Discussion:Cost Segregation Specialists
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Discussion Forum Index --> Tax Questions --> Cost Segregation Specialists
RidenourEA (talk|edits) said: | 25 October 2007 |
| I have a client who owns a motel. He has been approached by a Cost Segregation Specialist copany that analize assets and depreciation to see if certain costs can be depreciated quicker. Apparenly these companies are known to target motels.
Does anyone have any experience with this type of company? If so, any comments would be greatly appreciated. | |
| October 25, 2007 | |
| I have a client in the business, but have never used one. It seemed like a lot of smoke and mirrors in my opinion. Here's why: the client's getting all the depreciation eventually anyway. So timing is key. If they're coming on a property that's already been in service a while, what are they going to do? Charge thousands, maybe tens of thousands, to speed up depreciation a bit? Just seems a bit overkill to me. They make it sound like it's really something, but to me, unless you're loading in a relatively new building and can do this from the get go, it's much ado about not much. | |
RidenourEA (talk|edits) said: | 25 October 2007 |
| JR1-thanks for the reply. These were my thougts also. One question I did have-If the client goes this route and depreciation changes-do I amend returns? Or is there some kind of current year adjustment? | |
| 25 October 2007 | |
| I have seen these in action as well. I would ask for a preliminary analysis and a fee quote. I have a firm that I refer cost seg work to, and they always do a preliminary analysis and a fee quote to show whether there is a benefit to proceeding with the study. Of course, the benefit is a time value of money benefit, so generally there has to be a lot of value there. In addition, I would suspect they target hotels because there is a lot of opportunity for benefit. | |
| 25 October 2007 | |
| Consider this: They redo the parking area, paving , stripes etc. You as the acct will know the cost. Maybe it will last 15 years. The carpeting wont't last 39 years. It will have to be replaced sooner. The furniture and beds and linens are a different amount. Be realistic, you can probably do the analysis by using realistic depreciation. | |
| 25 October 2007 | |
| They can generate a lot of savings in the right circumstances looking at time value of money concepts. On the other hand, upon final disposition, that accelerated depreciation becomes ordinary income recapture instead of unrecaptured 1250 gain. | |
RidenourEA (talk|edits) said: | 25 October 2007 |
| If the client goes this route and depreciation changes-do I amend returns? Or is there some kind of current year adjustment? | |
| 25 October 2007 | |
| Are you required to use such a Cost Segregation Company? Can the client do it himself? I had a small client that made some leasehold improvements as lesee. They were an architecture firm, so some of the improvements were fairly expensive (but I could see that some were theorectically in the nature of "personal property"). I think it ended up as 15 year property instead of 39 year anyway. But I called one of these cost segregators, and they told me, it was not worth it, it would cost my clients too much. Now these guys are architects to begin with, why can't they do it? Weren't the detailed lists the IRS put out for the restuarant industry as far a determination of leasehold property fixture vs. personal made for the landlord or tenant to appy themselves? | |
| 25 October 2007 | |
| I have a restaraunt client that was approached by one of these companies, they gave him a preliminary analysis that showed that he would save $46,026 in the first year. That was on an ESTIMATED tax rate of 36%. So here's what my client heard, "We'll save you 46,000 in tax in the first year, and even more in the next few years." Problem is, this partnership (restaraunt) had a loss of 93,000 using just regular 39 yr depreciation in that first year (2006 was the first year). They were going to charge a fee of $6,950 to provide the in-depth analysis. It took me almost a full hour to explain to my client that he was NOT going to save $46,026, he had ZERO tax liability already. | |
Death&Taxes (talk|edits) said: | 25 October 2007 |
| Obviously cost segregation analysis is a growth industry. It came in when day trading went out.
That's a lie, but the initials HCA have a lot to do with it. | |
| 25 October 2007 | |
| If the client goes this route and depreciation changes-do I amend returns? Or is there some kind of current year adjustment?
It’s a 481(a) adjustment, taken all in the year of adjustment. It is a change in accounting method so you have to file a 3115 with the appropriate attachments, but it’s an automatic change so you will be approved, you just have to file the form. I think you can find what you need in Rev. Proc. 2002-9, Section 2 and the appendix (it’s been a while since I’ve gone over this so don’t hold me to that Rev Proc). You basically figure out what depreciation was under the old method and what it should have been under cost seg (the new method) and the difference is your additional deduction in the current year. Then you depreciate the assets under the new method on a go-forward. The audit technique guide has a lot of info on cost seg: [1]. I think one of the requirements to do a cost seg is that you need an independent appraisal, so you can’t just guestimate. You need to pay a professional. The time-value/cost-benefit issues that have been pointed out are important - just make sure your client isn't paying for something that isn't really there. Cost seg has a time and a place, but it's not for everyone. | |
Proptaxguy (talk|edits) said: | 25 October 2007 |
| You may want to clarify exactly what they are talking about as far as "tax" savings. They may be looking to reduce your property tax liability by cleaning up the large lump sum entries that typically are capitalized with a major renovation. You would be amazed at how much money you are paying for property taxes for assets buried in these costs that have been gone for years. Hotel rooms get refurbished quite often and the new costs are capitalized without completely retiring the original assets. The "We'll save you 46,000 in tax in the first year, and even more in the next few years." sounds more like a property tax savings project to me. | |
| 25 October 2007 | |
| There is at least one category of tax savings which goes beyond the present value issue- it is the reclassification of spending which was originally booked with land, which should have been classified as depreciable land improvements. Cost Seg has been a specialty of the large accounting firms and large appraisal firms for decades. Usually a preliminary study is done at no cost. If true in this case, why not see what the probable benefit will be and then let the client decide what to do. I very much agree with the poster who said that, if the property is likely to have small or no profits going forward for many years, it may be of little worth. But in any other case, it is worth looking into. -Bob | |
CostSegAdvisor (talk|edits) said: | 26 October 2007 |
| For KathyT. if a "true" professional had done work for your restaurant client they would have made it absolutely clear to the client that Cost Seg is only applicable if the company (or the clients group of companies - LLC's) are working at a profit and can handle the additional depreciation.
They would have also emphasized that the only absolute delivered is DEPRECIATION! The actual dollar values vary based on individual tax rates! True professionals dont "SELL" cost segregation studies they provide numbers and allow the client to make it a "Business Decision" as to whether the benfits and cost warrant the professional services. Is it worth paying someone to get what could be considered a "Interest Free Equity Loan" -- because it is their money -- they just get to use it NOW instead of waiting! The higher the cost of the building the bigger that "loan" which can be used to fund additional projects.
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| 26 October 2007 | |
| Ridenour-one benefit of the cost segregation study is that you DON'T have to amend prior year returns.
All you need to do is in the year the cost seg. is completed, enter as a Miscellaneous Deduction - 481(a) adjustment (I think that's the reference) which is the cumulative change in the depreciation deduction.. | |
CostSegAdvisor (talk|edits) said: | 27 October 2007 |
| The form is the 3115 and Uncle Sam is correct....no need to Amend or Restate tax return! | |
| 2 July 2008 | |
| It is amazing that so much "bogus" information is out there on the Tax Almanac website regarding cost segregation and cost segregation studies. As a cost segregation/valuation specialist for the past 36 years, I would strongly advise readers of postings on this site to read the Cost Segregation Audit Techniques Guide promulgated by the IRS.
There are many unprofessional cost segregation firms that promise incredible tax savings through present value of tax savings calculations in the reclassification of property. However, these savings are often inflated by including FF&E or equipment in the analysis. For example: If you are constructing a new hotel for $25 million and that cost includes the room and common area furnishings, then you will not reap huge tax savings by having a cost segregation study completed on the $25 million. You recognize benefits on the analysis and proper classification of assets contained in the construction costs. To imply that taxpayers, or their accounting firms would classify the FF&E or equipment in the 39 year building class is a typical ploy used by unprofessional cost segregation firms to beef up the promised tax savings through additional depreciation benefits. Before you engage the services of cost segregation firm, ask them the following questions: 1. Do you have professional cost segregation engineers/architects/construction engineers employed in your firm who will do the cost estimating necessary as prescribed by the IRS ATG mentioned earlier? 2. Does your firm actually do the cost segregation analysis or subcontract it out to a third party? 3. What is the experience of your firm in defending the report in front of the IRS (agent level, appeals level, or pre-trail)? 4. Can your firm provide references (names and contact information) of clients who have had cost segregation studies done by your firm for similar facilities? 5. How long has your firm been in business and with regards to the studies your firm claims to have done, are those studies your specific firm did, or are they studies some of your staff members were involved with in previous employment? 6. What methodology does your firm employ, and which section of the IRS ATG describes your methodology? 7. Who will be assigned to the project, what are their credentials, and will any subcontractors be used on the study. There are, of course many more questions you should ask. Cost segregation studies, done properly, do provide great tax benefits for taxpayers who can use the additional depreciation. Corporate America uses cost segregation firms on a continuous basis. While smaller taxpayers may benefit from the cost segregation study, it is prudent to determine if the benefits can be used. I hope this clarifies the situation. If you have any questions, feel free to ask me in a follow-up. In the meantime, do not hesitate to ask as many questions as you deem necessary to make sure you get a professionally prepared cost segregation study by a firm that has experience. If not, you will will get what you pay for. | |
RoyDaleOne (talk|edits) said: | 3 July 2008 |
| "It is amazing that so much "bogus" information is out there on the Tax Almanac website regarding cost segregation and cost segregation studies."
And where is this bogus information? | |
Ksnoopytax (talk|edits) said: | 3 July 2008 |
| I think it's more along the line that when you are approached about doing a research and development study or a cost segregation study, there is an automatic assumption that it would be a waste of client time and money. I don't have alot of clients that need these products currently but I do keep it in my head as a tax planning tool and will contact a reputable provider with the qualifications mentioned by GHAMILTON if the situation emerges. I think automatically dismissing these tools as a waste of time and money does a disservice to your clients and it's our jobs as CPA's and EA's etc.. to evaluate the presentations the client receives on these products from the other firms and determine if it will benefit them. | |
| July 3, 2008 | |
| What he's written is very helpful and useful, the only incorrect part perhaps about the 'bogus information'. But let's no kid ourselves, there are threads out there that would have you believe that cost segregation is the answer to all problems, and I think that's what he's referring to. Correctly so. | |
Death&Taxes (talk|edits) said: | 3 July 2008 |
| It does seem to me there was another gentleman, I think from Florida, who kept posting to various discussions that the CS Study would cure all ills. If I recall, his posts were finally deleted. Seems to me this discussion runs a fine line between providing information and advertising one's services. Where it falls depends on the eye of the reader. | |
| 3 July 2008 | |
| What irks me is that a lot of this stuff is common sense.
This may be a Gilda Radner moment, but I am going to change the topic just a little bit: Col. Hamilton jumps right to the heart of the matter, but does not address the most important question, which is WHEN might the CS study be required to support the TP's position? If anyone has looked at that Restuarant Cost Segregation guide on the IRS website, I have posted it on here, and so have others I think. Notice the terminology: GUIDE, for whom? The ever loving TP, I say. Anyway, am I to believe that the TP and preparer cannot work together to do that segregation? I think they CAN. I do not think all these things have to be done by outsider engineers, architects and the like. There's a distinction here I'm trying to put my finger on. P.S. there is a difference between what is required, and what may be the most probative evidence if challanged, I am aware of that. I am getting at: what's required? | |
RoyDaleOne (talk|edits) said: | 3 July 2008 |
| CrowJD, any reasonable methodology that gives a correct answer. I have had people want to reallocate new construction costs that were based a cost breakdown provide the general contractor.
"I don't have a lot of clients that need these products", this may be true, however, every piece of rental real estate has this problem, be it new, purchased, or converted. Criteria; 1. If property is purchased (not new construction), 2. the value is greater than 10 million, and 3. the client is knowledgeable, and 4. the type of property would matter, is the point were I would start looking into a study. JR1 if that is true, I would suggest, that was not very clear, from what I read. A good cost study needs to be communicated clearly. | |
RoyDaleOne (talk|edits) said: | 3 July 2008 |
| I write long run-on paragraphs? lol...<g> | |
| 6 July 2008 | |
I am a CPA (Florida) and I work for a firm of Engineers and CPAs who prepare Cost Segregation Studies - we have performed over 3,000 without a significant change from the Service. The first step is to review IRC 268(a) - no deduction is allowed for the purchase of real property.
The review IRC 167 - Depreciation Methods and find Real Property is required to be depreciated on a straight line method over 39 years (commercial) 27.5 years residential (apartments). Where it is in the best interests of the Client to accelerate the deduction for depreciation and the property othewise qualifies (there are cost pools of 5-7 15 year lived property)a savings will develop from sheltering current cash flow. One point overlooked in this thread is the "look-back" provision, where open years may be amended to reflect the change in method of accounting, usually resulting in significant refunds. A Tax Preparer may not "informally" change a method of accounting, the change occurs pursuant to an engineering based study - by that - the Cost Seg firm's Engineers (and get a firm who is a licensed engineering firm like ours) obtain the blueprints and apply Marshall/Swift software to delineante the "section 1245" property (the parts) those parts will depreciate more rapidly than the structural components of 39 years. If you refer to a Cost Seg firm make certain they are CPAs and PEs - fully licensed the others are not qualified. | |
| 6 July 2008 | |
| Why is it necessary that the Cost Seg firm be CPAs?
PEs I can fully understand, but why is it required for them to be CPAs? | |
| 6 July 2008 | |
| Great.
Next time I need a Cost Seg study done for a client - the first thing I'll ask is if they are CPAs - not if they are qualified to distinguish between different classes of fixed assets or experts in estimating construction costs, or what experience in construction they have - but if they can whip up financial statements in a jiffy. The fact that you are a CPA connected with Engineers that do Cost Seg work - I'm sure has nothing to do with your biased and self serving opinion. | |
| 7 July 2008 | |
| Why not fill in your Bio Uncle Sam - your chest thumping smacks of bias. | |
| 7 July 2008 | |
| Because I have chosen not to. It's not a requirement (yet) on this board.
But I will tell you this - I'm BOTH a CPA and an EA - and EAs are JUST AS QUALIFIED to do this work as CPAs are. | |
| 7 July 2008 | |
| Once again this forum out does itself. I knew nothing about this stuff and now feel pretty well informed. Wish we could get CPE Credit for this. Uh, WPBCPA, perhaps if you would fill out your profile before you admonish others? | |
| 7 July 2008 | |
| What about earthquake property? I had a client that ran a chinese chop house purched on a cliff along the A-1, great location; but now, due to a minor quake, he finds himself on the valley floor, fortunately again in a great location. He's going to sell it to his son (#1-son), whom I also front for, err, I mean represent.
Can I make an exception and depreciate the land here on son's purchase? It's moveable. I've got three soil egineers and one feng shui expert that say they've never seen anyting like it, and will say anything I tell them to. I think that's the characteristic involved: moveability w/o destruction of the property. Well, I'm going with it, but I am attaching the 8275. I expect that within two or three years the way the earth is moving, number one son will have waterfront property, and then we can sell it to number 2 son, and repeat the process. Meanwhile, I'm hiding out in the workshed with No. 1 daughter. | |
| 7 July 2008 | |
| Lancermc - Bio updated (I had that updated and it was delected, somehow).
Sounds like Uncle Sam is in the Cost Seg - Biz too. | |
| July 7, 2008 | |
| Uncle has been around here a long time. His profile is his quality material posted here. With intimate knowledge of the inside team. | |
| 7 July 2008 | |
| Lancermc and JR - thank you for your kind words.
That's the best birthday present (7/7) I can get. Thanks again. And no - I'm not in the Cost Seg business. | |
| 15 July 2008 | |
| Kevin - yes lots of expertise - from Arthur Andersen, Grant Thornton - the Wharton School of Finance.
How about you which High School did you get your diploma from to sit for the EA Exam. | |
| 29 July 2008 | |
| Apparently Kevinh5 has a bit of chip on his shoulder. It was not my intention to "cut anyone down". What I was addressing was the importance of finding a qualified firm/individual to prepare a supportable cost segregation study. And, yes, Kevin there is a lot of information out there which is somewhat misleading. I chose the word "bogus" since I feel it best represents the report quality that will cause problems during an IRS exam, or in litigation. My call.
One further point to the readers of this discussion board. I do not solicit work from contributing to these discussions. If that is what you perceive, then so be it. However, that is not the case. What I thought I was doing was offering some free advise based upon information set forth in the Audit Techniques Guide for Cost Segregation, not a marketing pitch. I will answer your questions to the best of my ability, and that is it. If you do not like my answer, fine, but let's keep the personal attacks out of this. It appears others did get some insight from my posting. And isn't that what this is supposed to be all about? | |
| 29 July 2008 | |
| well, then I misinterpreted your post, GH. I thought you meant that the 'bogus' info was right here on Tax Almanac. | |
Donniecastleman (talk|edits) said: | 29 July 2008 |
| WP3CPA wrote...."How about you which High School did you get your diploma from to sit for the EA Exam."
Rich are you talking out of your ass again? | |
| 30 July 2008 | |
| Kevin was correct. I should have been clearer as to where the Bogus information was. There were posts from a cost segregation provider in Florida that were deleted, so my comments were not applicable without those posts. Sorry for the confusion. Kevin does not have that chip on his shoulder after all. My apologies.
My offer to discuss topics is still open. And, it will be devoid of any marketing efforts. I have enough work to do anyway. | |
