The two-story apartment building contains 28,000 square feet of gross floor area and is situated on a 1.7 acre site. The land improvements consist of the 40 unit apartment building constructed of concrete, masonry, steel and reinforced concrete slab on grade with standard reinforced concrete spread and strip footings. The building is enclosed with concrete masonry and brick walls, with glass doors at the entrance. The property was purchased in 2008 for [Read more…]
The market conditions in the Apartment Industry continue to improve and remain strong. According the NMHC (http://www.nmhc.org/2014-July-NMHC-Quarterly-Survey) markets are tighter, sales volume is up and financing is more available. Many apartment owners have increased profitability from the lower vacancies/higher rents. With increased profitability, comes increased tax liabilities. Engineering Based Cost Segregation can help apartment owners decrease their tax burden, [Read more…]
The IRS recommended approach to cost segregation is the Engineering Approach. Most cost segregation companies claim to be using some form of Engineering Approach; however, the majority of them are actually providing an Abbreviated version known as a Residual Study. While they may use Engineering methods to identify and assign costs to the short life assets, they then simply lump the remaining balance into the long life “Real Property” category. Often times, these studies will leave out many items that should be reclassified, resulting in lost benefits to the property owner. The study may even over estimate the amount of personal property, leaving the owner open to increased scrutiny and risk in the event of an IRS audit. What’s more is that these Residual providers are typically charging [Read more…]
A Cost Segregation Study performed In-House, by employees of the company, is often times reviewed with more scrutiny by the IRS.
Here is the summary of the Boddie-Noell Enterprises court case:
- The Company owned and operated approximately 240 Hardee’s restaurants.
- The two employees who conducted the original cost segregation study used an estimate of a existing study conducted by Hardee’s Food Systems which indicated 24% of the assets qualified for ITC. They sent questionnaires regarding costs to contractors but didn’t keep those records.
- The IRS examined the methodology and threw out the results of the study.
- The company took it to court and hired an individual cost segregation practitioner to conduct studies on 7 properties prior to trial.
- The practitioner did not visit any of the sites.
- Indirect costs were improperly allocated to the estimated take offs (i.e. the allocation of excavation and other site work to electrical, HVAC, etc.)
- Some costs were taken from estimating books others were randomly assigned or adjusted from the estimating books.
- After examining the methodology the court stated, “The methodology employed by plaintiff…. was at best, unusual.” They also stated that the results of the 7 studies performed by the individual cost segregation practitioner appeared to be “based on after-the-fact speculations”. The court also found a lack of contemporaneous evidence supporting the corporations’ claims.
If you have a client that owns Commercial or Residential Rental property that is currently profitable, or was profitable within the last five years, a properly performed engineering based cost segregation study could help reduce their current tax burden or help them qualify for a tax refund. We can provide a free initial evaluation for the property that you can use to assist them with year end tax planning strategies.
Typically, building costs are classified for federal income tax purposes into three categories. Each has a different depreciation recovery period and method under the Modified Accelerated Cost Recovery System (“MACRS”):
TANGIBLE PERSONAL PROPERTY
Depreciates Over 5 OR 7 YEARS
At a 200% Declining Balance
Depreciate Over 15 YEARS
At a 150% Declining Balance
RESIDENTIAL RENTAL – REAL PROPERTY
Depreciates Over 27.5 YEARS
Straight Line (Residential)
COMMERCIAL – REAL PROPERTY
Depreciates Over 39 YEARS
Straight Line (Commercial)