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commercialaffiliate.com [email protected]
205 SE Spokane Street, Suite 370 • Portland, OR 97202 • Phone: 503.731.6000 • Fax: 503.208.8053
CapitalRecoverySpecialists
COMMERCIAL AFFILIATES
Welcome to our Cost Segregation Training This training will provide you with an understanding of the fundamentals of cost segregation. In addition, we will be discussing your status as an independent contractor, and the facts you need to understand to pursue a career as a Commercial Affiliate.
Introduction to the Cost Segregation Industry
• What is Cost Segregation?
• Cost segregation is a service that helps clients reduce their federal and state income tax liabilities through accelerated depreciation of their investment property.
• Market is very large and under-served.
• There is a clear need for simple, focused training in this area. The clear and present question could be classified as: What is Cost Seg, anyway?
The Cost Segregation Definition
• Cost Segregation is the process of identifying and reclassifying discrete components of investment property as either personal property, or land improvements instead of real property under the Tax Code.
• Real property is depreciated over 39 years.
• Personal property is depreciated over 5 or 7 years.
• Land improvements are depreciated over 15 years.
• Reclassification is accomplished through an engineering based study that combines a working knowledge of tax law and construction accounting.
The Benefits of Cost Segregation
• On average, cost segregation results in the reclassification of 20% to 40% of a property’s value. For some properties, the reclassification can go as high as 60% to 80%.
• These reclassified components are subject to an accelerated rate of depreciation of 5 years and 7 years for personal property and 15 years for land improvements vs. 39 years for real property (or, 27.5 years for residential income property.
• By accelerating the rate of depreciation, property owners increase their depreciation deduction, and thereby reduce their federal tax liability.
History of Cost Segregation
• Concept has been around for decades and used to be referred to as component depreciation.
• Investment Tax Credit, (ITC) focused on separate assets with cost segregation.
• The Tax Reform Act was repealed in 1986 and many believed cost segregation was repealed as well.
• 1997 landmark decision, Hospital Corp. of America, Tax Court ruled cost segregation was alive and well.
• 2002 IRS allows automatic consent to change method of accounting using Form 3115 and allows “catch up” on prior years.
• 2002 IRS eliminates 4 year waiting period to change method of accounting.
Property Classes Defined
• 39 Year Property: refers to the building structure and its integral components. This includes the foundation, the load-bearing walls, roofs, ceilings, general electrical, plumbing and mechanical systems.
• 5 Year Property: refers to specialized equipment that serves the primary function of the business. Examples include specialized mechanical, electrical and plumbing systems such as those found in a restaurant kitchen, or in manufacturing facility.
• 7 Year Property: refers to those items that dress out the interior such as furniture, decorative lighting, drapes, flooring, cabinetry, non-bearing walls, telephone equipment and office equipment.
• 15 Year Property: refers to exterior land improvements separate from the building structure. It includes such items as irrigation systems, site utilities, trash enclosures, paving, grading, storm drains, parking lots, retaining walls and landscape lighting.
Accelerated Depreciation
• 5 and 7 Year Property is subject to a double declining method of calculation. Can claim 40% of value as depreciation in first year alone.
• 15 Year Property is subject to 150% declining balance method of calculation. Can claim 10% of value as depreciation in first year, as well.
• These concepts help to front load the benefit to be achieved from cost segregation.
Catch Up on Prior Years
• Property owner can go back and recapture past depreciation for the years preceding the timeframe of the study as long as the property was placed in service after 1987.
• For example, if Property owner purchases a building in 2002 and completes a study in 2009, he/she can claim benefit of all five years of accelerated depreciation in this tax year.
• End result is substantial cash flow benefit to client.
• Client files IRC §481(a) adjustment with tax return.
An Accelerated Rate of Depreciation
The chart below illustrates the relative annual depreciation deduction for a $100,000 asset in each of the four property classes.
$0
$5,000.00
$10,000.00
$15,000.00
$20,000.00
39 Year15 Year
7 Year5 Year
An Increased Tax Benefit
The chart below illustrates the net tax benefit to the owner for the same $100,000 asset in each of the four property classes.
$0
$1,750.00
$3,500.00
$5,250.00
$7,000.00
39 Year15 Year
7 Year5 Year
The Bottom LineLet’s assume a property is valued at $2,500,000 and compare a straight-line depreciation with a 30% reclassification through cost segregation.
$0
$50,000.00
$100,000.00
$150,000.00
$200,000.00
$250,000.00
$300,000.00
Year 7 Year 6 Year 5 Year 4Year 3
Year 2Year 1
Cost Seg 39 Year
Improved Cash FlowIn the preceding example, our owner liberated $615,383 in accelerated depreciation and obtained a net tax benefit of $215,384 through cost segregation.
! The accelerated depreciation and net tax benefits, over and above the 39 year method of depreciation, were also front-loaded as illustrated below.
$0
$50,000.00
$100,000.00
$150,000.00
$200,000.00
$250,000.00
Year 7 Year 6 Year 5 Year 4Year 3
Year 2Year 1Depreciation
Net Tax Benefit
Cost Segregation & 1031 Exchanges
• These two concepts can be applied simultaneously.
• There are two key concerns:• Replacement property must have “like kind” personal property component.• Failure to address above can result in depreciation recapture taxed at ordinary income levels.
• Vehicle for repeat business as replacement property will also need to have cost segregation study performed to substantiate “like kind” claim.
What Type of Property Qualifies?• Commercial Property and Residential Income
Property with a tax basis of $1,000,000 or more.
• Property owner must operate as a “For Profit” entity and pay Federal taxes.
• Capital improvements and lease improvements with a basis of $500,000 or more are also candidates.
• 1031 Exchanges are also good candidates for cost segregation.
• New construction and projects under construction.
• Property should have been purchased within last 10 years.
What Are The Steps?• A completed Request for Proposal (RFP), with the
minimum following information needed:
• Address of the Property
• The date the Property was put into service
• The type of facility
• The Tax Basis (or cost basis)
• Upon receiving this information, a preliminary analysis can be developed.
• Obtain and review all available construction documentation and perform an onsite inspection to verify the information.
• Engineering Group analysis leads to a review and determination which components can be reclassified in accordance with the Tax Code.
• Findings, with all back up documentation, are presented to the client and to their accountant for review.
Your Marketing Strategy as a Commercial Affiliate
• Key to your success will be identifying users. Property owners can be identified in a variety of ways:
• Prospect Now• Loopnet• Propertyline
• County Recorder Sites
• It’s critical that you plan for building your referral network
• Use targeted direct mail and E-mail campaigns
• Often, finding owners for studies can be classified as simply “who you know”
Suggested Marketing Materials
• Sample letters that identify you and what you do for clients
• Personalized flyers which can be distributed at meetings and in investment forums
• Development or copying of articles on Cost Segregation
• Access to this and other PowerPoint presentations on Cost Segregation
• Development of a personal website highlighting your position as a Commercial Affiliate Analyst
• Targeted explanatory pieces for initial “exposure” to Cost Segregation
During Your Client Presentation
• Plan to educate the client:• Using PowerPoint• Using Articles
• Plan to show an example of a preliminary analysis• Explain the purpose• Explain the limitations
• Plan to offer an example of a final report• Explain the contents• Explain how it is to be used
The Timeline and Sales Cycle for Cost Segregation
Services• Initial letters, contact, marketing materials! ! 15 days
• First face-to-face meeting! ! 15-30 days
• Collection of Materials required! ! 7-10 days
• Preliminary Analysis and Fee Schedule Presentation! ! 14-21 days
• Commitment from Client! ! 5 days
• Executed Agreement! ! 7-14 days
• Engineering review and Study Completion! ! 45-60 days
10 Key StepsIdentify your potential clients.
Forward the appropriate marketing material to the client.
Set up a conference call with the client. Discuss the various aspects of the potential work to be accomplished.
Discuss the process and the alternatives that can arise.
Visit with the client and secure a preliminary review commitment.
Report the specific information garnered from the preliminary review to the client.
Write up and execute a written, formal Agreement with the Client.
Work with the Engineering Group to secure all needed information from the site visit. Keep in contact with the client.
Plan on visiting with the client during the Engineering Group meeting. Stay in contact for future business opportunities.
Create goodwill with the client and ask for networking opportunities.
Your Continued and Ongoing Responsibilities
• Assist with the completion of a study and ensuring client satisfaction.
• Continue filling your pipeline.
• Remain in contact and follow up with previous contacts.
• Network, network, network.
• Maintain the highest degree of ethics in your dealings with your clients.
Your Legal Considerations as a Commercial Affiliate
• Your Status as an Independent Contractor. Maintenance of this is paramount.
• Always use an IRS disclaimer in e-mail signature.
• Use of Your Own Collateral. Have statements vetted by a competent Attorney prior to submission to clients.
• Maintain personal and professional integrity at all times.
commercialaffiliate.com [email protected]
205 SE Spokane Street, Suite 370 • Portland, OR 97202 • Phone: 503.731.6000 • Fax: 503.208.8053
Thank You
COMMERCIAL AFFILIATES
