Cost Segregation Studies

Whether you are constructing a new building, expanding an existing one, purchasing real estate, rehabilitating an old facility or relocating with leasehold improvements, CTBK can show you how your property can generate much bigger tax savings than you realize. With 39-year Modified Accelerated Cost Recovery System (MACRS) real property deductions stretched out over 40 years, substantial tax and cash flow savings can be achieved by taxpayers who properly allocate their construction or acquisition costs between real and personal property. The result is that every $1,000,000 of personal property produces a present value tax benefit of approximately $220,000.

A cost segregation study carefully breaks down construction and/or acquisition costs and allocates them to specific categories-maximizing accelerated depreciation for qualifying building components. The shorter the depreciation period, the greater your tax savings. The study may also be used to increase your sales tax exemptions, lower your property taxes and provide the basis for your property records system.

A Proven Approach
Having your accountant or general contractor segregate percentages of construction sub-contracts or invoices can leave significant and valuable tax benefits on the table. This method also will not withstand an IRS audit.

At CTBK, the key to a successful cost segregation study is that the allocation is based on an engineering approach combined with work-paper documentation that provides the kind of detail and support acceptable to the IRS and the courts. We work in close affiliation with a professional group of construction engineers who have a thorough knowledge of the tax code and experience in successfully defending cost segregation studies before the IRS since 1981. Using tax, construction and engineering skills, we thoroughly analyze your construction and/or acquisition costs. We then perform quantity take-offs from the construction drawings which maximize the amount of personal property costs and provide the required documentation to support our conclusions.

How A Cost Segregation Study Works
Building costs are generally classified for federal income tax purposes into three categories. Each has a different depreciation recovery period and method under MACRS:

TANGIBLE PERSONAL PROPERTY
5 OR 7 YEARS
200% DB
LAND IMPROVEMENTS
15 YEARS
150% DB
REAL PROPERTY
39 YEARS
STRAIGHT-LINE

A cost segregation study performed by CTBK will help you identify items that should be property classified as tangible personal property or land improvements, rather than real property that is depreciated over 39 years. The tax benefits begin in the first tax year and continue throughout the depreciable life of the identified assets.

For example, a taxpayer who owns a manufacturing facility could classify the cost of certain equipment foundations, exhaust and ventilation systems, security systems, and electrical distribution as tangible personal property. Certain site improvements such as landscaping, underground utilities, and site lighting could qualify as land improvements. Knowing the difference is critical. So is the ability to support and document the decisions.

Our professionals can unbundle costs and assign them appropriately-not only the direct costs, but also a portion of any indirect costs, such as architect and engineering fees, contractors general conditions, permits and bonds. We have extensive knowledge of construction methods, engineering, and the Internal Revenue Code, as well as, applicable court cases and IRS revenue rulings. Our capabilities, which combine accounting and engineering expertise, include the ability to read blueprints and fully understand construction materials, costs and taxation.

Savings On Accelerated Depreciation Deductions
Any capital intensive business that invests in a cost segregation study can potentially achieve a payback of approximately 22 cents for each dollar reclassified as personal property and approximately 8 cents for each dollar reclassified as land improvements.

Our detailed cost segregation studies pay for themselves many times over, starting with the first year the property is placed in service. By investing in a professionally prepared cost segregation study from CTBK, you will have the assurance that you have maximized your depreciation benefits and have fully documented support for your depreciation claims should you be audited by the IRS.

Savings On Sales Taxes
Another benefit you can achieve from a cost segregation study is lower sales tax. About half the states grant a sales tax exemption for tangible personal property used in manufacturing processes and research and development. But supporting the deduction can be very complicated.

What is your state's particular definition of tangible personal property? Does it differ from the federal definition? Special-purpose property, roads, and concrete loading docks, for example, could qualify as tangible personal property in the federal definition-but not in the state's.

What, in your state, is manufacturing? Does your business have a manufacturing process--or is it assembling or processing (which may or may not qualify for a sales tax exemption)? Does your state allow an exemption for storage? Can you document that the identified tangible personal property is used directly in manufacturing, as most states require?

CTBK can answer these questions and help you realize substantial savings.

Savings On Property Taxes
As state and local governments seek ways to increase revenues and federal tax benefits decrease, companies now must pay closer attention to their property taxes and make property tax management an integral part of their cost management strategies.

With a CTBK cost segregation study you may be able to obtain a lower assessment by separating non-value cost items-or costs that are not real property costs-from your reported costs of construction or acquisition.

For example, overtime hours, demolition of the former building, and some change orders increase the cost of the construction project, but do not add to the market value of the completed building---even though they were necessary and the expenses were paid. These costs do not belong in your building's tax basis. They can be exempted in certain states, if the costs are correctly identified and documented.

Additional Services
Custom Modeling. If your firm constructs similar type projects, CTBK can develop a model cost segregation study which can be inexpensively customized for analysis of similar locations. Many of our clients have increased the already high return on their investment from our studies by utilizing this custom modeling approach.

High Tech Flexibility. We utilize custom PC-based spreadsheet and database software in developing our reports. This enables us to supply you with component cost detail in electronic form allowing you to utilize this data for other purposes. CTBK can also easily customize or modify reports to fit your specific needs.

Construction Advisory Services. CTBK has experience in negotiating contracts, establishing general contractors' accounting controls, and providing monthly reviews of contract payment applications. We also provide contract reviews to determine that all costs are reimbursable.