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"I am proud to say that I have been a client of the firm for almost twenty years. While business opportunities and cycles come and go over time, the unwavering support, professionalism, responsiveness, and general best-in-class customer service has proven to be invaluable to me... not just for my business but personally as well. John Jeffries' work and assistance, combined with the many other resources within the group, yield one of the most important aspects to our business today and we will always remain very appreciative."

Sandy Myers
ASF Logistics, Inc.
 

Cost Segregation

Recent Internal Revenue Service rulings and court cases are now enabling real estate owners to take advantage of greater tax savings through increased depreciation deductions resulting in increased cash flow.  This proven tax strategy can be applied to existing buildings, new construction and purchased buildings.

Since 1986, depreciation has been significantly limited for real property.  Starting in 1986, a building is depreciated using the straight-line method over 27.5 years for residential rental property and either 31 years or 39 years for non-residential real property, depending on the year the building was placed into service.  By performing a "cost segregation" study, it is possible to identify elements of a building that are considered personal property and depreciate those elements over 15, 7, or even 5 years, thus significantly lowering an organization's tax liability.

Most importantly, for existing buildings that are currently being depreciated over 27.5 to 39 years, it is possible to go back and identify the elements of a building that should have originally been considered personal property and catch-up the depreciation through an unprecedented one-year deduction. 

In alliance with an engineering firm who has over 20 years of experience in performing cost segregation analysis, Wilkins Miller Hieronymus provides a cost segregation service that allows tax benefits through accelerated depreciation deductions on new or existing property.

A cost segregation study will provide you with three key benefits:

It will maximize your depreciation benefits through a detailed engineering analysis that decreases your taxes and improves cash flow; it will provide thorough documentation for the classifications organized in a clear, easy-to-use format; and the study will be supported by our interpretation of applicable tax laws and regulations.

Building costs are generally classified for federal income tax purposes into three categories.  Each has different depreciation recovery period and method under the Modified Accelerated Cost Recovery System (MACRS).

Tangible Personal Property         5 or 7 years          200% DB

Land Improvements                           15 years          150% DB

Real Property                                       39 years          Straight-line

Our cost segregation study will help you identify items that should be properly classified as tangible personal property or land improvements, rather than real property that is depreciated over 39 years.  The tax benefits begin in the first tax year and continue throughout the depreciable life of the identified assets. For example, a taxpayer who owns a manufacturing facility could classify the cost of certain equipment foundations, exhaust and ventilation systems, security systems, and electrical distribution as tangible personal property.  Certain site improvements such as landscaping, underground utilities, and site lighting could qualify as land improvements.

Knowing the difference is critical.  So is the ability to support and document the decisions.  That is why you need expert advice.  Identifying items to be reclassified is only half the battle.  The other half is to determine the costs legitimately associated with each item.  The complication is locating single-item costs.  For example,  suppose you know that a portion of your facility's electrical distribution for specified manufacturing equipment should be in the shorter-life category.  You look at the contractor's charges under electrical and find that all the electrical costs for the job are bundled into a single number, but you need only the cost associated with the electrical distribution serving manufacturing equipment.

We can unbundle the costs and assign them appropriately -- not only the direct costs, but also a portion of any indirect costs, such as architect and engineering fees, contractors general conditions, permits and bonds, etc.

How much can you save on taxes after accelerating depreciation deductions?

Any capital intensive business that invests in a cost segregation study can potentially achieve a payback of about 22 cents for each dollar reclassified as a 5-year property and about 8 cents for each dollar reclassified as a 15-year property.  Our detailed cost segregations studies pay for themselves many times over, starting with the first year the property is placed in service. By investing in one of our professionally prepared cost segregation studies you will have the assurance that you have maximized your depreciation benefits and have fully documented support for your depreciation claims should you be qualified.

How can you save on sales tax?

Another benefit you can achieve from a cost segregation study is lower sales taxes.  About half the states give a sales exemption for tangible personal property used in manufacturing processes and R&D.  But supporting the deduction can be very complicated. 

What is your state's particular definition of tangible personal property? Does it differ from the federal definition?  Special-purpose property, roads, and concrete loading docks, for example, could qualify as tangible property in the federal definition, but not the state's.  What in your state is manufacturing? Does your business have a manufacturing process -- or is it assembling or processing, which may or may not qualify for sales tax exemption?  Does your state allow an exemption for storage? Can you document that the identified tangible personal property is used directly in manufacturing, as most states require? We can answer these questions and help you save money.

How can you save on property taxes?

As state and local governments seek ways to increase revenues and federal tax benefits decrease, companies now must pay closer attention to their property taxes and make property tax management an integral part of their cost management strategies.  Property taxes seem to continue to rise throughout the country and have become a principle source of municipal operating revenue.  Various state property tax reforms and classification measures have forced taxing jurisdictions to maintain the local tax burden on local businesses, despite the escalation of residential property values.  And many of the tax reform propositions recently enacted have made it necessary to focus on new business property investments as additional sources of tax revenue.  A cost segregation study has a third potential benefit.  You can obtain a lower assessment by separating non-valued cost items, or costs that are not real property costs, from your reported costs of construction or acquisition.  For example, overtime hours, demolition of the former building, and some change orders increase the cost of the construction project, but do not add to the market value of the completed building, even though they were necessary and the expenses were paid.  These costs do not belong in your building's tax basis.  They can be exempted in certain states, if the costs are correctly identified and documented.

When measuring the best cost segregation service, consider these important factors:

Substantial Tax Savings - cost segregation studies save millions of dollars in taxes.  The tax savings are many times the cost of the study itself providing a sizable return on your investment.

Engineering Approach - Because Wilkins Miller Hieronymus has partnered with professionals that are construction engineers, our cost segregation practice is based on more than tax knowledge.  It is a combination of construction experience and tax knowledge that sets us above the industry standard.  This approach has proven to be the most acceptable to the IRS and Tax Courts.

Wilkins Miller Hieronymus will gladly create a free cost segregation study tax benefit estimate before the study is agreed upon.  Our clients have seen that our detailed cost segregation studies pay for themselves many times over, starting with the first year the property is placed in service.