Archive for the ‘Cost Segregation’ Category
CPA Prospect acquired $6,400,000 Office building.
The owner did $800,000 in renovations, some which were energy efficient.
The tax benefit in additional one-year tax deductions for CPA’s newest client were:
Cost Segregation: $1,435,000
162 Retirement: $87,555
263a Repair & Maintenance: $288,127
For a total of benefit of: $1,878,682.00
The power of combining all the favorable tax incentives is powerful for property owners
Written by Richard Stolz: Published in Accounting Today, November 1, 2012
The straightest path to profitable growth begins not by scouring the horizon for some hot new market, but by looking inward for clues as to why your firm may have hit a plateau. Ultimately, that self-examination might lead you to expand into new markets – or instead to find untapped sources of growth that have been under your nose all along.
The classic impediment to recognizing and seizing growth opportunities, according to consultant Gale Crosley, CPA, is starting with the premise that your current expertise has value in the market. Unfortunately, it might not. "Existing talents aren’t relevant because the market doesn’t care," she said. "What the market wants is what you need to deliver." Doing so might require more than a superficial makeover.
Koltin Consulting Group’s Allan Koltin strikes a similar theme. "Instead of saying, ‘We are your audit and tax firm,’ you have to think of yourself as being in the business of helping clients with their business and financial problems," he said. (For a personification of that broader self-perception, see the online sidebar to this article on Lou Fuoco, managing director of Fuoco Group, at AccountingToday.com.)
BEYOND HOURLY BILLING
Another key element of the paradigm shift that some CPA firms need to undergo before they can grow significantly, Koltin asserted, is to supplement the time-based billing model. "Making money unrelated to time," as Koltin calls it, can involve flat fees for services, performance-based fees, contingent fees and even sales commissions.
Many firms have already begun acting on that idea. More than half of the firms on Accounting Today’s 2012 Top 100 Firm list reported they have increased their business in such typically non-hourly-billing-based services as business valuations, forensics/fraud, litigation support, M&A, retirement plans and employee benefits. Other emerging service areas highlighted in that survey that frequently are not paid based on an hourly billing model include business plans, investment services, cost segregation, employment search and "financing arrangements."
Finding customers for new services begins with your existing clients, said Koltin. He said that he’s surprised how rarely CPAs survey their own clients to identify areas of need that aren’t being met. Basic elements of a client survey – whether administered through a personal interview or a survey instrument – should include their satisfaction level with current services, and inquiries about other services they may be receiving from other service providers. The follow-up question to responses about services clients are already receiving elsewhere, Koltin said, is "Are these services we should be providing you?" This exploratory process with top clients should be treated more as a brainstorming process than a customer survey, he added.
Along similar lines, Troy Waugh, CPA and chief executive of The Rainmaker Companies, urges his accounting clients to "serve your ‘A’ clients as if they were your prospects [i.e., lavish attention on them], and serve your ‘B’ clients well enough to turn them into ‘A’ clients." Only after you have adopted that pattern should you focus on cultivating new clients, he suggested.
Charles Hylan of The Growth Partnership shares that perspective, but approaches it from a defensive perspective. "While we are all talking about growth, growth, growth, you can’t afford to let any clients fall out of the back door," he warned. He reminds clients of the classic 80/20 principle, that 20 percent of clients generate 80 percent of the profits.
But Hyland and others also emphasize that focusing on existing clients can open the door to new service niches and new clients, as well. Hylan is a fan of industry specialization. For some firms, the best strategy is to "go an inch wide and a mile deep," he said.
Many firms have made half-hearted efforts to develop a niche practice. "Ninety-nine percent of the accounting firms that say they have a niche practice really don’t," Hylan said. "The ones that really do are active in that industry and have expertise beyond accounting, auditing and tax," he said.
The challenge, then, becomes finding a viable niche. Sometimes it just occurs through happenstance, but success is more likely when firms use a comprehensive research methodology.
Crosley guides her clients to conduct research that will allow them to unearth genuine opportunities – both with existing clients and new ones. Simply "hobnobbing with bankers and lawyers" to explore the marketplace is inadequate, she said. "You have to get out there and interview lots of people, all kinds of people." Besides current clients, those people include thought leaders, university professors, even competitors.
Crosley developed a process she has named "The Research Call." Its purpose is to help CPAs "learn all you can learn about the ecosystem in which you are swimming" to identify growth opportunities. Although sales leads may be unearthed, they are only a byproduct of the effort.
An interview request can begin with the statement that your firm is expanding its services in a particular sector, and you want to "pick the brain" of the source. People will often agree because, Crosley said, "Accomplished people love talking about themselves."
At the interview’s conclusion, a crucial question to ask is for names of other sector experts for you to contact. After that, the final question can be, "Is there any way I can be of help to you?" Crosley suggested. Typically it won’t lead to a new client, but sometimes it will -a bonus, because it wasn’t the interview’s primary purpose.
Sometimes a probing interview with existing clients will yield insights on desired services that could become a new product line for other existing clients. For example, one of Crosley’s clients used to just perform audits for public sector entities. The interview process revealed that one such client, very price-sensitive with regard to its audit, wanted help improving its operational efficiency. The upshot was that the firm packaged the audit with an operational efficiency improvement service, and laid the foundation for a source of profitable growth.
When the analysis of particular markets concludes that a sector shows promise, firms should be prepared to invest in a high-profile leader to champion that niche, urged Hylan. One of his clients that conducts audits for several local hospitals decided to dive deep into the regional health care sector. It did so by recruiting a hospital CEO to lead the practice. That individual was a fixture within the local health care community, sitting on several boards and frequently giving speeches. The investment has led to growth in the number of the firm’s health care sector clients, and to the scope of the firm’s work for those clients. "They’re not just doing the ‘need-to-have’ services, but are getting the ‘want-to-have’ projects," Hylan said.
Sometimes those "want-to-have" services require specialized expertise that would not typically exist within a traditional accounting firm. Such services may include R&D tax credit and cost segregation studies.
The firm then faces the build-buy-lease decision with respect to delivering such specialized services – or entirely new services, such as international tax – to attract new clients. For many, the solution is to leverage external service providers, rather than build the capacity internally.
For example, accounting firms that work with Engineered Tax Services, a provider of energy tax services, cost segregation studies and other specialized analytical products, partner with the firm both to expand relationships with existing clients and to give them "a competitive advantage to secure new accounts," according to Heidi Henderson, the firm’s marketing director.
A new accounting service that may be promising in one market may not be in another, of course. "I hesitate to say, ‘This is hot,’" Crosley said. The only way to find out, she said, is to do your homework.
Looking for ways to lower your effective tax rate (both federal and blended state tax rates) prior to September 15, 2012? ETS can help. Specialty Tax Deductions and Credits can reduce liability payments to both the IRS and multi-state taxing authorities. ETS specializes in the following engineering based tax advisory services;
179D Energy Tax Deduction
Renewable Energy Credits
Cost Segregation Studies
Construction Tax and Energy Planning
Repair and Maintenance Tax Analysis
New Market Tax Credits
Historical Tax Studies
Land Allocation Assessment
Research and Development Tax Credit
Domestic Production Activity Deduction
For further information, please call 800.236.6519 to discuss how ETS can help you reduce your tax liability prior to the 9.15.2012 deadline
Engineered Tax Services (ETS), a leading provider of specialty tax services to the accounting profession, announces TheSpecialtyTaxCircleTM with Boomer Consulting, Inc. (BCI). BCI is the leading provider of firm management and technology consulting communities in the accounting industry.
TheSpecialtyTaxCircleTM will assist firms in identifying tax credit opportunities, resulting in firm growth and improved profitability. Firm leaders will come together for two meetings and two webinars annually. The first meeting will be in Kansas City, MO in August 28 and 29 , 2012 with a 2nd meeting in Las Vegas, NV in January, 2013.
BCI has successfully facilitated these types of meetings focused on firm management and technology with leading firms. This Circle is focused on leveraging growth opportunities associated with specialty tax credits. Firm leaders and Tax Professionals should attend as a team. The focus will be placed on identifying opportunities as well as naming, packaging and pricing the related services. Each Circle will have 25 firms.
“This is a great opportunity for our firms to focus on opportunities and share experiences using the resources from Engineered Tax Services and Boomer Consulting. Boomer knows how to successfully develop and facilitate communities via face-to-face meetings, webinars and the BKN (Boomer Knowledge Network) – a special purpose online community with multiple resources,” said Julio Gonzalez, CEO of Engineered Tax Services.
L. Gary Boomer, CEO of Boomer Consulting said, “I am excited to take our proven model into the specialty tax arena where firms can learn about identifying opportunities, best practices, trends and how to leverage technology in the process.”
Gary Boomer can be contacted on
785-537-2358 ext. 112
888-266-6375 ext. 112
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Interested in understanding a little more about Cost Segregation and reading the same guidelines as the IRS. Provided, is the COST SEGREGATION AND AUDIT TECHNIQUES GUIDE 12-2011 available for download. If you have further questions about Cost Segregation or your requirements, complimentary call ETS on 1800.236.6519.
Two recent court cases have had significant impact on the use of cost segregation studies in terms of reclassifying building components for accelerated depreciation.
In the most recent case, AmeriSouth XXXII, Ltd v. Commissioner of Internal Revenue, T.C. Memo 2012-67(“AmeriSouth”), the United States Tax Court denied AmeriSouth XXXII Ltd. over $1,000,000 of accelerated depreciation that had been previously reclassified using a cost segregation study.
The decision should be viewed as a cautionary tale about how trusted advisors in the accounting industry should exercise a high degree of prudence in how they select qualified engineering firms to provide tax studies for their clients. Ultimately, CPA’s and financial advisors need to be assured through their own proper due diligence that the selected engineering partner is able to justify the results of a study and is prepared to support the reclassifications in the event of an audit. The Amerisouth case potentially also signals greater responsibility to advise clients regarding firms that may inevitably place them at risk due to poor methodology, inexperience or an inability to defend their reports
The facts of AmeriSouth show what could have easily been avoided by a properly conducted and defensible study:
- AmeriSouth purchased an apartment complex in 2003 for $10.25 million.They commissioned a cost-segregation study and through it, attempted to accelerate the depreciation of more than 1,000 building components over five- or 15-year spans, instead of the 27.5 years applicable to rental real estate under the Modified Accelerated Cost Recovery System (“MACRS”). Through its methodology, AmeriSouth deducted $3,029,029 for depreciation in the years 2003–2005.
- When the IRS audited the AmeriSouth partnership returns, they disagreed with AmeriSouth’s treatment of the components and denied $1,079,751 in deductions for those years. The case ended up in Tax Court, where the IRS also argued that AmeriSouth was actually attempting to depreciate some assets it did not own.
- By the time the case was tried, AmeriSouth was in the process of selling the apartment complex that was the subject of the cost segregation study and stopped responding to communications from the court, the IRS, and even its own attorneys. The court allowed the attorneys to withdraw from the case.
- The court analyzed components in each of the 12 categories AmeriSouth had identified for faster depreciation, which included site preparation and earthwork, water distribution systems, sanitary-sewer systems, gas lines, site electric, special HVAC, special plumbing, special electric, finish carpentry, millwork, interior windows and mirrors and special painting.
- Based on its examination of the facts, the court sided with the IRS in all but a handful of instances, holding that most components were structural, integral to the buildings’ operation and maintenance, and therefore depreciable over the life of the building and not the shorter terms classified by the taxpayers.
This case was unique because the property in question was being sold about the time the case was tried and AmeriSouth had simply stopped responding to communications in a way that could have defended positions taken. As a result, AmeriSouth had neither the expertise nor evidence to uphold the study supporting their accelerated deductions.
If AmeriSouth had allowed itself to be properly represented, sufficient evidence could have been provided to refute the judge’s position on many of the disallowances. Experts in the engineering tax community familiar Hospital Corporation of America v. Commissioner, 109 T.C. 21 (1997)(“HCA”),would have been able to successfully challenge many of the court’s final disallowances of the reclassified components within the study.Unfortunately, several items in the report were overly aggressive and,worse for the taxpayer’s position,was the fact that the report may have included assets not even owned by the property owner. That fact alone could have opened the floodgates to an unusually high level of scrutiny and unprecedented disallowances in some categories that would be defensible under normal circumstances.
Ultimately, the court’s decision was beneficial for the engineering tax industry. Articles subsequent to the memorandum have fueled great concern for the reliability of cost segregation studies. Fortunately, the legitimacy of cost segregation as a tax liability reduction technique has not changed and these tax strategies are still one of the most viable tax treatments for real estate investors, when done properly. But the clear message for the trusted advisor, is the necessity for CPA’s to have a proper RFP (request for proposal) system in place to select qualified engineering partners to provide specialty tax services to their firm’s clients.
The RFP system for engineering tax services should include in its request:
• Verification of corporation engineering licenses
• Verification of employed professional engineers
• Verification of insurance coverage, including Errors & Omissions coverage for gross negligence
• Minimum of 10 references from CPA firms nationally that verify satisfied peer results
• Verification of licensed CPA and/or licensed attorneys for protection from IRS tax controversy
• Verification the engineering firm has successfully defended reports against IRS audits
Michael Daszkal, Managing Partner for a large regional Florida CPA firm, stated, “We as a firm, go through a very through due diligence process when selecting outside consultants who provide specialty tax services for our clients. I anticipate that we as an industry will see more of these court cases until the CPA community as a whole does a better job of managing the RFP process for selecting specialty tax firm. We have a very regimented process for selecting such firms that are approved for our partners to refer to our clients. Realizing that this is an unregulated industry and there are many new firms claiming expertise, we interviewed more than a dozen firms prior to selecting what we considered to be one of the only legitimate firms, Engineered Tax Services. We were able to verify their engineering licenses, their employment of professional engineers, their insurance coverages as well as get peer references. We have been thrilled with the relationship and we are glad we as a firm went through such a rigorous RFP process prior to selecting a firm we felt comfortable referring to our clients.”
Allan Koltin, considered one of the most influential people in accounting by Accounting Today, added that “it is vital that CPA firms be aware that there are great differences in the quality of specialty tax firms and that an RFP process which is managed top down by each firm is critical to assure quality of service and mitigate future risk.”
At this time, we can only speculate on the effect AmeriSouth will have on future inquiries. However, it would be reasonable to hope that those signing returns and advising clients properly investigate outside resources that provide such reports. If the IRS decides to intensify evaluations of cost segregation reports, CPAs would be prudent to expect outside firms to provide audit defense, comply with circular 230 regulations and offer detailed reports using architectural support, including plans, MEPs and “as-builts” to substantiate claims.
Another recent tax court case provides an additional lesson on the importance of CPA’s taking extreme care in selecting specialty tax partners when their clients are purchasing the assets of a business that includes real estate.
When a company acquires part or all of the assets of an existing trade or business, the purchaser’s tax basis is determined by the amount paid for the assets. Both parties in the transaction generally must agree to an allocation of the purchase price among the assets purchased. In Peco Foods Inc. and Subsidiaries v. Commissioner, T.C. Memo. 2012-18 (“Peco”), the Tax Court ruled that a taxpayer who purchased the assets of a business could not retroactively change a purchase price allocation agreed to in connection with the asset acquisition. The court held that even a properly completed cost segregation study could not be used to reclassify assets from real property to personal property after the purchaser and transferor had an enforceable asset allocation agreement in place.
According to tax consulting advisors familiar with the matter in Peco, taxpayers like Peco may be able to draft a purchase agreement that permits the taxpayer to perform a fixed-asset review or cost segregation study after the purchase transaction has been completed.
Gary Boomer of Boomer Consulting recently established The Specialty Tax Circle to address all these issues related to providing quality services in this tax arena. Said Boomer, “We’ve teamed up with Engineered Tax Services to introduce The Specialty Tax Circle in order to help firms improve growth and profitability by leveraging specialty tax services that address issues like this.This group brings together firm leaders who will share best practices and experiences dealing with tax issues that require special attention.” The first meeting is scheduled for June 17-18, 2012, in Kansas City, Mo., and the second in Jan. 15-16, 2013 in Las Vegas.
“This is a great opportunity for our firms to focus on opportunities and share experiences and resources,” said Engineered Tax Services CEO, Julio Gonzalez. “By creating this group, we are giving firms an opportunity to learn from each other and discover how not to repeat the mistakes that were made in the AmeriSouth and Peco cases.”
Taken together, this pair of contentious IRS cases should instill a greater sense of vigilance among CPA’s when researching a suitable specialty tax partner. The consequences of performing adequate due diligence in such cases can make an enormous difference in the final determination of allowable property classification and depreciation.
This article was written by John Cummings, Executive Strategic Officer at ETS, as well as General Counsel for ETS. John is also a partner at the New Jersey, New York and Florida-based law firm, Nicoll, Davis and Spinella. Contact John at 561.253.6640.
By Cindy Lucas
I like to think of it as a gift with purchase. A cost segregation study identifies and reclassifies real property to personal property. Think about your building as a dollhouse, now pick it up and turn it upside-down; everything that falls out is personal property, meaning it can be removed.
Traditionally commercial real-estate is depreciated straight line method over 39 years. Well the truth is that nothing in that building is going to last 39 years. Components like carpeting, pluming, and furniture even down to the wiring in electrical systems should be reclassified. The IRS has released the Audit technique guide, which serves as a reference for an engineering company to allocate these components to 5, 7 or 15 year lives.
What that means is cash flow to the property owner. The typical benefits of a cost segregation study are 7-10% of the purchase price or build cost realized back to the owner within the first five years. Some aggressive CPA firms may be doing some safe methods of accelerating their clients’ depreciation but in no way can achieve or justify the level of benefit that can come from an engineering firm who specializes in this. Afterall, how would a CPA know what your insulation would cost to replace?
Speaking of replace brings me to the insurance aspect. An Engineered Cost Segregation Study gives the ability to substantiate the replacement costs to the insurance carrier. This enables an insurance agent to go to their underwriters for the most aggressive pricing. The underwriter will have a very high comfort level of the risk due to the comprehensive building review in their file.
What if something happens to your building? I am sure we have all played the insurance game and it can be quite frustrating trying to collect for what you need to replace or repair.
A cost segregation study can serve as a substantive document that an owner can use as support to a claim that is being disputed to their favor. The depth of our reports helps an owner to avoid the need to hire a third party professional to justify their claim.
To an underwriter this becomes a disclosure safeguard whereby at time of claim the owner is able to substantiate a full disclosure position with the insurance adjuster which puts the onus on the carrier to pay!
For more information please feel free to contact me directly at 954-439-1671 or email firstname.lastname@example.org
Engineered Tax Services
Tax Strategies To Increase Building Cash Flow
May 10, 2012
One Riverway, Suite 1000 | Houston, Texas
Join Mark Barbour as he presents the popular and informative presentation for building owners – Tax Strategies To Increase Building Cash Flow over lunch, hosted by Harper Pearson, P.C.. Mark can also assist you to learn how ETS can assist you with specialty tax benefits to increase the ROI in your client’s business. Specialty tax benefits include Green Energy Tax Deduction, Research and Development Tax Credit, Repairs and Maintenance Studies, Cost Segregation Studies, Energy Star Benchmarking and Certification and more. For details call Mark Barbour on 310.383.1302.
BuildingsNY Conference and Expo
May 2 – 3, 2012
Javits Center, NY, NY
Join Michael D’Onofrio, presenter at Green To Gold Finance and Incentives Panel, May 2, 2012, 10.15 – 11.15am. Also Visit Peter Scalise and Michael D’Onofrio of ETS at our booth number 757. Learn how ETS can assist you with specialty tax benefits to increase the ROI in your client’s business. Specialty tax benefits include Green Energy Tax Deduction, Research and Development Tax Credit, Repairs and Maintenance Studies, Cost Segregation Studies, Energy Star Benchmarking and Certification and more. For details click here to visit the registration website.
North American Regional Meeting
May 20 – 22, 2012
The Pfister Hotel, Milwaukee
Join Chris Ostler and Art Goessel at the NARM 2012. Learn how ETS can assist you with specialty tax benefits to increase the ROI in your client’s business. Specialty tax benefits include Green Energy Tax Deduction, Research and Development Tax Credit, Repairs and Maintenance Studies, Cost Segregation Studies, Energy Star Benchmarking and Certification and more. For details click here to visit the registration website.