|
Save Even More with Cost segregation
About Bonus Depreciation
While many are concerned about the downfalls of the country’s economic slowdown, there is a silver lining. Congress has approved, as part of its national stimulus package, “bonus depreciation” for 2008. The benefits include the ability to take additional depreciation on qualifying property in 2008. The caveat is the very short window of opportunity to take advantage of this package.
Bonus depreciation isn’t a new concept. In fact, it has been used in several economic stimulus packages in the past, including the New York Liberty Zone, and the Gulf Opportunity Zone. Bonus depreciation allows qualified taxpayers to take an additional 50 percent depreciation of the basis of the qualifying property in the first year.
What Qualifies
To be eligible to claim bonus depreciation, property must be either; eligible for the modified accelerated cost recovery system (MACRS) with a depreciation period of 20 years or less, a water utility property, off-the-shelf computer software, or qualified leasehold property. For property to qualify for bonus depreciation, it must be acquired under a binding written contract entered into during 2008. Additionally, the taxpayer must begin the manufacture, construction or production of the property for the taxpayer’s own use during 2008. However, for property with a depreciation period of 10 years or longer, Congress extended the placed-in-service date through December 31, 2009. Construction started in 2007 does not qualify for this stimulus package.
Maximizing Bonus Depreciation with Cost Segregation
Cost segregation allows you to capture bonus depreciation by identifying property that falls into the recovery periods which are less than 20-years (i.e. 5, 7, 15, etc.). When the property is accurately identified in a cost segregation study, taxpayers experience accelerated depreciation by shortening the recovery period. The bonus depreciation benefit allows owner to depreciate 50% of the asset immediately!
The following is an example of how cost segregation, combined with bonus depreciation, benefits taxpayers.
Includes 50% bonus depreciation for first year.
As you can see, with cost segregation with bonus depreciation combined, taxpayers experience $379,570 more depreciation over the first five years.
Choosing the Right Consultant
Before beginning a cost segregation study and benefiting from both accelerated and bonus depreciation, make sure you work with a qualified cost segregation provider.
The IRS authored a Cost Segregation Audit Techniques Guide outlining the accepted criteria for a quality cost segregation study. Your provider/consultant should know and follow these guidelines when doing your cost segregation study. There are 13 parts to a quality cost segregation study:
- Preparation by an individual with expertise and experience
- Detailed description of the methodology
- Use of appropriate documentation
- Interviews conducted with appropriate parties
- Use of a common nomenclature
- Use of a standard numbering system
- Explanation of the legal analysis
- Determination of unit costs and engineering "take-offs"
- Organization of assets into lists or groups
- Reconciliation of total allocated costs to total actual costs
- Explanation of the treatment of indirect costs
- Identification and listing of section 1245 property
- Consideration of related aspects
Additionally, there are nine principal elements of a quality cost segregation report. They are:
- Summary Letter/Executive Summary
- Narrative Report
- Schedule Of Assets
- Schedule Of Direct and Indirect Costs
- Schedule Of Property Units And Costs
- Engineering Procedures
- Statement Of Assumptions And Limiting Conditions
- Certificate
- Exhibits
You should expect your cost segregation consultant to provide you with reports that meet all of these criteria.
There are also six methods approved by the IRS when conducting a cost segregation study. These include the Detailed Engineering Approach from Actual Cost Records; Detailed Engineering Cost Estimate Approach; Survey or Letter Approach; Residual Estimation Approach; Sampling or Modeling Approach; “Rule of Thumb" Approach. Any of these approved methods is acceptable to the IRS.
About O'Connor & Associates
O'Connor & Associates is a national real estate consulting firm headquartered in Houston with offices in Dallas, Los Angeles, Newport Beach, Chicago, Atlanta, and San Antonio. Our 270-person firm handles appraisals, market research studies, valuation and tax reduction strategies, and property tax protest services for commercial properties. In business since 1974, the firm has more than 40,000 clients. Patrick O’Connor, MAI, has been president of O’Connor & Associates since 1983. The firm is frequently acknowledged by national publications as a respected source of information on real estate trends.
|
