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					Best Bottom Lines, LLC
                          Understanding The Latest IRS Updates
                         Relative to Cost Segregation Studies


                         Release Powerful,
                         Underutilized Tax-Saving
                         Strategies for Commercial and
                         Investment Real properties




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                         DISCLOSURE, and (b) is intended only for the use
                         of Best Bottom Lines, LLC. You must have written authorization from Best
                         Bottom Lines, LLC to use, copy or distribute any part of this document as
                         it‟s strictly prohibited.
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                         Goal of Cost Segregation Studies
                             Would you Rather Get Your Money Back Today or in 39 Years?



                             Goal = to identify all construction-related costs that can be
                              depreciated over 5, 7 and 15 years and reclassified from 39,
                              31.5 and 27.5 years
                             Traditional depreciation for Real Property is 39 years for
                              commercial property and 27.5 years for residential rental
                              property
                             Personal property is depreciated much quicker and can be
                              depreciated over 5, 7, 10, and 15 years
                             Reducing tax lives results in accelerated depreciation
                              deductions, a reduced tax liability, and increased cash flow




                             “You must pay taxes. But stop leaving
                                            a tip.”
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                         Major Benefits to The
                         Property Owners?
                            Generates Cash Flow and Minimizes Taxes
                            Look back study for catch-up of depreciation could generate
                             refund
                            Free up money for investments which allows for compounded
                             growth
                            Benefit to clients includes ability to expense versus
                             capitalization of real property when conducting demolition or
                             when remodeling is involved.
                            Reduces real estate property taxes
                            Increase Cash Flow for Maximum Bank Financing
                            Section 179 Benefits
                            Reduced Insurance premiums
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                         So What Is The Big Deal?

                            The depreciation for a property with a Cost
                             Segregation Study allows for significant increase in
                             deductions within the first five years.

                            For every $100,000 of cost shifting from 39-year
                             property to 5-year property, the net present value
                             of the tax benefit is approximately $16,000*

                            For $100,000 of cost shifted from 39-year property
                             to 15-year property, the net present value of the
                             tax benefit is approximately$10,600*
                         * Benefits assume a tax rate of 35% and a 5% return on investment
 Timing Illustration
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Best Bottom Lines, LLC

                         CSS Brief History

                            CS has been around since the 1960’s – it was called Component
                             Depreciation
                            There have been over 200 court cases and IRS rulings supporting
                             the benefits of CS
                            Initial cases were related to Investment Tax Credit (ITC) and
                             whether items related to a structure could qualify for a credit.
                            Congress enacted ACRS 1981 with new shorter lives
                               40 year life reduced to 15, 18 & 19 years
                               Simultaneously disallowed component depreciation
                            MACRS enacted in 1986 reiterated disallowance of component
                             depreciation
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                         Hospital Corporation of America
                         Landmark Decision - 109 TC 21(1997)

                            Court reinstated and expanded a form of
                             component depreciation
                            Certain costs related to specific ordinary
                             use equipment (building support systems
                             that would otherwise be viewed as
                             structural) qualify to be depreciated over
                             life of underlying asset.
                            IRS acquiesced to Tax Court Ruling - 1999
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                             CSS Brief History

                            In 1999, the IRS released Legal Memorandum 19921045 in which the IRS agreed not
                             to contest the (HCA) reclassification of building costs into different asset categories
                             that result in shorter depreciation lives
                               – This legal memorandum directs agents to verify that an engineering or
                                  architectural study has been done to identify portions of the building's
                                  system not related to the operation and maintenance of the building
                               – Without these detailed studies, IRS agents are advised NOT to accept the
                                  reclassifications
                               – is a “facts and circumstances” assessment
                               – Use of Cost Segregation Study (CSS) must be specifically applied by the
                                  taxpayer
                               – Allocations based on “logical and objective” measures
                               – Not based on non-contemporaneous data, or assumptions without
                                  supporting records
                               – CSS must be “closely scrutinized” by the field
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                         IRS - Audit Technique Guide

                            Issued in April 2004
                            Developed to assist Field Examiners
                            “WHY” are cost segregation studies performed?
                            “HOW” are they prepared?
                            “WHAT” to review and look for?

                            IRS Cost Segregation Audit Techniques Guide –
                             Assist Field Examiners
                             –   “Why” are CSS performed?
                             –   “How” they are prepared?
                             –   “What” to review and look for?
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                         What is being said about Cost
                         Segregation?

                                            “Property Owners Profit from
                                            Change in Tax Law”



                                                              “Cost Segregation Studies
                                                              fast growing tax strategy”




                                                                              “Investors find a friend in the IRS”




                                               “It is not unusual for engineering consultants to
                                               classify 20 to 40 percent of construction as
                         Audit Technique Guide personal property”
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                         Qualifying Property

                            Any building placed in service since January 1st,
                             1987
                            Existing buildings undergoing renovation,
                             remodeling, restoration, or expansion
                            Major leasehold improvements to any building
                             made after January 1st, 1987
                            Inheritance of commercial and investment real
                             properties
                            Preconstruction planning to recommend possible
                             modification to the building designs to increase
                             shorter-life asset classification
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                             Cost Segregation for an Existing Building
                             “Catch Up” – Look Back

                            If a cost segregation study is conducted on an existing
                             building,
                               – The unclaimed depreciation on personal property
                                   components that were previously classified as real
                                   property can be deducted as a Code Sec. 481 (a)
                                   adjustment in the year of change
                               – The automatic change of accounting rules of Rev.
                                   Proc. 2002-9, apply



                            If a cost segregation study is performed on a building
                             that was placed in service in a tax year that ended before
                             December 30, 2003,
                               – The IRS will allow a tax payer to file amended returns to
                                  claim the benefits
                               – Interest is payable by the IRS on the refund
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                             Cost Segregation Studies Includes
                             New and Previously Acquired Properties

                              The optimal time to perform a study is the year the property is placed in service
                              Current IRS procedures allow a taxpayer to recover any missed depreciation on properties
                               placed in service as far back as 1987 without having to amend prior years tax returns
                              Cost Segregation is not limited to new construction. In fact, most studies are performed on
                               acquired properties where land and building is purchased for one negotiated price in a previous
                               year
                                                                                                MACRS - GDS

                                                                                               39 - Year Property

                                                                                              27.5 – Year Property

                                                     OR                                        15 - Year Property

                                                                                               7 - Year Property
                             NEW CONSTRUCTION              ACQUIRED PROPERTY
                                 Indirect Costs                                                5 - Year Property
                                        +                       Purchase Price
                               General Contractor                                              3 – Year Property
                                     Costs                        Land Cost
                                        +
                              Direct Costs outside             Building and Site
                                General Contract             Implementation Cost
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                         Benefit of Cost Segregation – Cash Flow –
                         Would You Take the Cash Savings Today?

                                                 CSS Illustration No. 1




                            A taxpayer purchases (or constructs) a strip mall for $4
                             million (land excluded)
                            Without a Cost Segregation Study, the taxpayer would
                             have depreciated $4,000,000 as a 39-year asset over 40
                             years (straight-line, HY convention)
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                         Benefit of Cost Segregation – Cash Flow –
                         Would You Take the Cash Savings Today?

                                                       CSS Illustration No. 1- (continued)
                                Asset                                   Original        Original        Allocation      Allocation
                                Class              Asset Life          Allocation      Allocation       After CSS       After CSS
                         Personal Property         5 yr. 200% db   $               -      0.0%      $       1,000,000     25.0%

                         Personal Property         7 yr. 200% db   $               -      0.0%      $             -        0.0%

                         Land Improvements        15 yr. 150% db   $               -      0.0%      $        400,000      10.0%

                         Real Property in yrs.          39         $       4,000,000     100.0%     $       2,600,000     65.0%

                                  Real & Personal Property         $       4,000,000     100.0%     $       4,000,000     100.0%

                                          Total Cost               $       4,000,000     100.0%     $       4,000,000     100.0%




                               By segregating assets and applying proper class lives, significant
                                portion of the building can be depreciated faster
                               Typically, about 35% of total cost can be reclassified from real
                                property to personal property for this type of building
Best Bottom Lines, LLC
                         Benefit of Cost Segregation – Cash Flow –
                         Would You Take the Cash Savings Today?
                                                                   Cost Segregation Estimate Benefit Calculation
                                                                                                         Tax Savings         NPV of




                                                                                                                                                         CSS Illustration Continued
                                                   Depreciation       Depreciation                     from Change in       Deferred
                                                     Expense          Expense With      Change in        Depreciation        Taxes         Cumulative
                             Asset Year     Year   Without CSS            CSS          Depreciation     (35% Tax Rate)   (5% Disc. Rate)     NPV
                                  1         2006   $     98,291      $      283,889   $     185,598    $        64,959   $       64,959    $   64,959
                                  2         2007   $    102,564      $      424,667   $     322,103    $       112,736   $      107,368    $  172,327
                                  3         2008   $    102,564      $      292,867   $     190,303    $        66,606   $       60,414    $  232,740
                                  4         2009   $    102,564      $      212,647   $     110,083    $        38,529   $       33,283    $  266,023
                                  5         2010   $    102,564      $      209,569   $     107,005    $        37,452   $       30,812    $  296,835
                             5-year Total   2010   $    508,547      $    1,423,638   $     915,091    $       320,282   $      296,835

                               6            2011   $     102,564     $      149,198   $      46,634    $       16,322    $       12,789    $   309,623
                               7            2012   $     102,564     $       90,286   $     (12,278)   $       (4,297)   $       (3,207)   $   306,417
                               8            2013   $     102,564     $       90,286   $     (12,278)   $       (4,297)   $       (3,054)   $   303,363
                               9            2014   $     102,564     $       90,286   $     (12,278)   $       (4,297)   $       (2,909)   $   300,454
                              10            2015   $     102,564     $       90,286   $     (12,278)   $       (4,297)   $       (2,770)   $   297,684
                         10-year Total      2015   $   1,021,368     $    1,933,981   $     912,614    $      319,415    $      297,684

                              40            2045   $       4,274     $        2,778   $       (1,496) $            (524) $          (78) $     200,039
                         Over 40 Years             $   4,000,000     $    4,000,000   $          -    $             -    $      200,039

                                Cash savings of $320,282 can be achieved over the fist 5 years w/ CSS
                                Although cash savings / tax savings over the tax life of the building does not exist, net
                                 present value of the earlier tax savings or deferred taxes due to accelerated
                                 depreciation results in net present value of $200,000!
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                         Again, What is the Big Deal?
                             FASTER CASH FLOW!
                            The depreciation for a property
                             with a Cost Segregation Study
                             allows for significant increase in
                             deductions within the first five
                             years.

                            For every $100,000 of cost shifting
                             from 39-year property to 5-year
                             property, the net present value of
                             the tax benefit is approximately
                             $16,000*             (NPV = $16.00
                             per $100 invested)

                            For $100,000 of cost shifted from
                             39-year property to 15-year
                             property, the net present value of
                             the tax benefit is
                             approximately$10,600*
                             (NPV = $10.60 per $100 invested)
                            * Benefits assume a tax rate of
                             35% and a 5% return on
                             investment
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                         Why are the CPA and Engineer
                         Important in the CSS Process?
                            First element of a quality Cost Segregation Study according to the IRS Audit Techniques Guide is:
                            Provider who marries the science of engineering with the principles of tax and accounting to arrive at financial
                             solutions that results in increased cash flow, minimized tax payments and increased ROI. A firm that meticulously
                             follow the IRS guidelines and go beyond the standards and basic requirements outlined by the IRS
                            “Prepared by an individual with expertise and experience.”
                                    Select CPAs and engineers familiar with engineering, construction, architectural and estimating processes
                                    and techniques are essential for a quality CSS process.
                                   Select CPAs and engineers with appropriate tax background and knowledge of over 200 court cases, many
                                    revenue ruling and revenue procedures dealing with cost segregation area are essential for a quality CSS.

                            Additional Considerations

                            I think Audit should be first

                            I would also add preconstruction
                                 Must understand abandonment issues
                                 Knowledgeable on issues involved with §1031 & §1033 exchanges and how they interact with Cost
                                  Segregation
                                 Must have expertise in Form 3115 Change in Accounting Method filing procedures
                                 Understanding how Cost Segregation can affect estate taxes, passive loss situations, IRS §179
                                  deductions, Net Operating Loss situations, §168(k),
                                 partnership §754 step-up elections and other tax situations
                                 Experience in lease review and identification of
                                  “qualified leasehold property”
                                 Does the CSS include time for audit support
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                         Tax Planning & Other Benefits

                                                     •   Insurance Premiums
                            Demolition Loss –
                             expense vs capitalize   •   Recapture
                            Estate Planning
                             Strategies
                                                     •   Closing Costs (doc stamps)
                            1031 Exchange           •   Property Tax Benefits (RE vs. Tangible PP)
                             Strategies
                                                     •   Preconstruction recommendations
                            Real Estate
                             Professional            •   Lessor
                            Passive Taxpayer &
                             Multiple Entities       •   Lessee
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                         1031 Exchanges Planning With CSS
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                         Why do I need an Engineering
                         Expertise for a CSS?

                                     3 Words: Mechanical, Electrical, Plumbing
                                   Cost segregation study (CSS) is an IRS-sanction technique allowing businesses
                                    to accelerate depreciation on their facilities
                                   Although the IRS does not prescribe one specific methodology, the IRS‟ Cost
                                    Segregation Audit Technique Guide does not enumerate several and elevates
                                    the Detailed Engineering Approach From Actual Cost Records as “the most
                                    methodical and accurate approach”
                                      –   This approach consists of carefully examining all contemporaneous
                                          construction and accounting records
                                      –   Estimates or “take-offs” are used to supplement the actual cost detail when
                                          the existing detail is not sufficient for the purposes of the study
                                      –   A professional firm comprised of accountants, engineers, and architects
                                          with prior cost segregation experience, is required to perform this kind of
                                          cost segregation study
                                   Methodology without the engineering expertise will not withstand IRS scrutiny in
                                    accordance with the IRS Audit Technique Guidelines
                                   Without the contractor/engineering expertise coupled with the tax law guidance,
                                    there will likely be valuable tax benefits left on the table
                                   Determining 1245 property value on existing
                                    properties must be properly documented and
                                    appraised and indicated according to the IRS
                                    Audit Technique Guidelines
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                         Detailed Engineering Approach

                            Identify the specific project/assets that will be analyzed
                            Obtain a complete listing of all project costs and substantiate the
                             total project costs
                            Inspect the facility to determine the nature of the project and its
                             intended use
                            Photograph specific property items for reference.
                            Review “as-built” prints, specifications, contracts, bid documents,
                             contractor invoices and other construction documentation.
                            Identify and assign specific project items to property classes
                            Prepare quantitative take-offs for all materials and payment
                             records to compute actual unit costs



                                   “It is the most methodical
                                   and accurate approach.”           Audit Technique Guide
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                         Qualifying Property

                                                                           Property Types
                         Airports                     Gas stations                          Research facilities
                         Apartment buildings          Golf resorts                          Retail centers
                                                      Grocery stores Hospitals
                         Assisted Living Facilities                                         Resorts
                                                      Hotels                                Restaurants
                         Automobile dealerships       Industrial facilities                 Service stations
                         Automotive service centers   Laboratories                          Shopping centers
                         Banks                        Manufacturing facilities              Sports facilities
                         Casinos                      Marinas                               Storage facilities
                         Cinemas                      Medical facilities                    Warehouses
                         Day care centers             Mixed-use facilities
                         Department stores            Nursing homes
                         Distribution centers         Office buildings
                         Fitness centers
                         Funeral homes
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                         Which Properties Benefit Most?

                                                             Property Type        Percentage Reallocated
                                                 Reso rts                   38%

                                            Restaurants                34%

                                     Residential Rentals               34%
                                                                                    Personal Property
                               Leaseho ld Impro vements                33%

                                                  Ho tels              33%
                                                                                    Real Property
                         Nursing Ho mes/A ssisted Living               32%

                                   Labo rato ry/Research              31%

                                                   B anks             31%

                                        M edical/Surgical             29%

                                            Wareho uses              27%

                                               Ho spitals            27%

                                       Day Care Centers              27%

                                       A uto Dealerships             26%

                                        Fitness Centers          25%

                                     Department Sto res          25%

                                         Office B uildings       25%

                                             P o st Office       24%

                                                 M arinas        24%

                                   A uto Service Centers         23%

                                      Sho pping Centers         21%

                                                Industrial     19%

                                    Distributio n Centers      18%

                                        A irpo rt Hangers      18%

                            M anufacturing & P ro cessing      18%
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                         Cost Segregation Recent Results

                                   Project: Apartment Complex – 12 Complexes
                                   Cost: $18,100,000
                                   5 Year Tax Savings: $1,585,222


                                      Project: High-End Office
                                      Building
                                      Cost: $5,234,125
                                      5 Year Tax Savings: $625,678

                                Project: Hotel
                                Cost: $7,123,456
                                5 Year Tax Savings: $812,145
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                         Look Back Example




                                                                                         CSS Look back Example
                         •   A taxpayer purchased (or constructed) a strip mall for $4
                             million (land excluded) in 2000
                         •   Without a Cost Segregation Study, the taxpayer has
                             been depreciating $4,000,000 as a 39-year asset over 40
                             years (straight-line, HY convention)
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                         Look Back Example – continued




                                                                                                                      CSS Look Back Example
                                                   Cost Segregation Estimate Benefit Calculation


                                                     Depreciation    Depreciation
                                                       Expense       Expense With      Change in     Overpaid Taxes




                                                                                                                           (continued)
                             Asset Year     Year     Without CSS         CSS          Depreciation   (35% Tax Rate)
                                  1         2000     $     98,291   $      283,889   $     185,598   $       64,959
                                  2         2001     $    102,564   $      424,667   $     322,103   $      112,736
                                  3         2002     $    102,564   $      292,867   $     190,303   $       66,606
                                  4         2003     $    102,564   $      212,647   $     110,083   $       38,529
                                  5         2004     $    102,564   $      209,569   $     107,005   $       37,452
                                  6         2005     $    102,564   $      149,198   $      46,634   $       16,322
                             6-year Total            $    611,111   $    1,572,836   $     961,725   $      336,604

                               IRS Owes The Property Owner $336,604!
                         •     What could you do with the new found money of $336,604 that was
                               trapped in the walls of your investment?
                                     Make additional investment
                                     Reduce mortgage debt
                                     Address maintenance items
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                         Examples of Pre-Construction
                         Benefits
                            Pre-Construction Planning: In the design phase, CORE can help
                             make the building more tax efficient by identifying business
                             components from the structural components
                            Example: Law Firm uses hinges for $1MM decorative lobby
                             shelving versus attaching shelving with a permanent adhesive

                              –   Total property is able to be moved from
                                  39-year depreciation to 5-year
                                  depreciation for a tremendous savings
                            Example: Hospital installs $1.8MM floating floor system versus
                             permanent attached flooring

                              –   Structurally as sound, cash savings from
                                  more attractive depreciation schedule
                                  substantial
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                             Insurance Savings Alone May Pay for
                             Cost Segregation Study

                            There are a number of benefits to your insurance program after completing
                             a Cost Segregation study:
                              –  Lower premiums. By providing the insurance underwriter with a Cost
                                 Segregation study, they can better understand your risk, their
                                 company‟s exposure and accurately rate your insurance
                                     There is no more guess work on the underwriters behalf and that
                                       guess work usually works in their favor in the way of higher
                                       premiums to you
                              –  In the wake of the recent natural disasters affecting the insurance
                                 market, most insurance policies are changing from blanket policies to
                                 stated value
                                     Each location will carry a stated value on the policy and in the
                                       event of a claim that is the maximum you can collect
                                     A Cost Segregation study will provide you with the piece of mind
                                       that you are insured to full value
                                     Cost segregation studies allow property owners to accurately
                                       insure their business property, leading to a more cost effective
                                       use of your insurance dollar
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                             Additional Benefits from CSS
                             Demolition/Rehabilitation
                            Ability to identify components of a building
                             prior to demolition and/or rehabilitation which
                             can be reclassified as personal property
                             versus real property
                            Allows the owner to write off these items
                             versus capitalizing the assets which generate
                             a substantial tax savings
                            For example, if a property owner has a $5-
                             million property that they are going to
                             demolish:
                              –    The total cost would typically get
                                   applied to the land with the property
                                   owner having no ability to depreciate or
                                   recoup the $5-million investment
                              –    A cost segregation study, prior to the
                                   demolition, identifies $1,500,000 of
                                   personal property
                              –    The property owner will now be able to
                                   write off the $1,500,000 as abandoned
                                   personal property
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                              Real Estate Investment Trusts
                             (REITs) Benefit
                            Increase non-cash expense to reduce income and thus minimize
                             dividend distribution, allowing increased cash flow for additional
                             acquisitions
                            REIT dividends have 3 components:
                               –  Ordinary Dividends
                               –  Long-Term Capital Gains Dividends
                               –  Return of Capital Dividends
                            Due to the favorable tax treatment of Return of Capital Dividends
                             (taxed at the long-term capital gains rate of 15% or 25% and tax
                             payment is deferred until the sale of the share), investors typically
                             prefer dividends with the greatest percentage of Return of Capital
                            Cost Segregation increases the Return of Capital component; thereby,
                             increasing the Taxable Equivalent Yield
                            DIVIDEND GROWTH IS INCREASED
                               –  A significant source of dividend growth is acquisitions
                                      REIT must pay out a minimum of 90% of taxable income as
                                        dividends, and many REITs pay out over 100% of taxable
                                        income.
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                         Cost Segregation Asset Class
                         Lives for Restaurants




                            The crux of cost segregation is determining whether an asset is I.R.C.
                               –  §1245 property (shorter cost recovery period property, 5 or 7 years) –
                                  e.g., depreciable personal property, such as equipment – or
                               –  §1250 property (longer cost recovery period property, 39, 31.5 or 15
                                  years) – e.g., buildings and building components, which generally are
                                  not §1245 property
                            The Director for the Retailers, Food, Pharmaceuticals and Healthcare
                             Industry chartered a working group to address the most efficient way to
                             approach cost segregation issues specific to the restaurant industry
                               –  The group produced a special section related to the required cost
                                  segregation study for such purposes
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                          Cost Segregation and 1031 Exchanges
                         - Best of Both Worlds -

                            Most valuable tax deferral strategies for real estate are:
                              –   Cost Segregation (Accelerated depreciation of real estate)
                              –   1031 Exchanges (Deferral on the disposition of appreciated property)
                            How To Best Utilize Both Strategies
                              –   Real Estate Investors and their advisors must understand issues in
                                  utilizing both strategies
                            Real vs. Personal Property
                              –   Real and personal property under section 1031 is determined by state
                                  law
                              –   In contrast, the definition of real and personal property for cost
                                  segregation studies is determined under federal law
                              –   Property such as wall coverings, carpeting, special purpose wiring or
                                  other installations affixed to the building can be considered real
                                  property under state law and like kind for section 1031 purposes, but
                                  be considered personal property in cost segregation studies
                              –   Real estate owners can benefit from both the gain deferral under
                                  section 1031 for real estate exchanges and the enhanced cost
                                  recovery deductions of cost segregation study
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                         IRS Determination/Tests -
                         Structure or Personal?
                              Factors that now govern whether property is permanent or can be reclassified
                                           in accordance with IRS Audit Technique Guidelines:

                         Permanency test - Sec. 1.48-1 (c)
                           Is the property capable of being moved?
                           Has it been moved?
                           Is the property designed or constructed to remain
                            permanently in place?
                           Are there circumstances which tend to show the
                            expected or intended length of affixation - i.e. may
                            or will be moved?
                           How substantial of a job is removal of the property
                            & how time consuming?
                          Is it readily movable?
                           How much damage will the property sustain upon
                            removal?
                           What is the manner of affixation of the property to
                            the land?
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                         IRS Determination/Tests -
                         Structure or Personal?
                                   Appearance and Function Test
                                   The appearance test:
                                     –   Whether the structure looks like a building
                                     –   Generally only requires that the structure enclose
                                         a space within its walls and usually be covered
                                         by a roof
                                   The second part of the test requires that the
                                    building function as a building:
                                     –   The courts primarily focused on whether the
                                         structure provides working space for employees
                                         that is more the merely incidental to the primary
                                         function of the structure
                                     –   Both the quantity and qualify of human activity
                                         inside the structure may be considered in this
                                         regard
Best Bottom Lines, LLC
                         Items To Be Reclassified in a Cost
                         Segregation Study

                                            Site Improvements
                                             (landscaping/parking)
                                            Light Fixtures
                                            Branch wiring
                                            Special Plumbing
                                            Flooring
                                            Millwork
                                            Millwork Window Coverings
                                            Partition Walls
                                            Cabinetry
                                            Furnishings
                                            Shelving
                                            Wall Coverings
Best Bottom Lines, LLC

                         Qualified Property

                                              Partitions
                                     Property to include:
                                       –   Accordion-style room
                                           dividers
                                       –   Decorative lattice millwork
                                           used to separate areas
                                     These items are not permanent structures
                                      therefore do not affect the operation nor
                                      maintenance of the building
                                     1245 property
Best Bottom Lines, LLC

                         UNIQUE ASSETS TO IDENTIFY
Best Bottom Lines, LLC

                         Qualified Property

                           Primary and Secondary Electrical Distribution Systems
                                   Property to include:
                                      – Main panels
                                      – Motor control centers
                                      – Transformers
                                      – Main distribution panel switchgear
                                      – Related wiring and conduit
                                   The courts conclude that the portion of the cost of
                                    the primary and secondary electrical distribution
                                    systems which is equal to the percentage of the
                                    electrical load carried to those systems allocable
                                    to the property equipment, as stipulated
                                    constitutes the 1245 qualification class property
                                    and is depreciable over an accelerated life
Best Bottom Lines, LLC

                         Qualified Property

                          Branch Electrical Wiring and Connections, and Special Electrical
                                                     Equipment
                                      Property to include:
                                         – Controls
                                         –  Battery packs
                                         –  Battery chargers for emergency power
                                           equipment
                                         –  Illuminated emergency and entrance signs
                                         –  Medical gas control and alarm equipment
                                         –  Kitchen equipment
                                         –  Wired clock systems
                                       Normally 100% of the load carried relates to this
                                       type of equipment, therefore the balance of the
                                       electrical is normally allocated to the building
Best Bottom Lines, LLC

                         Qualified Property

                            Electrical Wiring Relating to Internal Communications
                                             •       Property to include:
                                                         Conduit
                                                         Wiring
                                                         Electrical connections


                                                      Systems supported:
                                                      Call systems
                                                          –   Intercommunicatio
                                                              n systems
                                                          –   Dictation systems
                                                          –   Music systems
                                                          –   Paging systems
Best Bottom Lines, LLC

                         Qualified Property

                         Wiring and Related Property Items Relating to Television Equipment
                                                Property to include:
                                                 Branch electrical wiring
                                                 Conduit, floor boxes
                                                 Junction boxes
                                                 Outlet receptacles
                                                 All other equipment in
                                                   connection with its
                                                   operation
Best Bottom Lines, LLC

                         Qualified Property

                                    Kitchen Plumbing

                                   Property to include:
                                    Items relating to operation of
                                      grease trap systems
                                    Trench drains
                                    Grease waste piping
                                    Waste excavation
                                    Waste fill
                                    Trap itself
                                    All connections (hose and reel
                                      connections)
                                    Water piping used for
                                      operation of kitchen equipment
Best Bottom Lines, LLC

                         Qualified Property

                                              Kitchen Hoods and Exhaust Systems
                                         Property to include:
                                           – Air intake fans & related
                                               duct work
                                           – Dishwasher condensate
                                               return units
                                         These items ventilate air,
                                          remove humidity and steam,
                                          replace air expelled
                                         Test:
                                           – Do the items relate to the
                                               buildings operation or
                                               maintenance?
                                           – NO! Therefore are
                                               considered Section 1245
                                               property
Best Bottom Lines, LLC

                          Sample Report –
                          Engineering Calculations Per IRS Guidelines

                         Office
                                                                                                   Unit of                      Functional   Total Unit   Location
                                                                    Total S.F.       Unit Cost    Measure    Qty   Subtotal       OBS.         Cost        Factor    Unit Cost Adj.   Totals     Reference Numbers
                         Sales Floor                                  880
                         Special Finishes
                         Vinyl Baseboard-4" high, .080" thick                    $         1.78      l.f.    108       192.24      100.00%      192.24        100%         192.24                09-651-200-1150
                         Carpet-42 oz. Nylon                                     $        43.00     s.y.      98     4,214.00      100.00%    4,214.00        100%       4,214.00                09-673-800-1100
                         Total-Special Finishes                                                                                                                          4,406.24

                         Finishes
                         1/2" gypsum wallboard- taped & finished                 $         0.65     s.f.     972      631.80       100.00%      631.80        100%         631.80                09-250-700-0150
                         Paint                                                   $         0.73     s.f.     972      709.56       100.00%      709.56        100%         709.56                09-910-920-1240
                         Total-Finishes                                                                                                                                  1,341.36

                         Furnishings                                                                                                                                          -
                         Window coverings-Vertical 3" PVC                        $         9.55     s.f.     180     1,719.00      100.00%    1,719.00        100%       1,719.00                12-483-100-1500
                         Total-Furnishings                                                                                                                               1,719.00

                                                                                                                                                                                      7,466.60

                                                                                                   Unit of                      Functional   Total Unit   Location
                                                                    Total S.F.       Unit Cost    Measure    Qty   Subtotal       OBS.         Cost        Factor    Unit Cost Adj.   Totals     Reference Numbers
                         Office #1                                    195
                         Special Doors & Windows
                         Interior Window Glass-3/8" thick, tinted                $         6.90     s.f.     36       248.40       100.00%      248.40        100%         248.40                08-810-850-0600
                         Total-Special Doors & Windows                                                                                                                     248.40

                         Doors & Windows
                         Hollow core door-3' W x 6'-8" H                         $       102.00     ea.       1       102.00       100.00%      102.00        100%         102.00                08-210-900-2380
                         Door trim-pine, 4-9/16" deep                            $         8.35     l.f.     15       125.25       100.00%      125.25        100%         125.25                08-210-960-3020
                         Total-Doors & Windows                                                                                                                             227.25

                         Special Finishes
                         Vinyl Baseboard-4" high, .080" thick                    $         1.78      l.f.    53        94.34       100.00%       94.34        100%          94.34                09-651-200-1150
                         Carpet-42 oz. Nylon                                     $        43.00     s.y.     22       946.00       100.00%      946.00        100%         946.00                09-673-800-1100
                         Carpet Padding-sponge, rubber                           $         6.05     s.y.     22       133.10       100.00%      133.10        100%         133.10                09-673-600-9000
                         Total-Special Finishes                                                                                                                          1,173.44

                         Finishes                                                                                                                                                        0.00%
                         1/2" gypsum wallboard- taped & finished                 $         0.65     s.f.     488      317.20       100.00%      317.20        100%         317.20                09-250-700-0150
                         Paint                                                   $         0.73     s.f.     488      356.24       100.00%      356.24        100%         356.24                09-910-920-1240
                         Total-Finishes                                                                                                                                    673.44

                                                                                                                                                                                      2,322.53
Best Bottom Lines, LLC
                              Sample Report –
                              Depreciation Analysis
                              Per IRS Guidelines

                                                                 Cost Segregation Analysis - Depreciation Reconciliation

                         Total Construction                       $ 1,300,000.00           Pert Client Records                 Dec-04        $ 1,300,000.00
                         Land Value                               $ 450,000.00
                         Depreciable Basis                        $ 850,000.00


                         Total Depreciable Basis                  $ 850,000.00

                         Market Value Factor                            111.04%

                                 Total Building Cost                                                                                         Total Project Cost Basis
                         Building Construction                                     Class   Market Value Factor    Totals      39 yr. acc        15 yr. acc      7 yrs. acc.
                          2100   Sitework-Improvements            $   104,090.94     15         111.04%          115,581.51             -          115,581.51            -
                          3000   Concrete                         $    33,690.60     39         111.04%           37,409.69      37,409.69                -              -
                          3100   Special Concrete                 $     6,528.00      7         111.04%            7,248.62             -                 -        7,248.62
                          4000   Masonry                          $    53,650.00     39         111.04%           59,572.41      59,572.41                -              -
                          5000   Metals                           $     5,076.00     39         111.04%            5,636.34       5,636.34                -              -
                          6100   Special Woods & Plastics         $    12,302.82      5         111.04%           13,660.92             -                 -              -
                          7000   Thermal & Moisture Protection    $    27,664.00     39         111.04%           30,717.82      30,717.82                -              -
                          8000   Doors & Windows                  $    89,015.50     39         111.04%           98,841.89      98,841.89                -              -
                          8100   Special Doors & Windows          $     2,278.80      5         111.04%            2,530.36             -                 -              -
                          9000   Finishes                         $    91,175.06     39         111.04%          101,239.85    101,239.85                 -              -
                          9100   Special Finishes                 $    49,360.91      5         111.04%           54,809.85             -                 -              -
                         12000   Furnishings                      $    13,814.40      5         111.04%           15,339.37             -                 -              -
                         15000    Mechanical                      $   141,440.60     39         111.04%          157,054.18    157,054.18                 -              -
                         15100   Special Mechanical               $    45,515.40      5         111.04%           50,539.83             -                 -              -
                         16000   Electrical                       $    24,883.60     39         111.04%           27,630.49      27,630.49                -              -
                         16100   Special Electrical               $    65,010.40      5         111.04%           72,186.88             -                 -              -
                                             Sub-Total            $   765,497.03                                 850,000.00    518,102.67          115,581.51      7,248.62
                                               Total              $   765,497.03                                 850,000.00    518,102.67          115,581.51      7,248.62
Best Bottom Lines, LLC

                          Sample Report – Depreciation Schedule
                          Per IRS Guidelines

                         Depreciation Analysis
                                                                              MACRS General Depreciation System Schedule: MM/MQ/HY Conventions
                                                                                                                                              YR                 1                 2

                                                        Scenario 1:- Original Method                                    Report        Total Accum. Dep.         2004              2005

                         Method of Depreciation         Depreciation Expense: 12/21/2004      Placed In Service


                          39 Year Commercial Property                                            12/21/2004           $850,000.00         $850,000.00       $        909.50   $    21,794.00
                         Total Depreciation                                                                                                                 $        909.50   $    21,794.00




                         DEPRECIATION DATA

                                           12/21/2004
                                    Total Construction $                       1,300,000.00
                                           Land Value $                          450,000.00
                                   Depreciable Basis $                           850,000.00




                                                                                                                                                                 1                 2

                                                     Scenario 2:- Using Cost Segregation                                Report            sub-totals            2004              2005
                                                  Cost Depreciated Over 39/15/7/5 Years:


                                                      Depreciation Expense: 12/21/2004
                         Method/Convention of Depreciation                                    Placed In Service
                            Straight Line-Mid Month                                               12/21/2004      $         518,103   $         518,103     $        554.37   $    13,284.15
                         Sub-Total 39 Year Real Property                                                          $         518,103   $         518,103     $           554   $       13,284

                               150% MM 4th Qtr        15 year Land Improvments                   12/21/2004       $         115,582   $         115,582     $         1,445   $          11,419
                         Sub-Total 15 Year Real Property                                                          $         115,582   $         115,582     $         1,445   $          11,419

                              200% - MM 4th Qtr       7 Year MACRS Property Sec. 1245            12/21/2004       $           7,249   $             7,249   $          259    $           1,997
                         Sub-Total 7 Year Personal Property                                                       $           7,249   $             7,249   $          259    $           1,997

                              200% - MM 4th Qtr       5 Year MACRS Property Sec. 1245            12/21/2004       $         209,067   $         209,067     $        10,453   $          79,446
                         Sub-Total 5 Year Personal Property                                                       $         209,067   $         209,067     $        10,453   $          79,446

                         Total Depreciation Per Cost Segregation Analysis                                         $         850,000   $         850,000     $        12,711   $        106,146
                         Difference in Depreciation                                                                                                         $        11,802   $         84,352
                           2004 Total Depreciation                                                                                    $            12,711
Best Bottom Lines, LLC

                          Sample Report –
                          Tax References Per IRS Guidelines
                                                                                                      Tax References
                            •2004 U.S. Master Depreciation Guide, CCH Inc: …***

                         Revenue Rulings:

                               Rev.   Rul.   69-558, 1969-2 CB 4 Definition of section 38 Property
                               Rev.   Rul.   75-78., 1975-1 CB 8  Factory air handling and safety
                               Rev.   Rul.   75-137, 1975-1 CB 74 Dredging and excavation costs
                               Rev.   Rul.   75-77, 1975-1 CB 7   Factory air conditioning and heating units
                               Rev.   Rul.   81-240, 1981-2 CB 11 Individual room refrigeration units; warehouse
                               Rev.   Rul.   80-93, 1980-1 CB 50 Land preparation costs; Electric and gas distribution systems


                         Regulations:…**

                               1.48-1
                               1.48-(a)(1)
                               1.48-(e)(1)
                               1.48-(e)(2)
                               1.48-(c)


                         Revenue Procedure 88-35

                         LSMB Field Directive

                         Court Cases:

                               Hospital Corp of America, et. Al. v. Commr, 109TC No.2 ***
                               Morrison v. Commr, T.C. Memeo 1986-129***
                               Whiteco Indus., Inc. v. Commr, 65 T.C. 664,672-673(1975)***
                               Central Citrus Co. v. Commr, 58 T.C. at 374***
                               Scott Paper Co. v. Commr, supra,***
                               Fed. Sav. And Loan Association v. United States, 313 F. Supp 294-96 ***


                         *   Denotes, in text
                         ** Denotes, referenced in text
                         *** Denotes, reference material
Best Bottom Lines, LLC
                         The Cost Segregation Study
                         Process    Continued…




                                   Electrical



                                                Site Work




                                                 Landscaping
Best Bottom Lines, LLC
                         The Cost Segregation Study
                         Process

                                 Prepare final reconciliation
                                 Prepare final report
                                 Deliver Draft
                                 Review with tax advisor
                                 Deliver Final Study with sample 3115
Best Bottom Lines, LLC

                         Summary

                         •   Time Value of Money
                         •   Dramatic reduction in taxable income
                         •   Increased cash flow for investment opportunities and
                             business expansion
                         •   Property tax savings
                         •   Insurance savings



                                                    www.bestbottomlines.com

                                                         (888)-598-9667
Best Bottom Lines, LLC

                             I.R.C § 1031: Key Points


                            A 1031 Exchange rolls the gain from
                             the sale of an Old Property into a
                             New Property - Without having to pay
                             tax

                            There is no limit to the number of
                             times you can do a 1031 Exchange
                             –   Hold Property 1 year + 1 day
Best Bottom Lines, LLC

                         Property Use and Title

                            Property given up and property
                             received must be held for productive
                             business use or investment
                             –   Real Property
                             –   Personal Property


                            Property given up and property
                             received must be held by the same
                             taxpayer (i.e. Same Tax ID #)
Best Bottom Lines, LLC

                             Timeline Rules

                            45 Day Identification Period
                              – The Exchangor must identify the potential replacement
                                 property by midnight of the 45th day from the date of the sale

                            180 Day Exchange Period
                              – The Exchangor must acquire the replacement property by
                                 midnight of the 180th day, or the date the taxpayer must file
                                 its tax return (including extensions) for the year of the
                                 transfer of the relinquished property, whichever is earlier
Best Bottom Lines, LLC

                         §1031 Exchange Timeline

                                          45/180 Day Rules
                              Start                                          Finish
                                                 Identification Date
                             Day 1                                          Day 180
                                                       Day 45




                                                                       Close of Escrow
                           Close of Escrow       ID Form Due            On Purchase
                           On Sale Property                                Property
                                                    To AEC
                                                                        (AEC to fund
                         (Net Proceeds to AEC)
                                                                          proceeds)
Best Bottom Lines, LLC

                         Replacement Identification Rules

                            3 Property Rule – Three properties of any value
                                                                  OR
                            200 Percent Rule – Any number of properties as
                             long as their combined fair market value does
                             not exceed 200 percent of the value of the sold
                             property
                                                                  OR
                            95 Percent Rule – Any number of Replacement
                             Properties, of any value, but only if the
                             Exchangor buys at least 95% of the aggregate
                             fair market value of all identified Replacement
                             Properties
Best Bottom Lines, LLC

                         Reinvestment Requirement

                            Equal or Up
                             –   Purchase price of NEW Property must be
                                 equal to or greater than the net selling price of
                                 OLD Property
                            Reinvest All The Cash
                             –   You must reinvest all of the cash. Any cash
                                 you touch will be taxable
Best Bottom Lines, LLC

                         Constructive Receipt
                            What is Constructive Receipt?

                            Main Reason Taxpayers „flunk‟ §1031
                              – Funds credited to taxpayer account or made available for
                                 use
                              – Funds credited to a “Disqualified Person” on behalf of
                                 taxpayer are treated as credited to taxpayer

                            Safe Harbor from Constructive Receipt – Qualified Intermediary
Best Bottom Lines, LLC

                         Functions of QI

                            Prepare Documentation

                            Act as Trustee
                             –   Funds – Deferred Exchanges
                             –   Property – Reverse Exchanges


                            Consulting
Best Bottom Lines, LLC

                         AEC 1031 Exchange, LLC



                            Reverse Exchange
Best Bottom Lines, LLC

                         AEC 1031 Exchange, LLC
                            Basic Concept
                            Buy a New Property
                            BEFORE
                            Selling Old Property
Best Bottom Lines, LLC

                         Advantages of §1031 Exchanges


                             Why Do A Reverse Exchange?
                            Act quickly to acquire New
                             property
                            Old property sale is delayed
                            Effectively extends 45 and 180
                             time limits
                            Allows adequate time for Due
                             Diligence
Best Bottom Lines, LLC

                         §1031 Exchange Timeline


                                    Reverse Exchange - 45/180 Day Rules
                                                                                                   Finish
                          Locate
                           New                                       Identification Date          Day 180
                         Property                                          Day 45




                                                   Close of Escrow      ID Form Due
                           Due Diligence Period                                            Close of Escrow
                                                  On New Purchased                          On Sale of Old
                                                                          To AEC
                                                      Property                                Property
Best Bottom Lines, LLC

                         AEC 1031 Exchange, LLC

                                Key Point

                          Taxpayer cannot receive
                           and own both OLD and
                          NEW property at the same
                                    time
Best Bottom Lines, LLC

                         AEC 1031 Exchange, LLC

                              Two Reverse Methods
                         1.   Give up OLD property to
                              „EAT‟ before receiving NEW
                              property
                         2.   NEW property is received by
                              „EAT‟ and held in trust for
                              taxpayer until OLD property
                              is sold
Best Bottom Lines, LLC

                         AEC 1031 Exchange, LLC

                            Business started as Alaska
                             Exchange Corporation (AEC)
                            Over 20 years experience
                            1000‟s of Exchanges – all 50 states
                            Interest paid on trust funds
                            Specialize in providing exchange
                             strategies and guidance

				
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