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Cost Segregation - Why Every Commercial Property Owner Needs to Know About Cost Segregation
Cost Segregation - Why Each and every Commercial Property Owner Needs to Know About Cost SegregationBy Dallas Alford
What is a Cost Segregation Study?
Cost Segregation is an IRS-approved application by which commercial property owners can accelerate depreciation and reduce the amount of any taxes owed. Cost segregation consists of re-classifying components and improvements of a commercial building from real property to commercial property. This process allows the assets to be depreciated on a 5, 7, or 15-year schedule in place of the traditional 27.5 or 39-year depreciation schedule of real property. Thus the commercial property owners taxable income is greatly reduced because a larger depreciation expense deduction is created. Ultimately this improves the building owners cash flow and allows them to reap the advantages of depreciation up front.
How did Cost Segregation come about?
In August 1997 the Hospital Corporation of America owed the IRS $800,000,000 in taxes. This case (Hospital Corporation of America v. Commissioner, 109 TC 21 (1997)) was the ground breaking case for cost segregation. On August 24th, 1997 Judge Tom Wells permitted Hospital Corporation of America to use cost segregation with respect to a multitude of improvements in their commercial building which allowed them to distinguish between components that constitute IRC section 1250 class property (real property) and property items that constitute section 1245 class property (tangible personal property).
Why have I not heard of Cost Segregation?
When Cost segregation first became available as a tax planning strategy it was only performed by the major accounting firms with in-house cost segregation departments on the largest of properties of their most significant clients. One study originally cost upwards of $100,000.Â
Even today if you are currently using a local accounting firm or smaller CPA firm they probably are not offering cost segregation services as they may not have the resources available to provide a cost segregation study as the IRS does require that an engineered study be performed. More likely than not the smaller CPA firm does not keep an in-house engineer on staff to perform cost segregation studies.
How do I know if my property qualifies for a cost segregation study?
Basically if your property was bought, constructed or remodeled after January 1, 1986 you have the ability to have a cost segregation study applied to your commercial property.
When should a cost segregation study be done?
It is greatest to have a study completed for the year the building or improvements are placed in service. However, IRS Revenue Procedures allow taxpayers to "catch up" on the depreciation that was not claimed from the first day the property was placed in service withoutamending prior years' tax returns. Furthermore, the IRS recently allowed for the "catch up" period all in the first year rather than over four years, when the Revenue Procedure 99-49 was first introduced.
How does a cost segregation study work?
Building costs are generally classified for federal income tax purposes into three categories; (1) Tangible Personal Property, (2) Land Improvements, and (3) Real Property. Each has a different recovery period and method under the Modified Accelerated Cost Recovery System (MACRS). The qualified engineers who perform the study will have an in-depth knowledge of construction methods, materials, and building components and will perform a detailed analysis of your commercial property to identify the building components and improvements that will be reclassified to take advantage of accelerated depreciation.
This information and details will then be communicated to your CPA so that they can book your depreciation accordingly and notify the IRS of a change in your accounting methods.
Will a cost segregation study trigger an audit?
If a cost segregation study adheres to and is done in accordance with the IRS Cost Segregation Audit Technique Guidelines then the IRS will not question your cost segregation study.
If a study is performed outside these guidelines an audit could potentially be triggered and the IRS could dispute your accounting methods and take back any deductions taken in error.
If you are going to have a study done tt is imperative that you have a qualified third party perform the study in order to avoid an IRS audit.
To learn more about the Cost Segregation click on the following link:Â
Dallas L Alford IV, CPA is a licensed Certified Public Accountant in the state of North Carolina and owner of Atlantic Financial Consulting, a consulting firm that is focused on helping business owners improve cash flow. Services include full service medical billing for healthcare providers, cost segregation studies for commercial property owners and an array of other services for general businesses.
To learn more about Atlantic Financial Consulting, you may visit their website at http://atlanticfinancial.us or contact Dallas L Alford IV, CPA at 1 888-428-2555.
,Depreciation - Useful Life, Or Economic Life
Depreciation - Useful Life, Or Economic LifeBy Sean Goss
Depreciation is the definition in accounting for a reasonable estimate, in monetary terms for the devaluation of an asset over a period in time. Since most assets are capitalized on the balance sheet, in financial statements, the "cost of depreciation", is provided as an expense on the income statement.
Many debates on depreciation are continuing in accounting circles, since it is difficult to establish what would constitute a "reasonable estimate". It was furthermore accepted, until recently, that land and buildings cannot depreciate, however appreciates. Recent developments, however, have now proposed depreciation on buildings.
Tax "write-offs", on assets complicates matters further, since prescribed statutory rates for tax deductions are higher than depreciation rates, thus creating variances between tax values and book values of assets.
It is my contention that asset accounting can only be performed thoroughly, with the assistance of an astute accountant. The accountants expertise, on fixed asset registers, accounting standards and firm grasp of tax legislation is vital.
Whereas tax writes offs on assets are higher, the trend in accounting is to depreciate assets in terms of its useful life, and not its economic life. The prescribed rate for a computer in tax would be three years or 33, 3%. (depending on the tax regime of the country).But a company or business could only use it for 6months and sell it as a scrap. This 100% provision for depreciation, as useful life, should be factored in. Office furniture couldbe utilized for 5 years, and then scrapped, however tax rates could prescribe four years, for a tax write off!
The rate that businesses would depreciate their assets at coincides with the economic life of an asset. So accepted economic life is useful life for business assets. In not-for-profit organizations and other community establishments, such as churches etc. the picture becomes very confusing. Churches will retain assets such as furniture for up to 40 years. Even computers that businesses normally upgrade from 6 to 12 months are used for 3 to 4 years!
So if the useful life method is applied, in not-for-profits ,assets could have a depreciation rate as low as 2%. Accounting standards expect fair presentation. Depreciation rates, for not-for-profits and other community organizations,should be carefully applied.
No one expects a company or business owner or director, of a Not-for- Profit Organization to understand these concepts, just to ensure that at the very least, a proper asset accounting system is in place.
Our firm specialises in small business consulting, including cashflow management, business formation and entrepreneurial advice to an international small business community. Sean Goss website: http://www.sgafc.co.za
,Real Estate Accounting - An Important Business Aspect That Your Business Needs
Real Estate Accounting - An Important Business Aspect That Your Business NeedsBy Alvis Brazma
Your business is what defines your achievements in a professional way. Since accounting is one of the vital aspects of any business organization, it pays to pay attention to it. Therefore, keeping track of any financial transaction is very important, since minute details have to be attended so that the final statement is flawless one. An alert staff which tends to have an eye for detail increases the efficiency of the accounting department in general. Real estate accounting similarly, needs an expertise which is quite capable of handling the accounting projects is a proper way. The accounting department has to follow certain strategies for the maintenance of a proper business setup. In the end, the results show for themselves, as the tasks are handled by the excellent accountants themselves.
Since innumerable accounting deals and bookkeeping records have to be maintained in the area of real estate, one should go for the able personnel only. Real estate accounting being a tedious job needs the qualifications of an accountant who simplifies complex financial details to be understood by the client companies. Strategies and principles are same as of any other business firm where accounting records are maintained along with the yearly financial transactions. In real estate accounting, a thorough track of the balance sheets, the ledger books, credited and debited transactions and other financial details are attended to. A painstaking study of the financial details is done by the accounting experts and these are properly stored for the future use in the accounting processes. The authenticity of the financial records is maintained by the accountants, including details related to utilities, maintenance and management of your business.
A commitment to make the client reach his business objectives in a systematic way is what these accountants are adept at. Since the job is somewhat complex in nature, it requires an undisturbed focus and commitment so that the projects are finished with accuracy. The importance of occupancy cost is very important in the real estate accounting process for an accurate measurement and managementof the processes involved. A profit curve attained in this way is the result of paying attention to these important details and helps to further boost the business. The losses are successfully curbed by these measures as a number of methodologies are utilized for proper functioning of the accounting department. Accounting software has been introduced in real estate for this purpose where a number of keys are used for the number crunching processes.
In the accounting processes, capital costs, property taxes, insurance and depreciation charges are basically the costs for providing the assets. Real estate accounting thus involves thus a lot of expertise to handle your business accounts. As this aspect is very important for estate business only experienced personnel who are apt for handling the accounting projects should be contacted. Contact those clients which have been handled by the accounting professional while working on their projects previously. The real estate accounting software is an efficient way to handle your business accounts. It also includes other aspects of business like distribution, payroll, budgeting and accounting as well. The software system is installed by the accounting professional in such a way that it is user-friendly. This type of interface is fashionable due to its flexibility in operation and solutions which are easy to operate by the client companies. Your real estate business is sure to attain a new identity with this type of accounting.
Alvis Brazma gives advice to business owners about how to manage their business efficiently without any hassles.To know more about Accounting help, accounting outsourcing, real estate accounting, bookkeeping help visit this leading internet source: www.impacctusa.com