage of this, you could very well be costing yourself more taxes and less profits.
Okay so how do you go about setting this up? Well, first ask your CPA or your company chief financial officer if they are aware of cost segregation accelerated depreciation methods. This is a strategy that historically has been applied to large businesses, but now these methods are being made available and affordable to smaller properties and companies. Next, find an experienced and qualified firm that can do an engineering survey of your property from head-to-toe, including blueprints. This ensures that you have documentation to back you up in case the IRS ever audits you on the issue. Then apply the results of the report to your current year’s tax return.
There are many firms that do cost segregation reports if you search on Google, but you are better served if you use one that follows the IRS recommendations and proper BMPs. One nation-wide company is CSSI or Cost Segregation Services Inc., and they offer a no-cost property analysis review to determine if this strategy will provide you with tax savings benefits. You need to find a firm that will work with your chief financial officer or CPA, and not in place of them.
Why do this now? Well, why wait when you can start decreasing taxes this year? This report will improve your balance sheet by taking taxes away and improving your cash flow numbers. There are other benefits to all this and your CPA or chief financial officer will be looking pretty brilliant once it’s implemented.
By Lance Winslow