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Do you own commercial property? If so, you may be
entitled to a large cash benefit from the IRS immediately. Fortune 500 firms have been using this IRS approved tax strategy for years. You to can drastically increase cash flow reduce tax liabilities and improve your ROI.
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Thousands of business owners are improving cash flow and finding immediate tax savings from their commercial and residential investment properties. They are finding these benefits from an unexpected source: The Internal Revenue Service. This incredible tax strategy known as Cost Allocation allows commercial property owners to accelerate the depreciation of their building from a straight line method of 39 years down to shorter recovery periods of
5,7 or 15 years. This could equate to thousands, hundreds of thousands...maybe even millions of dollars for your immediate access!
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In other words, if you were to hit the lottery, would you like the payout spread over 39 years or over the next 5 or 7 years?
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"Cost Allocation Studies are a
lucrative tax strategy that should be used in
almost every major purchase of commercial
real estate"
US TREASURY DEPARTMENT
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Some examples of how our clients benefit:
Manufacturing Firm: 1st year cash benefit: $1,982,000
Large Nursing Home: 1st year cash benefit: $550,000
Hotel Owner: 1st year cash benefit: $376,000
Large Office Building: 1st year cash benefit: $49,174,112
Auto Dealership: 1st year cash benefit: $550,000
Cost Allocation Overview:
Money doesn’t grow on trees...but it could be hidden in the walls
Cost Allocation Studies (CAS) have become an increasingly valuable, but not a commonly understood tax strategy that should be considered by virtually every tax payer who owns, constructing, renovating or acquiring a real estate facility.
Its tax benefits can be applied to virtually all types of real estate that have a value of at least $750,000.
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> Manufacturing Facilities
> Strip Malls
> Apartment Buildings
> Warehouses
> Medical Facilities
> Health Clubs
> Banks
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> Restaurants
> Grocery Stores
> Office Buildings
> Golf Courses
> Retail Facilities
> Car Dealerships
> Senior living facilities
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What is Cost Allocation?
Cost Allocation is a lucrative opportunity for commercial property owners to apply an accelerated depreciation schedule to property usually classified as "real" (Section 1250) - but under improved IRS rulings - can be reclassified as "personal property" (Section 1245).
The concept of cost allocation is fairly simple. The IRS Code allows the structural components of a building to be depreciated over a period of 39 years (27.5 years for residential investment property). But non structural components: carpeting, electrical system, HVAC, fixtures, plumbing, ceiling, equipment, land improvements, parking lots etc... Can be compressed into shorter cost recovery periods (5, 7 and 15 years). When these non structural components are segregated into a much shorter depreciation class and reclassified as personal property, substantial savings can be realized immediately. In most cases, up to 40% of a building can be reclassified!
These rulings are not new, but have historically been available to commercial property owners who were clients to the elite big 4 accounting firms. Most CPA's are aware of accelerated depreciation but do not have the architectural and structural engineering background to perform this very detailed extensive study that's needed to maximize the IRS Cash Benefit. This engineering-based study must be performed by a qualified engineering firm, or thousands and even hundreds of thousands of dollars could be left on the table.
Qualification for a Cost Allocation Study
1. Is the property valued in excess of $750,000 (land excluded)?
2. Do you operate for profit?
3. Do you intend to hold the property for another 3 years?
4. Do you pay income tax?
5. Was the building constructed or acquired since 1987
if you answered yes to these questions, then you should consider a cost allocation study.
What are the immediate benefits?
1. Increase your cash flow immediately
2. Reduce your taxable income
3. Increase ROI
4. Qualify for "Catch Up" depreciation back to 1987
5. Reduction on insurance premiums
6. Reduction in property taxes
7. Complete audit trail supporting asset reclassifications
Can I do the Allocation Study?
No, for two reasons. First, you will obtain maximum benefit by hiring a firm with expertise in onsite engineering surveys, estimating, appraising and allocating construction and acquisition cost based on IRS Techniques/Guidelines and case law.
Second, the IRS states that: "an accurate cost allocation study may not be used on non contemporaneous records, reconstructed data, taxpayer's estimates or assumptions that have no supporting records."
"Cost segregation studies require a skill and understanding of case law that is vested only in specialist. The studies require a significant expenditure of time in preparation...Only those taxpayers with access to the professionals who can prepare a valid study may claim this tax benefit." Ken M. Berry, IRS
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THIS FIRM THROUGH OUR PARTNER CORE Solutions Group provides the team and years of experience in Cost Allocation and Structural Engineering to meet all IRS, Treasury and legal requirements.
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How fast can I receive my cash benefit?
Savings are generally available right away. For newly acquired buildings or improvements savings begin immediately by using the shorter lives and accelerated methods in the tax returns filed for the year that the assets are placed in service. For older buildings or improvements, any savings not taken advantage of since the construction, may be recovered or caught up. In some cases a tax refund can be obtained depending on the taxpayer's circumstances.
What are the typical savings I can expect from the study?
The average net present value (NPV) of additional cash flow is approximately $200,000 for every $1,000,000 of 39 year property that is reclassified. Typically between 15% - 40% of buildings overall cost can be reclassified to one of the shorter cost recovery periods. The actual cash benefit depends on the type of property and its specific construction components.
Example: The Wall Street Journal reported an interesting example of a real estate developer in Southern California who used cost allocation accounting to his advantage, saving hundreds of thousands of dollars in taxes in the first year after performing the study. After developing a $4.6 million manufacturing facility, the owner could have depreciated the property by $120,000 using the simple 39 year straight line IRS formula. But by using cost allocation, the owner was able to depreciate the property by $397,000 in just the first year alone.
IRS and history on Cost Allocation:
Although cost allocation has a long history, the basis for today's studies was established in a landmark US Tax Court decision in 1997 by the efforts Hospital Corporation of America. HCA argued even after the tax changes in 1986, the old tax rules could be used for separating personal property from buildings structural components for depreciation purposes. The law suit between HCA and the IRS ended up in US Tax Court, which eventually sided with HCA.
This ruling saved HCA millions of tax dollars and ushered in a new era in cost allocation accounting.
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This tax strategyis supported by more then 200 court cases, treasury regulations and IRS revenue rulings.
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What is involved in having a study done?
1. CORE offers a Free NO RISK Initial Review to determine feasibiltiy/applicabiltiy. We will evaluate your current tax status and future business plans to determine whether a Cost Allocation Study will benefit you.
2. CORE will then ask you to provide us with preliminary information from which we will run through our software to furnish an assessment of the potential savings that may available.
3. CORE will visit the site and meet with you in person and review the potential cash benefit and our fees to conduct the study, as well as answer any and all questions.
4. With your written approval, we gather information from your construction documents and other supporting information to show how components and systems are utilized.
5. We then bring in a team of specialized engineers to perform the on site study. Our team uses state of the art industry tools to segregate cost based on case law and strict IRS Guidelines.
How much does a study cost?
It depends on the project. Each study is unique and the fee is comprised of many different variables. We charge a reasonable fee depending on the size and scope of the project. We also bring other valuable cost savings techniques that separate us from all other firms.
The finished product:
At the conclusion of the study, CORE delivers and reviews with you a written and detailed report showing the breakout of the costs qualifying for the shorter lives, outlining the methodology used and documenting the allocated cost in detail. More importantly, providing a complete audit trail that will withstand an IRS Audit.
Why hire CORE?
CORE'S team of Engineers has been specializing in cost allocation services and have been offering award winning Architectural and Engineering services since 1989. We offer a unique blend of tax professionals, extensive experience in design and structural engineering which allows us to properly identify and classify cost of building elements to maximize the benefits from a Cost Allocation Study.
Check out the other Profit Improvement Services we offer. You will be amazed on what we bring to the table.
CALL TODAY FOR A FREE PROPERTY REVIEW.
To learn more about how a Cost Allocation Study could benefit you,
please contact Alex Tong at (972) 248-4382
