Cost Segregation

Cost Segregation Studies

Welcome to Figure Financial, where we specialize in unlocking hidden value within your real estate assets through comprehensive cost segregation studies. We understand the intricacies of cost segregation and its potential positive impact on your bottom line. Whether you’re a property owner seeking to maximize tax benefits, a real estate investor looking to enhance returns, or a business entity with owned properties, our expert team provides tailored solutions to meet your specific needs. Partnering with Figure Financial can be a strategic decision to optimize your tax position and boost cash flow.

What is a Cost Segregation Study?

A cost segregation study segregates the cost components of a building into the proper asset classifications and recovery periods for federal and state income tax purposes, which generally results in significantly shorter tax lives for these components (e.g., five- or seven-year periods rather than the standard depreciation periods of 27.5 years for residential rental property or 39 years for nonresidential real property). This allows real estate owners to frontload their depreciation deductions to receive their tax benefit sooner!

Examples of property components that may be depreciated over a shorter period of time:

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If you own rental or commercial property, you may be eligible for additional savings. Contact us today!

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Frequently Asked Questions

FAQs

What is cost segregation?

Cost segregation is a strategic tax planning tool that professionals like CPAs and tax consultants use to help clients accelerate depreciation deductions. It involves identifying and reclassifying personal property assets and land improvements for faster depreciation, which can provide significant tax benefits to clients.

How does offering cost segregation benefit my firm?

Providing cost segregation services can enhance your firm’s value proposition by helping clients optimize their tax savings and improve cash flow. This service can lead to deeper client relationships and open ppportunities for additional consulting and financial planning engagements.

Who is qualified to conduct a cost segregation study?

Qualified professionals include certified public accountants (CPAs), tax consultants, and engineers with expertise in construction cost estimation and tax law. Firms offering this service should have or develop expertise in both areas to ensure accurate and compliant studies.

What types of client properties are suitable for cost segregation?

Business properties of almost any type, such as office buildings, industrial sites, retail spaces, and hotels, can benefit from cost segregation. The key factor is identifying properties with significant personal property assets or land improvements for tax purposes.

When should we advise clients to consider a cost segregation study?

Advise clients to consider a cost segregation study when acquiring, constructing, or renovating a property. It’s also possible to conduct retrospective studies on properties acquired in previous years, offering a catch-up depreciation benefit without amending prior returns.

What documentation is required for a cost segregation study?

Essential documents include construction plans, contracts, budgets, payment records, and for purchased properties, closing statements, and appraisals. Accurate and detailed documentation is crucial for a successful study.

What is the typical timeline for completing a cost segregation study?

The timeline varies, but most studies are completed within 30 to 60 days after receiving all necessary documentation. This timeline allows for a thorough analysis and preparation of a detailed report.

Are cost segregation studies subject to IRS review?

Yes, these studies can be scrutinized by the IRS. Therefore, it’s vital to ensure the study is well documented, accurate, and in line with IRS guidelines. This protects both your firm and your clients in case of an audit.

Can older properties qualify for a cost segregation study?

Yes, properties that have been in service for several years are still eligible for cost segregation. Performing a study on such properties can provide clients with substantial tax benefits by catching up on missed depreciation.

Does cost segregation apply to leasehold improvements?

Absolutely. Cost segregation can be applied to leasehold improvements, allowing these costs to be depreciated more quickly than the building structure, which can be advantageous for clients leasing their business space.

 

What should clients know about selling properties after a cost segregation study?

Clients should be aware that selling a property after a cost segregation study may result in recapture taxes. This aspect should be factored into their long-term tax planning strategy.

Does a cost segregation study impact property taxes?

Cost segregation is primarily a strategy for federal income tax purposes and does not typically affect property tax assessments, which are based on different valuation criteria.

Can cost segregation be integrated with other tax strategies?

Yes, it can be combined with other tax-saving strategies like the energy-efficient commercial buildings deduction (Section 179D), historic preservation tax credits, or opportunity zone investments. Offering a comprehensive approach to tax planning can greatly benefit your clients.

When is the ideal time for a cost segregation study?

The ideal time to perform a cost segregation study is the tax year the property is purchased or construction is completed.

Can I have a study done on prior investments?

Yes – this is an excellent strategy, especially with the Tax Cuts and Jobs Act (TCJA) and 100% Bonus depreciation since September 28, 2017. Property owners may claim “missed” depreciation by filing Form 3115 with a 481(a) adjustment and claim the favorable adjustment in the current tax year.

Is the bonus depreciation rate still 100%?

Below is a list of bonus depreciation rates starting with the TCJA on 9/27/2017

  • 9/28/2017 – 12/31/2022: 100%
  • 2023: 80%
  • 2024: 60%
  • 2025: 40%
  • 2026: 20%
  • 2027 and thereafter: 0%

These are subject to change with potential updates from Congress

Does it still make sense to have a study completed when bonus isn’t 100%?

Yes – the cost-benefit analysis will be more important than ever but in general, the benefits will still outweigh the costs.

Who is cost segregation NOT for?

“Fix and flips”, short-term holders, tax-exempt organizations, and properties where the cost of the study outweighs the benefits.

What is the typical minimum holding period for a cost seg to make sense?

The property preferably would be held for at least three years, ideally up to five years, to minimize depreciation recapture. However, a 1031 exchange can be a planning option if a sale must take place early in the holding period.

Does performing a study increase my audit risk?

No – performing a study does not increase the likelihood of an audit by the IRS and the IRS has issued guidance on how to perform these studies. Compliance with these guidelines, proper documentation, professional expertise, and reasonableness of results are crucial in a legitimate study and protecting the benefits to the taxpayer.

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Frequently Asked Questions

FAQs

Is the IRS cancelling the ERC program early?

The IRS released updated guidance on the Employee Retention Credit program on September 14, 2023. The news release below explains that the IRS has placed an immediate moratorium through the end of the year on the processing of new ERC claims in effort to curb fraudulent applications by bad actors. While a moratorium may sound alarming, this intentional pause is a common practice used by the IRS.

This is a developing situation, and we will continue to provide updates as new information is released. This what we know so far:

  • This news confirms that the ERC is still a valid and valuable tax incentive for qualified businesses – this is not a cancellation of the program.
  • The IRS moratorium will delay taxpayers from receiving their ERC funds, but it does not prevent taxpayers from continuing to file for the credit.
  • The IRS may ask for more information to process future ERC claims, which we are prepared to provide as it is already part of our normal substantiation process.
  • We will only release a credit for your business if we are confident you meet the IRS requirements. The positions we take are in line with the updated guidance that the IRS has provided.
  • A large portion of the businesses we evaluate for ERC do not meet IRS eligibility requirements. If we filed a credit on your behalf, it is because we are confident you qualify. You should not be concerned about the credits you have claimed. The positions we have taken continue to be in line with the updated guidance that the IRS has provided.
  • The IRS is taking steps to help taxpayers remediate any inappropriately claimed credits in good faith. The IRS encourages taxpayers to evaluate their eligibility for the credit. If you know anyone concerned with a credit they claimed individually or through a company other than ERC Pros, we can offer assistance through our ERC Substantiation Services.

On January 31, 2024, the House passed the Tax Relief for American Families and Workers Act of 2024, which proposed an end to the ERC program effective January 31, 2024. This is now pending approval from the Senate. Please note that we will not be processing any new ERC claims until a final vote is reached. Our team of attorneys and CPAs is closely monitoring the situation. For more information about this new legislation, read this Tax Update from our legal team on our blog.

Who can withdraw an ERC claim?

Employers for whom all of the following is true:

  • The claim was made on an amended employment return (Forms 941-X, 943-X, 944-X, CT-1X);
  • The amended employment return only added the claim for the ERC – no other adjustments were made;
  • The employer seeks to withdraw the entire amount of the ERC claim; and
  • The IRS had not paid the claim, or the check for the refund has not been cashed or deposited.
Who cannot withdraw an ERC claim?

Employers who have already cashed their refund checks or who claimed the ERC on their original employment tax return.

Why did the IRS create this withdrawal option?

The IRS created the withdrawal option to help small business owners and others who were pressured or misled by ERC marketers or promoters into filing ineligible claims.

Why is this so important?

Claims that are withdrawn will be treated as if they were never filed. The IRS will not impose penalties or interest, which can save you a lot of money.

How does an employer withdraw an ERC claim?
A: Review the instructions carefully at: Withdraw an Employee Retention Credit (ERC) claim | Internal Revenue Service (irs.gov) Section A: You haven’t received a refund and haven’t been notified your claim is under audit.
  • Make a copy of the adjusted return with the claim you wish to withdraw.
  • In the left margin of the first page, write “Withdrawn.”
  • In the right margin of the first page:
  • Have an authorized person sign and date it.
  • Write their name and title next to their signature.
  • Fax the signed copy of your return using your computer or mobile device to the IRS’s ERC claim withdrawal fax line at 855-738-7609. This is your withdrawal request. Keep your copy with your tax records. **If you can’t fax your withdrawal request, you can mail it to the address in the instructions for the adjusted return that applies to your business or organization. Before doing so you should make a copy of the signed and dated first page to keep for your records. It will take longer for the IRS to receive your request if you mail it. Mail your package via certified mail to track and confirm delivery.
Section B: You haven’t received a refund and you’ve been notified your claim is under audit. If you’ve been notified that the IRS is auditing the adjusted employment tax return that includes your ERC claim, prepare your withdrawal request using the steps in Section A, but don’t submit to the withdrawal fax line or mail it using the address below. Instead:
  • If you’ve been assigned an examiner, communicate with your examiner about how to submit your withdrawal request directly to them.
  • If you haven’t been assigned an examiner, respond to your audit notice with your withdrawal request, using the instructions in the notice for responding.
Section C: You received a refund check but haven’t cashed or deposited it.
  • Prepare the claim withdrawal request using the steps in Section A, but don’t fax the request.
  • Write “Void” in the endorsement section on the back of the refund check.
  • Include a note that says, “ERC Withdrawal” and briefly explain the reason for returning the refund check.
  • Make copies for your tax records of the front and back of the voided check, the explanation notes and the signed and dated withdrawal request page.
  • Don’t staple, bend, or paper clip the voided check; include it with your claim withdrawal request and mail it to the IRS at:

Cincinnati Refund Inquiry Unit

PO Box 145500

Mail Stop 536G

Cincinnati, OH 45250

**Mail your package via certified mail to track and confirm delivery.

What happens after submitting the withdraw request?

The IRS will send you a letter telling you whether your withdrawal request was accepted or rejected. Your approved request is not effective until you have your acceptance letter from the IRS. If your withdrawal is accepted, you may need to amend your income tax returns if you already included the claim for the ERC in the filing. If you need help, seek out a trusted tax professional.

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