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IntroductionIntroduce Yourself – give backgroundThank you for comingWe are here today to discuss how Cost Segregation Services can help your current year cash flow And how you can maximize your benefits by using The Concord GroupWe will be discussing todayWhat is Cost SegregationWhy do we use the serviceHow it helps increase cashWhen it makes sense to use the serviceSome Examples How to get started with letting your building create more cash flow for youThe presentation will be about 40 min – it is for your benefit so please do not hesitate to ask questions as we go through the presentation. We will have some time at the end to answer questions also
Only when you combine the efforts of a highly technical engineering group such as The Concord Group with sound accounting can you hope to maximize your benefits and be secure in the knowledge that the project will be done correct and to IRS standards
So what is the benefit of performing a cost segregation study…..In most cases we see that the building will be put on the books as entirely Real Property (or depreciated over 39 Years) and Land . What happens in a Cost Segregation Study is that we break the building up into its components from an asset standpoint so that we can assign shorter lives to as much if the building as possibleThe result is that we will now have Personal Property – depreciated over 5 or 7 years (the Asset Life is determined by the business use of the building)And we have Land Improvement Property – depreciated over 15 yearsThe Largest portion of the building will in most cases be Real Property – depreciated over 39 yearsLand is non-depreciable and therefore our discussion throughout the presentation will be based the depreciable portion of the buildingThis graph is for representation purposes only. Every building will be unique in the amount of Personal Property, land improvements, and Real Property
So Why do we break it up into the three asset classes and depreciate it over different periods…..The results of our study effect how much you will pay in Federal TaxesDepreciation is a cost to a companyAs we depreciate over a shorter period – we increase the depreciation in the earlier years of ownershipIncreased Depreciation is a deduction and helps to lower incomeLower income results in lower taxes paidThe lower taxes paid results in an increase in cash flow for the company And especially in the earlier years of ownership when money is tight (or a slower economy) this increase in cash flow can be used to help grow the business
This is a graphical representation of the differences in depreciation for the various classifications over the life of the buildingAs you can see if you were to put your building on the books as real property – you would be depreciating it over 40 years at a rate of approximately 2.5% per YearIf you were to place some of the property in the Land Improvement Asset Class you can see that you dramatically reduce the period of depreciating the asset – in the first two years alone you will depreciate over 14% of the property compared to between 4 and 5%As we move assets to the personal property you can see that the results are even more impressiveFor 7 Year property you will depreciate over 38% in the first two yearsFor 5 Year property you will depreciate 52% in the first two yearsA couple of things to Note:We are not creating any additional depreciation over the life of the building – we are simply accelerating it into the earlier years of owner ship – helping cash flow in the earlier years of ownershipThere are other asset class life but the most common ones are the 5, 7 15 and 39 Year shown in the slide
Another way to look at this is how dramatic the change is over the span of 5 years.As you can see the Real property is depreciated at about 12%The Land Improvement Property is depreciated at approximately 38%The 7 Year Personal Property is depreciated at nearly 78%And the 5 Year Personal Property is depreciated at about 95%
So the question is – When does this make sense and for what type of project or buildingCertainly it is easy to understand that for a new building this is a great opportunity to put the assets on the books correctly to begin with and take maximum advantage of your depreciationThere are other opportunities as well that you may not be aware ofMajor Renovations – nearly the same concept as a newly constructed building but maybe on a smaller scaleTenant Improvements are a real opportunity for a Cost Segregation Project – and this may be beneficial to the owner of the building and/or the tenantAcquisitions are a prime candidate for a study – this is another opportunity – any time a building is acquired the depreciation for it starts over and a study can be performed (on one particular building I have performed 3 different studies as it was sold and then resold again)And the last but not least are properties that are currently owned and not fully depreciated – These can be acquired or newly constructed buildings
The ability to look at existing property for Cost Segregation Services is very powerfulBack in 1996 the IRS did something very uncharacteristic – the said that you could look at look at your existing properties and “correct” the depreciation on them if you had not done it correctly from the beginning of ownershipBecause you are doing a correction of depreciation – the mechanism by which you do this is a Form 3115 or Change of Accounting Method (we can provide this service as part of the study)The best part about this is that you will not have to amend any tax returns and that the “catch-up” depreciation is all taken in the year of performing the study and filing the form
The tax advantages of doing a Lookback are incredible….This is an example of a building that had been owned for 5 years before a study was performedIn this case we have identified $750,000 in assets originally classified as Real Property After the study it was found that these assets were 5-Year Personal Property You can see the depreciation prior to the study is $87,350The corrected depreciation after the study is $706,800The depreciation adjustment is $615,450And the resultant Increased Cash Flow from performing the study is $246,180 (assumes a combined federal and state tax rate of 40%)A quarter of a million dollars that you now get as additional cash flow to help grow your business – interest free….One thing to note here:If the resulting benefit puts you into a NOL (net operating loss) situation we have the ability to carry that loss back 2 years and forward 20 years. Therefore, the benefits could be even more compelling than those stated.
Above and beyond the standard accelerated depreciation available for short life property we can still take advantage of several stimulator programs which provided bonus depreciation Bonus is for all short life propertyThis was a program for new constructionOnly for certain periodsWe can only take advantage of this for lookback studiesThe important thing to know is that we will be taking full advantage of all opportunities available to you to help Maximize your Benefits
You may be able to start using the benefits of the study right away – even before filing your tax returns</li></li></ul><li>The Proposal Process is Straightforward and Simple<br />Information Requested:<br /><ul><li>New Construction</li></ul>- Site Plan and Construction Plans<br />- Breakdown of Construction and Soft Costs<br /><ul><li>Acquisition</li></ul>- Appraisal<br />- Closing Statements<br />- Drawings – if Available<br /><ul><li>Lookback – Properties Already Owned</li></ul>- Depreciation Schedules (In addition to the above)<br />
The Proposal Provides<br /><ul><li>No Cost Review of Plans and Costs
If the Study does not Provide a Benefit Amount that far Exceeds the Professional Fees – We will not Suggest Moving Forward with the Study</li></li></ul><li>Why The Concord Group…..<br />“An accurate Cost Segregation Study may not be based on non-contemporaneous records, reconstructed data, or taxpayer’s estimates or assumptions that have no supporting records.”<br />“Cost Segregation Studies should be performed by qualified Individuals or firms, such as those employing personnel competent in design, construction, auditing and estimating procedures relating to<br />building construction.”<br />According to the IRS<br />