Synopsis
Cost segregation studies are specific engagements conducted by tax experts to maximize the tax benefit of real estate ownership by identifying, segregating and classifying a building's components to asset categories with the shortest possible life to create significant tax deductions sooner for federal and state income tax purposes. Application of the findings from these studies can lead to substantial reductions in current taxable income for clients by accelerating depreciation, and thereby increase cash flows. In addition to improving tax liabilities generated by recently purchased or constructed properties, a cost segregation analysis can produce substantial tax benefits for properties that have already been depreciated for as many as 10 years or more by catching up on missed depreciation. CCH's new book, "Practical Guide to Cost Segregation (Second Edition)," not only explains how a cost segregation study is performed, but also outlines the steps needed to practice in this discipline and how to integrate and expand the broad practice of the firm taking it on. Comprehensive discussion is supported by practical illustrative examples. The book also explains how to sell and price cost segregation studies and analysis as a meaningful service to a firm's clients. Cost segregation involves much more than real estate. Land improvements and personal property components potentially eligible for separate depreciation over a reduced depreciation period include parking lots, sidewalks, curbs, roads, fences, storm sewers, landscaping, signage, lighting, security and fire protection systems, removable partitions, removable carpeting and wall tiling, furniture, and counters. Also potentially eligible are appliances and machinery unrelated to the operation and maintenance of the building and the portion of electrical wiring and plumbing properly allocable to machinery and equipment that is unrelated to the operation and maintenance of the building. Cost segregation is a natural fit with many accounting firms with strong tax practices. A reliable cost segregation study cites legal authority (e.g., regulations, case law, and rulings) to support the treatment of an item for tax purposes as personal property or as a land improvement. A reliable study also sets forth methods to determine depreciable basis. Established standards for acceptable cost segregation studies are high, requiring: - On-site inspection of the facility to determine the property's character; examination of the processes and functions that the property is intended to serve; and identification of components the consultant considers relevant to cost segregation. - Detailed qualitative take-off of all the facility's materials gleaned from a complete set of 'as built' building plans and specifications. - Computation of in-place costs of each property item through application of unit costs against quantities of materials and necessary labor indicated. - Listing of facility components by contractor trade, subcontract, or specific purchase order. - Distribution of the facility's actual total construction cost to its components, based on the relative reconstructed costs of each component. - Allocation of costs of architectural design, engineering and miscellaneous capitalized costs to each component. This insightful new Guide covers these and other critical details in straightforward, clear and concise language that both novices and veteran practitioners will appreciate.
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About the Author
Paul G. Di Nardo, CPA has an undergraduate degree in accounting from TheCollege of William and Mary in Virginia. He is a shareholder of The Cost Segregation Group and is a member of the AICPA and the VSCPA. He is also a shareholderin the CPA firm Wall, Einhorn and Chernitzer, PC in Norfolk, VA. His experience includes eight years of extensive work in the area of cost segregation and ten years in advanced tax planning strategies with KPMG. Shirley C. Baldwin, CPA, CFP, MBA has an undergraduate degree in commerce with a concentration in accounting from the University of Virginia and an MBA from the College of William and Mary. She is a shareholder of The Cost Segregation Group, a shareholder of the CPA firm Wall, Einhorn & Chernitzer, PC in Norfolk, Virginia, and a member of the AICPA and VSCPA. She is a former KPMG, LLP partner with extensive experience in real estate, closely held businesses, and estate planning for closely held business owners. Cathy A. Harris, CPA has an undergraduate degree in Business Administration with a concentration in accounting from Old Dominion University. She is the director of the Cost Segregation Group and a tax manager at the CPA firm Wall, Einhorn & Chernitzer, PC in Norfolk, VA. She has extensive experience in real estate taxation and depreciation from over 10 years at Wall, Einhorn & Chernitzer, PC and KPMG, LLP in Norfolk, Virginia.
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