Oh Baby! Posted February 26, 2014 Report Share Posted February 26, 2014 Client had a cost segregation study performed. The result, (obvious) reclassified a large amount of the company's "building" to 5, 7, and 15 year property. Is this as simple as going into the fixed asset tab and reducing the value of the building and then adding three new groups of assets? or is there a formal election that I have to make with the IRS to notify them that I am making the change to the asset allocation? Quote Link to comment Share on other sites More sharing options...
Max W Posted February 27, 2014 Report Share Posted February 27, 2014 It usually requires form 3115 - Change in Accounting Method. http://www.irs.gov/Businesses/Cost-Segregation-ATG---Chapter-6.2-Change-in-Accounting-Method Quote Link to comment Share on other sites More sharing options...
michaelmars Posted February 27, 2014 Report Share Posted February 27, 2014 its very involved, for the 3115 you need to recalc the depr as if it were depr under the shorter life then subtract out the amount taken. the difference is the current year adjustment or extra depreciation. I usually put the new life assets separately on the schedule and subtract the corresponding amounts from the original building on the books. ie I create new asset called 5yr-cost seg, 7-yr cost seg and 15yr-cost seg. plug in the opening amounts as previousely taken and override the adjustment to current year deduction. you also have to do these calc for alt min purposes for the 3115. the 3115 has a bunch of questions that need answering and I do it on a separate schedule and attach. don't forget to discuss bill with client, my charge is about $1000 per building. if this is the year of purchase then of course you just start the depr as per the study and no 3115 gets filed. 1 Quote Link to comment Share on other sites More sharing options...
jshtax Posted February 27, 2014 Report Share Posted February 27, 2014 It is best to do this at the time of purchase not years after building has been in service. If they have owned it 3 years wouldnt some of the depreciation on a 5 yr asset be lost. Quote Link to comment Share on other sites More sharing options...
imjulier Posted February 27, 2014 Report Share Posted February 27, 2014 Who does a cost segregation study? A realtor? I wonder if this would help my client as they have a commercial bldg which I simply allocated between land and bldg. Bldg is obviously being depreciated over 39 years. They are paying off the loan over 20 years. This is creating $0 cash flow but they are having to pay taxes due to income. I believe allocating some assets to a different class life would obviously accelerate depreciation and lower their tax burden. Does anyone have experience with this? I'd appreciate some input just to make sure I am thinking about it correctly. Quote Link to comment Share on other sites More sharing options...
jshtax Posted February 27, 2014 Report Share Posted February 27, 2014 Who can perform a cost segregation study? The IRS requires that a study be "performed by 'qualified' individuals or firms, such as those employing … personnel competent in design, construction, auditing, and estimating procedures relating to building construction." Our team approach will result in a study that maximizes the tax benefits of the study, while conforming to IRS regulations and appraisal guidelines of The Appraisal Foundation (USPAP) and by the American Society of Appraisers (ASA). All work is performed in-house by our specially trained cost segregation engineers, each with significant experience in performing these highly specialized analyses. We are well versed in the IRS requirements and use this knowledge as the framework for our projects. Quote Link to comment Share on other sites More sharing options...
kcjenkins Posted February 27, 2014 Report Share Posted February 27, 2014 Who does a cost segregation study? A realtor? I wonder if this would help my client as they have a commercial bldg which I simply allocated between land and bldg. Bldg is obviously being depreciated over 39 years. They are paying off the loan over 20 years. This is creating $0 cash flow but they are having to pay taxes due to income. I believe allocating some assets to a different class life would obviously accelerate depreciation and lower their tax burden. Does anyone have experience with this? I'd appreciate some input just to make sure I am thinking about it correctly. Here is what the IRS says: "The preparation of cost segregation studies requires knowledge of both the construction process and the tax law involving property classifications for depreciation purposes; a preparer's credentials and level of expertise may have a bearing on the overall accuracy and quality of a study. In general, a study by a construction engineer is more reliable than one conducted by someone with no engineering or construction background. However, the possession of specific construction knowledge is not the only criterion. Experience in cost estimating and allocation, as well as knowledge of the applicable law, are other important criteria. A quality study identifies the preparer and always references his/her credentials, experience and expertise in the cost segregation area." (IRS Cost Segregation Audit Techniques Guide chapter 4) http://www.irs.gov/Businesses/Cost-Segregation-Audit-Technique-Guide---Chapter-4---Principal-Elements-of-a-Quality-Cost-Segregation-Study-and-Report Accountants may have specific knowledge of the appropriate tax law, but they are typically absent of the required construction expertise. Most accounting firms don't have construction engineers on staff to physically inspect the property, examine architectural/engineering drawings and analyze cost data. Accountants may be able to find some of the deductions, but without construction expertise they may overlook substantial assets that can be reclassified. Quote Link to comment Share on other sites More sharing options...
kcjenkins Posted February 27, 2014 Report Share Posted February 27, 2014 Here are a couple of good articles on the subject, that are worth at least skimming and bookmarking, for when a client is asking questions. http://www.journalofaccountancy.com/Issues/2004/Aug/CostSegregationApplied.h http://www.journalofaccountancy.com/Issues/2012/Apr/20114805.htm Quote Link to comment Share on other sites More sharing options...
imjulier Posted February 27, 2014 Report Share Posted February 27, 2014 KC-Those are good articles. I noted that one recommends CPAs look at cost segregation if the purchase of the building is gretaer than $750K. That does not fit this situation. I'm curious if anyone has had a chance to catch up on the new capitalization rules though because I think they require this....anyone know? Quote Link to comment Share on other sites More sharing options...
michaelmars Posted February 27, 2014 Report Share Posted February 27, 2014 most of my clients that had cost segs recently were 60-100 unit apartment buildings and the cost fee is $5000-$7000. in every case the immediate savings were greater than the fee so they saved money from year one. to jshtax: since the 5 year asset is now fully depreciated you get to claim the full amount over the amount that was claimed. a 10,000 asset at 27.5yrs would be an annual deduction of 363.00 so lets say its year 10 and the amount should have been the full $10,000 and $3,630 would have been claimed. then this year the deduction would be $6370. if the client is in the 50% bracket then this one asset saves 3185 in taxes or 1/2 the cost of the cost seg study. Residential buildings get much more allocated to 5 & 7 year property than commercial in most cases and thus it makes more sense to do the study. Quote Link to comment Share on other sites More sharing options...
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