Cost Segregation – A Dollar Today is Worth More than a Dollar Tomorrow

Cost Segregation Studies Can Free Cash Flow

Tight and weak economies slim-down profit margins, tighten credit markets, and restrict investment capital.  Under these conditions, prudent business owners look for unconventional capital sources.  One such unconventional source begins with a Cost Segregation Study (a “Cost Seg”).  A Cost Seg can free cash for capital expenditures or normal operations.

Manufacturers can save when upgrading or adding onto their production infastructure.  The possibilities seem limitless.  Interestingly, Cost Segs can enhance a business with no expansion/updating objectives too.

Cost Segs are technical tax componentizations applied to commercial buildings constructed, remodeled, expanded or purchased since 1987.  Cost Segs can result in sizeable tax savings by accelerating depreciation allowances.  Even the U.S. Treasury Department advised in the Wall Street Journal that Cost Segs “should be considered in almost every real estate purchase.”

Whether or not you’re considering a real estate purchase – or recently made one – multiple reasons exist for considering a Cost Seg.

A Cost Seg segregates the costs of various building parts/components.  This permits classifying certain parts/components as “personal property” or “land improvements” rather than “real property.”  This classification reduces the tax bill by accelerating available depreciation deductions.

Real property depreciation is figured over extended lives (as long as 39 years).  Long lives mean small annual depreciation deductions.  Personal property depreciation routinely entails substantially shorter depreciation lives such as 5, 7 and even 15 years.  Shorter lives mean larger depreciation deductions.  “A dollar in your pocket today is worth more than a dollar in your pocket in the future.” 

Consequently, reclassifying $100,000 worth of lighting, plumbing, HVAC and other such assets as five-year personal property (as opposed to real property) creates roughly $16,000 in net-present-value tax savings (assuming a 5% discount rate and a 35% marginal tax rate).

Newly constructed improvements may qualify for either bonus depreciation or expensing under IRC §179.  In any event, profitable manufacturers moving to new (or at least new to them) facilities may find a Cost Seg results in partially funding the costs of buying and renovating the facility.  A business with a net operating loss (aka NOL) may be able to carry back the Cost Seg-generated depreciation losses and secure cash refunds of prior year taxes.

A peripheral benefit of reclassifying building components as personal property may permit real property value reductions for “property tax” purposes.  And Cost Seg componentization simplifies writing off the lighting, plumbing, HVAC or other such assets when they are replaced or become obsolete.

Be Proactive!

The IRS requires thorough and detailed records for Cost Segs to achieve their desired results.  Hence, a Cost Seg specialist becomes indispensable.  In new construction, early specialist involvement assures more suitable documentation respecting personal property’s use and cost.  Specialists also assist your architects or engineers with creating necessary information and documentation.  This is particularly valuable in constructing complex and highly detailed buildings.

Cost Segs are both possible and valuable after construction is complete.  Success in this setting depends on recognizing, documenting and valuing all building components so the reclassification is approved by the IRS.  In this setting, the IRS approval is necessary.  Here is where our specialists really prove his/her worth.

Cost Segs can be applied to most types of commercial buildings, but conventionally Cost Segs are most valuable regarding specialized buildings such as manufacturing, or special purpose buildings.

A Cost Seg may be just the cash flow boost you business has been seeking.

To learn more about Cost Segs and how they may favorably impact your business, contact Stephen C. Smith or your Holbrook & Manter representative before attempting any Cost Seg.  We facilitate Cost Segs for growth-minded clients.

Grandview Yard & Holbrook & Manter, CPAs

Grandview Yard’s location has been paramount in attracting tenants, patrons in a slow economy

 

According to the Columbus Dispatch, there are several ways to measure the success of the Grandview Yard, the development rising from land once home to a huge Big Bear warehouse. 

Please read more in the Columbus Dispatch at:

http://www.dispatch.com/content/stories/business/2012/01/27/successful-launch.html

 

Holbrook & Manter, CPAs Presents

Mr. Justin Linscott, CPA, presented to the N2Publishing Networking Group on January 26, 2012.  The event was held at SOHO Fashion & Furniture Exchange in Dublin.  The networking group is comprised primarily of local business owners in the Dublin, Powell and Worthington, Ohio area.  Mr. Linscott educated the attendees about current tax opportunities as well as other financial incentives pertaining to their small businesses.

 

 

Holbrook & Manter presents to Local Board Members

Holbrook & Manter Partners with United Way to help Local Organizations - “Keeping Your Organization Out of Hot Water” – Free Seminar for Local Nonprofit Board Members

MARION, OHIO – The United Way of Marion County, in partnership with the Marion Community Foundation, Holbrook & Manter, CPA’s and State Attorney General Mike DeWine’s office, is hosting an informational seminar geared toward local nonprofit board members on November 17th, 2011 from 9:00am to noon at TRECA, 100 Executive Drive, Marion.

The seminar will cover basic requirements for all charitable organizations, reporting and fiduciary responsibilities for board members, how to read an agency’s IRS 990 form, easy-to-follow tips to meet board responsibilities, and how to protect your organization.  Speakers for the event include Larry Havens of Holbrook & Manter, CPA’s and Peter Thomas and Beth Short of the Ohio Attorney General’s Office.

Both executive staff and board members of all local nonprofit organizations are encouraged to attend this event.  There is no cost to participants.  If you would like to attend, please call 740-383-3108 or e-mail mary@unitedwaymarion.org to make a reservation, as seating is limited. 

Voluntary Worker Classification Program

The VCSP for Employee/Independent Contractor Issues—A solution or a Trojan horse?

The IRS recently announced their voluntary “worker reclassification” program (the “VCSP”) which incentivizes employers by (1) lowering current year employment taxes, (2) waiving of interest and penalties and (3) avoiding of prior year employment tax audit exposure. The VCSP encourages employers’ reclassification of workers as employees who were previously treated as independent contractors.

But, is it a gift or a Trojan horse?

Background:

The magnitude of employment taxes on “common law employees” spawned serious tension over service provider classifications (i.e. employee versus independent contractor). Many businesses err, and continue to err, on the side of independent contractor classification hoping to avoid a plethora of administrative and benefit costs and tax burdens.

Historically, employees for IRS purposes are “common law employees” which is a “legal term of art” not defined in the Internal Revenue Code (the “Code”).

As one of the Code’s “all the facts and circumstances” tests, these worker classification determinations are frequently problematic. Factors such as control over the details and means of work, furnishing tools, providing a place to work can impact classification. However, “facts and circumstances tests” like this one are notorious for creating as much confusion as they avoid.

This uncertainty, the proliferation of IRS employee classification positions and creative taxpayer litigation positions reached such a pitch in 1978 that Congress enacted a “safe harbor” provision which forced some level of certainty back into this theater.

Section 530 Safe Harbor:

In 1978, as part of the Revenue Act of 1978 (but interestingly, not as part of the Internal Revenue Code), Congress enacted a “temporary safe harbor relief statute” (aka “Section 530”). Section 530’s avowed purpose was prevention of the IRS’ retroactively reclassifying workers from independent contractors to employees; provided that, the employer satisfies certain criteria.

Section 530 doesn’t refine the classification process but merely relieves qualifying employers of employment tax liabilities even in cases where their workers are employees. It also relieves employers from the statutory/ common law rules necessary to avoid reclassifying workers from independent contractors to employees.

Hence, in recent years IRS worker classification/reclassification inquiries have focused on Section 530’s three (3) qualifying tests; namely, (1) reasonable basis test, (2) tax return test and (3) position test. Compliance with each test is the employer’s burden. Interpreting these three (3) necessary tests is both complex and beyond the scope of this piece.

If you’re wondering if your business can avail itself of the Section 530 Safe Harbor, please contact your H&M tax advisor.

Voluntary Classification Settlement Program:

The VCSP permits qualifying employers’ reclassification of their independent contractors to employee with the following advertised incentives:

  • Pay only 10% of the employment tax liability for “wages” paid to workers during the most recent tax year,
  • Pay no interest or penalties on that liability, and
  • Not being subject to an employment tax audit worker classification audit for prior tax years.

Not all is sunshine and roses—you must extend the statute of limitations (the “SOL”) by three (3) years for each of the three (3) tax years following the year of VCSP participation which represents a dramatic lengthening of the SOL.

VCSP qualification is not a forgone conclusion. Qualification demands: (1) consistent treatment of workers as independent contractors and (2) filing all required 1099 forms for the “workers” for the previous three (3) tax years. The latter point may be a stumbling block for employers.

However, even if you met the “qualifications” qualification isn’t assured. A quote from the IRS notice announcing the VCSP states….”The IRS retains discretion whether to accept a taxpayer’s application and verified eligibility.” The soldiers are exiting the Trojan horse as we speak!

Should you pursue the VCSP?

One the one hand, if your workers are clearly employees under recognized classifications tests or if you can’t qualify for Section 530’s safe harbor and you can qualify for this Program, VCSP participation limits your prior tax exposure and provides some certainty in terms of your future employment tax exposure.

On the other hand, if your workers are clearly independent contractors under recognized classification tests, or if you qualify (and can defend such qualification) for Section 530’s safe harbor, participation not only exposes you to tax and it most likely eliminates your ability to rely on Section 530 in future.

Surely some business owners suffer from anxiety over their current/past employment tax return worker classification positions, but this apparent “amnesty” program holds attractiveness mostly for those whose audit lottery number hasn’t been drawn. If your classification is sound or Section 530 provides an effective safe harbor, your response might best be “thanks but no thanks.”

Worker classification and Section 530 qualifications might fairly be characterized as technical. Correspondingly, if VCSP seems attractive, contact your H&M tax advisor so you can make this important decision armed with the necessary information.