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AEC Brings Local Expertise in Facilitating Asset Segregation Tax Breaks
A new resource is now available in Central Oregon with expertise in navigating a tax break that could generate significant additional cash flow for investors and business owners – through a niche of depreciation acceleration which has become more potentially attractive in light of the most recent tax reforms.
Keith Burke, Director of AEC Cost Recovery, has relocated to Central Oregon from Alaska — where his background included leadership experience in the oil and gas industries — bringing a proven track record of creating and developing business development strategies that penetrate and expand key markets.
Burke, who was born and raised in Roseburg, Oregon, came on board with AEC some eight years ago, joining his longtime friend and company founder Marcus Elliott to oversee engineering-based “cost segregation” processes for clientele, which in the last five years have covered over $1 billion in projects with a combined appreciation adjustment of more than $350 million, resulting in over $100 million in tax benefits.
He now aims to primarily cater to potential clients in Central Oregon in guiding such strategies, explaining: “The lifeblood of any business, large or small, is a free, unfettered source of cash flow. In today’s world of financial uncertainty, tight credit markets and continuous downward pressure on business profit margins, maintaining a positive cash flow has become more difficult than at any time since the Great Depression.
“Another reality of business is the certainty of taxes. While most business owners find discussion of taxes, particularly U.S. Federal Income Taxes, to be a painful and frightening experience, there is some very good news about a tax break that provides the opportunity to reduce both current taxes payable and at the same time generate additional cash flow for the business.
“The tax strategy is known as a Cost Segregation Study. It is easily one of the most overlooked and ignored tax breaks in the entire U.S. Federal Tax Code even though it can be utilized by the vast majority of taxpayers who own or invest in commercial real estate.
“It has been available for since 1997, yet nearly 90 percent of commercial real estate owners and investors that could benefit from this strategy have failed to do so. And now, further to The Tax Cuts and Jobs Act of 2017, it has become even more compelling as the allowance for the immediate write-off of a significant percentage of acquisition costs makes for a major benefit.
“Through provisions in this legislation, bonus depreciation has been returned to 100% for five years and will be with us at various levels through 2026. Unlike prior requirements that bonus depreciation be related to original use property, the new law also applies to acquired property.
“This is the most significant change in tax law and as of this year is applicable to every purchase of commercial real estate. Under the new law, when a taxpayer buys an existing and previously used building, the new owner can take 100 percent bonus depreciation on all property with a five-, seven- or 15-year depreciable life.
“In the typical commercial building, these classes of property make up 30 percent to 40 percent of the commercial building purchase price. For example, on a $10 million purchase, the new owner would be able to take a $3 million to $4 million tax deductible expense in the year of the acquisition.
“There is no limit on the amount of the deduction for professional real estate property owners or when the property is used in a trade or business. If the deduction is more than the taxable income of the qualified taxpayer in that year, the balance can be carried forward, indefinitely, until used up, though this provision is limited to 80 percent of the taxable income in any given year.”
In the most basic terms, a Cost Segregation Study reclassifies certain real property to personal property allowing for additional accelerated depreciation, which, in turn, provides larger current tax deductions. This results in an immediate reduction in taxable income and, hence, lower taxes due.
Essentially, all components of a building that are not integral to its basic structure and operation — such as electrical installations, plumbing, mechanical components, and finishes — can potentially be identified and reclassified to shorter term property life asset classes, which can add up to substantial savings to the client.
In a cost segregation study, certain commercial building costs previously classified with a 39-year depreciable life, can instead be classified as personal property or land improvements, with a five-, seven- or 15-year rate of depreciation using accelerated methods. Residential buildings, including multi-family buildings are subject to a 27.5-year life.
Burke said these items can quite easily account for 30 percent of a building’s construction costs, but those who make such a determination, such as AEC, must bring engineering expertise to pass muster with the IRS. An “engineering-based” study allows a building owner to depreciate a new or existing structure in the shortest amount of time permissible under current tax laws.
The benefits of a cost segregation study include: an immediate increase in cash flow; a reduction in current tax liability; the deferral of taxes, and the ability to reclaim “missed” depreciation deductions from prior years (without having to amend tax returns)
Burke said, “Our firm specializes in assisting clients in recovering and/or reducing federal and tax income taxes by performing IRS-defined engineering-based cost segregation studies.
“Cost segregation is based on the fundamental time value of money principle that ‘a dollar today is worth more than a dollar tomorrow’. The same logic applies to the statement, ‘a tax deduction today is worth more than a tax deduction tomorrow’.
“It can be a key cog in tax planning strategy, though it needs to fit in with a particular model as if a property is sold within a certain shorter timeframe it can trigger depreciation recapture obligations which need to be factored in to the overall equation.
“By accelerating a building’s depreciation, property owners can lower their tax liability and thus realize a significant increase in cash flow. This larger cash flow — resulting from postponing tax payments — is then potentially available for other investments.
“The longer the taxpayer has owned the property the tax savings will generally be less since more depreciation will have already been recorded.
“Typically, it can be of significant benefit if the property has been owned for less than ten years, with the ‘sweet spot’ being at about five years. Around that point it is possible to record a major reclassification as a one-time ‘catch up’ adjustment.”
Burke said a Cost Segregation Study can be particularly beneficial if a taxpayer is:
- Building a new building;
- Acquiring an existing building;
- Improving, renovating or expanding an existing building;
- Constructing leasehold improvements.
He added, “Our Cost Segregation Studies have been performed for commercial property owners across a wide spectrum of industries. This includes office buildings, retail centers, restaurants, senior living facilities, medical/dental offices, private schools, hotels, motels, warehouses, storage facilities, mini-warehouses and manufacturing facilities.
“To each project AEC brings the personal attention and professionalism that all clients and their CPA need to be assured of full and complete compliance with all IRS cost segregation tax rules.”
AEC’s key processes include providing a complementary feasibility assessment to determine the potential after-tax cash flow benefits to the client, providing a formal Cost Segregation Study under a fixed fee and conducting on-site visits to document the various components and systems.
The IRS Audit Techniques Guide sets forth criteria and experience which should be possessed by individuals and firms performing Cost Segregation Studies. These include a knowledge of both construction processes, cost estimating and allocation, plus the tax law involving property classifications for depreciation purposes.
Burke said the AEC Management Team brings to clients the necessary detailed engineering approach experience, documentation requirements and qualifications that the IRS expects for such studies.
The company also guarantees that it will provide a full and complimentary defense of the study should the IRS have any questions about the report, methodology and results — at no additional cost to the client.
He concluded, “I think the reason so few taxpayers utilize this strategy and in a large measure it gets overlooked, is because of the very nature of the U.S Federal Tax Code, which is currently some 71,000 pages.
“The code is not only lengthy, but immensely complex; so much so that is it safe to say that not one person on the entire planet knows and fully understands it — not even the IRS or the Congresses that have enacted the laws!
“Additionally, many taxpayers view a Cost Segregation Study as overly complicated and complex. While there are complex construction and tax issues to be considered, none rise to the level that should discourage the taxpayer from implementing the strategy.
“The cost benefits are simply too large to overlook and ignore. A Cost Segregation Study will typically provide benefits that outweigh the costs by at least a ratio of 10:1.
“The bottom line is that virtually every taxpayer who owns, constructs, renovates, or acquires a commercial real estate structure stands to benefit from a cost segregation analysis.
“It is one of the most effective strategies that can be utilized by owners of commercial real estate to legitimately reduce their federal and state income tax liabilities.
“Yet, at the same time, it remains one of the least known, least understood, and least utilized strategies in the entire U.S. Federal Tax Code.
“For the overwhelming majority of commercial real estate owners and investors, who have not taken advantage of it, cost segregation remains a literal ‘cash box’ waiting to be opened. “
For more information contact Keith Burke at AEC, 907-830-4444 or kburkealaska@gmail.com
