Cost Seg Training 10 2010

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Cost Segregation Studies
Grant Keppel, CPA
National Director

Cost Segregation Studies (CSS)
What are they?
• Comprehensive analysis of hidden personal
or tangible property for commercial
buildings.
• Analyze cost data including the contractor’s
application of payments (AIA), change
orders, owner incurred costs, and indirect
disbursements.
• CSS is not a component study.

What are they?
• Analyze purchase price of property to
segregate assets from the building cost
• Generally 15-50% of costs can be
segregated to shorter lived assets
• Allows indirect costs to be allocated to
various depreciable lives.

• New buildings under construction
• Existing buildings undergoing renovation
or expansion
• Office leasehold improvements and
“fit-outs”
Applies to What?

• Purchases of existing properties.
• All post - 1986 real estate construction,
building acquisitions or improvements.
Applies to What?

The Evolution of CSS’s
• Pre TRA-86 CSS undertaken to take
advantage of ITC which was only available
on personal and other tangible property
• ITC issues were resolved through IRS
rulings and the courts
• At least 100 IRS rulings/cases on the
subject
• New Ruling in 2008

Benefits of Cost Segregation
Studies
• Increased depreciation
in earlier years and/or
one time catch up in
one year
– results in less federal
and state income taxes
– results in increased
cash flow

HCA Case (109 TC 21 (1997))
• Old ITC case law can be used in
determination of structural component vs.
personal property for purposes of
MACRS.
• Reaffirmed by IRS on its acquiescence.

IRS Revenue Procedure 2008-52
• Allows a one year catch up on missed
depreciation deductions.
• Provides one year “windfall” for those who
where in error the first time
• Generally for buildings purchased or
constructed subsequent to 1986

• No need to amend returns previously filed.
• Automatic Accounting Method Change with
no fee for filing Form 3115.
• Form 3115 must be filed by the tax return
due date including extensions.

• Can provide cash flow windfall even
though the statute of limitations is closed
on the property construction or acquisition
year.
• Two tax years must be filed before
utilization of procedure – No longer.

Bonus Depreciation
• Contracts in 2008 - 2010
• In service in 2008-2010
• 50% in year one – assets with class life of 20
years or less

Major Areas of Cost Allocation
• Electrical
• Plumbing
• Site Work
• HVAC

• Finished
Carpentry
• Indirect or Soft
Costs
• Owner Incurred
Costs Paid
Outside of
General Contract
Major Areas of Cost Allocation

Electrical

Interior Electrical for Machinery
and Equipment

Plumbing

Plumbing
Trench Drains

Plumbing
Interior Kitchen Equipment

Plumbing
Grease Interceptors

Site Work

Who Benefits????

Manufacturing

Special Use Building

Car Dealerships

Hotels & Motels

Medical Office Building

Financial Institution

Nursing Homes

Fast Food Restaurants

Office Buildings

All Other Buildings

Case Study

Case Study
• $2.7 Million Ambulatory Surgical
Center
• Engineering Analysis
• $170,000 – 15 yr. 6.2%
• $1.3 Million – 5 yr. 48%

Case Study
• 71.4% of plumbing was process (medical)
• 56% of HVAC was process (medical)
• 73.5% of electrical was process (medical)
Additional depreciation Yr. 1 $230,000
Additional depreciation Yrs. 2-4 $745,000

Common Questions/Concerns:
• IRS Audit Experience?

Potential of Reclassification
Type of Structure Percentage Misclassified
1. Retail 10-40%
2. Grocery Stores 15-40%
3. Office Building 10-15%
4. Hotels 20-40%
5. Warehouses 8-12%
6. Light Mfg 15-40%
7. Heavy Mfg 25-70%
8. Processing Plants 60-90%
9. Nursing Homes 15-30%
10.Restaurants 15-40%

Connecticut, Prime High-rise
A 92 mil, 15 story office with a separate parking
garage and plaza wherein we located over 230
qualified assets. The results were 8.36 mil in 15-yr,
4.08 in 7-yr, and over 1.83 mil in 5-yr.
Alabama, Office Building
A 400,000 sq.ft. building leased to the U S
Government. In the 31 mil purchase price, we
located 4.35 mil in 15-yr, 2.6 mil in 7-yr, and 1.22
mil in 5-yr assets.
Case Studies

Factors To Consider
• Profitability
• Partners / Shareholders of Pass-Thru
Entities
• Mid Quarter Convention
• Other Depreciation Elections
Previously Made on Tax Returns
• Like Kind Exchanges

Factors To Consider
• Passive Loss Rules
• Early Disposition
• Alternative Minimum
Tax
• Estate Planning

QUESTIONS??

Cost Seg Training 10 2010

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