Cashflow. For many business owners in 2020, this is the single term that has kept them up at night. With paycheck protection plan (PPP) funds expired, grant competition fierce, and loan opportunities reduced for those with the most need, the refrain business advisors are hearing from their clients, no matter the industry, is “What should we be doing right now?”
Hiding in plain sight is a strategy that 90% of eligible businesses are not considering. It’s a strategy that is so useful and effective that Congress explicitly increased it within the Coronavirus Aid, Relief and Economic Security (CARES) Act legislation.
What is it, and why haven’t you heard about it? It’s called cost segregation, a tax strategy for commercial real estate (CRE) owners that are not performed by a business accountant, but that works in partnership with what your business accountant does for you. It requires the consultant to understand both engineering as well as a niche area of the tax code.
This specialty service requires interdisciplinary expertise, so while most accountants are aware of the strategy, very few have the specialty training to provide IRS-compliant work. Because most business owners see their accountants as an all-knowing resource for financial considerations, few take the time to investigate opportunities their accountants do not investigate for them.
How much help can cost segregation provide?
In the case of a small, $300,000 office building with a $200,000 buildout, we were able to lower the client’s taxable income by over $250,000 and decrease their income taxes by $115,000 for the 2020 tax year.
What’s more, because this client will not owe income taxes in 2020 due to the Covid-19 downturn, they are able to use the CARES Act legislation to receive refunds of income taxes paid all the way back to 2015. Though they have no taxes to reduce this year, they can still receive the $115,000 owed to them through tax refunds from the past five years.
The amount of income tax savings or refund is affected by the use, size, and age of the building or buildout, but it typically ranges from 5% to 30% of the cost of the assets. This means a $1 million asset could yield as much as $300,000 in income tax reduction or refunds.
Does this sound complex? You bet it is. This is why it is necessary to work with a specialist in addition to the work your accountant does for you. A good consultant should be able to gather information from you in less than 15 minutes to determine if this is a good strategy for you.
Who should consider cost segregation as a strategy?
Anyone who has purchased, constructed, enlarged, or renovated a commercial or residential rental property or who has paid for leasehold improvements in the last seven years should consider cost segregation. Leasehold or renovation projects should exceed $100,000 in cost, and buildings should exceed $300,000.
How do you find a firm that provides IRS-compliant work?
Look for a consultant who is not only a member of the American Society of Cost Segregation Professionals but who also uses what is called a detailed engineering approach. This is the IRS preferred methodology.
How much should this work cost?
You should only pay a fee if savings are identified for you. Fees should never be a percentage of the savings found, but rather a fixed fee or fee range based on the hours of the project.
What if I do not expect to owe income taxes this year?
If your CRE assets — the building, renovation, or improvements — were created or purchased between 2018 and 2020, you are in luck! The CARES Act opportunities were created specifically for you. If your ownership of the assets began before 2018 or will begin after 2020, cost segregation can still work for you, just on a different timeline.
Cost segregation is the open secret among savvy commercial real estate owners. Though Fortune 500 companies like the Home Depot utilize this strategy, it also works for very small properties, such as warehouses, apartment buildings, veterinary clinics, doctor’s offices, fast food chains, and hotels. They all benefit, no matter the size. Many owners who use cost segregation don’t like to draw attention to the great tax savings they are receiving, so you might be surprised to find you already know people using this savvy secret.
Please note-The article first appeared in the Albany Business Review