COST SEGREGATION STUDIES

Purpose

The purpose of a cost segregation study is to provide owners of purchased or self-constructed real estate facilities a cost analysis to maximize the tax depreciation recovery amounts.  Owners of nonresidential real property such as buildings generally must depreciate their buildings (including structural components) using straight-line depreciation over a long recovery period of 39 years.  However, part of the investment in a commercial facility may in fact be tangible personal property eligible for faster cost recovery under Federal Tax Depreciation (MACRS) rules.  Such tangible personal property usually will fall within a class life that is depreciated over 5, 7 or 15 years. 

 

Objective

The objective of our work is to:

·        Identify and provide support for all assets that qualify for shorter cost recovery. 

·        Assemble a list of specific assets by asset class life for depreciation purposes. 

·        Tie out asset costs to General Ledger. 

·        Tie out asset costs to Construction Costs. 

·        Identify direct and indirect costs to properly allocate soft costs. 

·        Provide tax authorities to support the classification.

·        Maximize tax depreciation. 

 

Savings

Benefit for the Company is obtained based on the NPV of cash flow due to the accelerated tax deductions from classifying assets in a shorter tax life. The following chart is provided to demonstrate the potential savings based on various asset cost reclassifications. These estimates are based on a 38% tax effective rate and a 10% internal rate of return on excess cash.

Class Life	Asset Value Reclassed	NPV of Cash Flow Savings MACRS	NPV of Cash * Flow Savings MACRS +30%	NPV of Cash ** Flow Savings MACRS +50%
5-Year	$1,000,000	$ 198,700	$ 218,000	$ 225,000
7-Year	$1,000,000	$ 179,000	$ 204,000	$ 215,000
15-Year	$1,000,000	$ 94,500	$ 148,500	$ 176,000
20-Year	$1,000,000	$ 73,000	$ 126,000	$ 162,000

*   Based on MACRS depreciation with 30% first year bonus depreciation.

** Based on MACRS depreciation with 50% first year bonus depreciation.

 

Candidates

A company that is purchasing, constructing or renovating commercial buildings or multi-unit residential buildings is a good candidate for a cost segregation study.  While all taxpayers are good candidates, the tax laws are especially beneficial to the following industries:

 

·        Retail

·        Hotel

·        Restaurant

·        Banks/financial

·        Real estate

·        Technology

·        Telecommunication

·        Manufacturing

 

Benefit

Beside the cash flow saving, we provide additional benefits as well.  While some companies may be familiar with cost recovery issues, most are not experienced at determining which building assets to reclass or are not familiar with the tax laws which allow such reclass.  We go the extra mile to provide records to support all costs available for reclass to shorter periods.

 

·        Cost effective service

·        Timely service

·        Extensive support for asset classifications

 

Information Access

In the process of performing our service we will try to be as transparent to your employees as possible while gathering the information needed.  This will entail working with your personnel and personnel of the general contractor.  We will need access to tour the facility and access to the following records.

 

·        General ledger cost records

·        Fixed asset cost records

·        Architectural drawings and costs

·        Electrical and engineering costs

·        Facility standards/requirements

·        Architectural or other “soft costs”

·        Invoices

SALES TAX REVERSE AUDITS

Purchases

We review your business to determine the use of purchased items and services to determine applicability of available exemptions and non-taxable services.  We provide detail analysis of purchase transactions to determine proper taxability.  We audit Accounts Payable transactions to determine potential refunds due to overpayments.  We track transactions to determine proper account classifications for “taxable and non-taxable accounts of interest”.  We dig down to the invoice level to determine the proper rate, location and state in which tax is due.

 

Sales

We review your business to determine the proper taxation of items and services you provide customers.  We review each line item on sales invoices to determine proper taxability.  We audit Accounts Receivable and Bad Debt transactions to determine potential refunds due to overpayments and overcollections.  We track sales transactions to determine proper account classifications for “taxable and non-taxable accounts of interest”.   We test samples of daily “z-tape” cash register transactions to determine proper keying of taxable versus non-taxable items.

FEDERAL AND STATE INCOME TAX COMPLIANCE AND AUDIT SUPPORT

Compliance Outsourcing

We provide outsourcing of the entire federal and state income tax compliance including returns estimates and extensions.  We also provide tax professionals to help out during heavy compliance season or for special projects.

 

Compliance Experience

Our professionals have experience in the following areas:

·        Review and preparation of federal and state income tax returns.

·        Representation on various federal and state audits/conferences.

·        Management of professional staff, including hiring and training.

·        Preparing and monitoring tax provision (FAS 109) and budgets.

·        Consolidated federal and state filing for group of 300+ companies.

·        Short-period filing positions regarding franchise tax and due dates.

·        Tax calendar to coordinate and assign duties on over 400 filings.

·        Federal and State return preparation utilizing CORPTax software package. 

·        Special projects utilizing SAP and Hyperion G/L software packages. 

·        Preparation of partnership and trust tax returns.

·        Reviewed and reconciled "tax" depreciation reports.

FEDERAL EXCISE TAX COMPLIANCE AND AUDIT SUPPORT

Compliance Outsourcing

We provide outsourcing of the entire federal excise tax compliance for returns filed by companies covered under FAA and FCC industry classifications.  We also provide tax professionals to help out during heavy compliance season or for special projects.

STATE SALES TAX COMPLIANCE AND AUDIT SUPPORT

Compliance Outsourcing

We provide outsourcing of the entire state sales and use tax compliance.  We also provide tax professionals to help out during heavy compliance season or for special projects.

 

Compliance Experience

Our professionals have experience in the following areas:

·        Coordinated sales & use tax audits by various state agencies.

·        Developed sales tax manuals and implemented at the operating locations.

·        Extensive research and “white-paper” write up on sales tax issues.

·        Responsible for review and preparation of sales and excise tax returns.

FEDERAL AND STATE STRATEGIC PLANNING

Our professionals have implemented the following planning strategies:

·        Prepare cost segregation studies.

·        Prepare tax due diligence reports on acquisitions.

·        Stock sale proceeds, subsidiary basis, selling costs and reserve analysis.

·        §338 purchase price allocation, basis of assets & CFC’s and selling costs.

·        Research and “white-paper” write up on federal and state tax issues.

·        Tax Exempt Bond funding calculations including §467 related issues.

·        Fixed Asset projects including “like kind exchange” calculations.

·        Sales tax bulk sale and occasional sale due diligence.

·        50 State research project on Merger & Acquisition related issues.

·        Implement Royalty Co. & filing position in states that tax royalty income.

·        Implement Finance Co. to generate interest expense & isolate income.

·        Implement Management Co. to minimize TX Franchise and MI SBT.

·        Limited Partnership to minimize TX Franchise tax.

·        Corporate mergers or restructuring to utilize losses and credits.

·        Optimal filing position for unitary and combined filing states.

·        Tax planning projects utilizing CORPTax software package. 

STATE VOLUNTARY DISCLOSURE FILING SUPPORT

We provide voluntary disclosure services before state departments of revenue.  We consult with various state agencies to determine filing and tax collection responsibilities for specific transactions without revealing client name. We will negotiate with state agencies to mitigate penalties and interest under amnesty and voluntary disclosure programs offered by various states.