It never hurts to have someone on the
inside, letting you in on the latest ways
to save a dollar — especially when it’s a tax dollar. According to Chris Hitselberger,
senior managing director at CB Richard
Ellis, an engineer with tax code experience
could be your new best friend. He or she
can conduct a cost segregation study to
point out places within a building that can
be subject to greater depreciation, and
lower taxes.
“This is a technique of accelerating the
depreciation on a commercial building or
multi-family building that will create about
$30,000 to $150,000 in tax benefits per million dollars of a building’s cost,” he says.
Smart Business spoke to Hitselberger
about what an owner needs to know about
cost segregation studies.
What is required of an owner for a cost segregation study?
Although executing a report is quite a
detailed engineering endeavor, it doesn’t
take much effort from the building owner.
The studies are relatively non-intrusive.
The building owner provides the tax basis
— typically the tax basis is the acquisition
cost minus the land, since the building
depreciates and the land does not — or
new construction costs in a new construction project. Providing complete and
organized blueprints, or a greater level of
cost detail than is normally tracked during
a construction project, certainly helps.
Is the history of the building purchased relevant?
The age of the building is irrelevant.
Every time a new owner takes over a space
or a building, it starts a new tax clock. So
the building may be 100 years old, but if
you just bought it this year, you begin
depreciating that building today for the
next 39 years, or 27-and-a-half years in the
case of a multi-family building.
What are some typical building components
in which savings can be found?
Components that are in the nature of supporting the client’s business activity or can
be removed without doing significant damage to the building may qualify to be treated as personal property for federal tax purposes. So we look at such things as the
electrical system. In the average office, you
need one electrical outlet, but there might
be four electrical outlets in somebody’s
office. One of those outlets writes off over
39 years — or 27-and-a-half years — along
with everything that makes the outlet
work: the conduit, the wiring, the circuit
breaker, etc. that write off over 39 years.
The nature of the intended use of the other
outlets is just to plug in office equipment —
copiers, printers, fax machines, etc. — so
those outlets, because they support personal property, depreciate as personal
property. So there might be a dataport that
also plugs into the computer. The dataport
and all the wiring write off over five years.
Interior walls or tenant improvements
that do not penetrate the plane of the suspended ceilings can be five-year walls.
Work cubes — made out of permanent
walls, drywall and studs, etc.— are only 4-feet high, so those are five-year walls. As
long as that wall can be considered
demountable, meaning you can move that
wall without disturbing the suspended ceiling system, it’s probably going to be a five-year wall.
Then everything from the edge of the
property to the edge of the building can
write off over 15 years. Those are site
improvements, such as parking lots, landscaping, sidewalks, exterior lighting, or signage.
By moving these costs into five, seven
and 15 years, it creates an accelerated
depreciation, which increases the present
value of the cash flow that’s created by
depreciating the building.
Can a cost segregation study withstand
scrutiny from the IRS?
Cost segregation is an IRS recognized
technique. In fact, the IRS has created an
audit technique guide, which anybody can
access. It’s at www.irs.gov. Search for ‘cost
segregation’ at this site, and it will take you
to the audit technique guide. And it has a
lot of interesting information about the history of cost segregation.
Who should take the lead on a cost segregation study?
It’s really the function of an engineer who
understands this part of the tax code.
Accountants simply aren’t taught how to
read blueprints. They’re not taught how
buildings are built, which is an essential
skill. Accountants certainly play a key role
in that they incorporate the results of the
study for their clients. They take reported
information and incorporate it into their
depreciation schedules.
It’s not only the knowledge of engineering and construction procedures, it’s also
the knowledge of the tax law. Because
even though an engineer may have gone to
a seminar that says a chandelier can write
off over five years, it’s very important to
understand why. You need to know what
part of the tax code, or what legal precedent, there is behind your argument to
write that chandelier off over five years.
CHRIS HITSELBERGER is senior managing director with
CB Richard Ellis. Reach him at (212) 425-4300 or
[email protected].