The IRS does it again! But this time, its a good thing.

NEW YORK - May 29, 2013 - PRLog -- The IRS does it again!…. But this time, it’s a good thing.

With the IRS in the forefront of media headlines for all the wrong reasons, believe it or not, the IRS provides certain statutes that actually help reduce the near-term tax burdens for certain businesses.  Indeed, the IRS encourages the use of an accelerated depreciation method, based on an engineering-based cost segregation study, which can effectively improve the bottom lines of businesses across the country. With the summer here and April 15, 2013 fading to just a memory, albeit a mostly unpleasant memory, it’s time to focus on tax planning for the current fiscal year.

“In this difficult operating environment, businesses need all the help they can get to improve profitability and utilize their resources as efficiently as possible. After all, liquidity and capital are both scarce and expensive,” said Steve Picarillo, Lead Cost Analyst at Creative Advisory Group, Inc.  “Accordingly, business owners, financial managers and accountants should seriously consider the often forgotten and misunderstood depreciation method based on an engineering-based cost segregation study.  Indeed, by adopting this tax accounting method, businesses and property owners may be able to improve cash flows, decrease their tax burdens in 2013 and for years to come, and improve overall profitability,” Steve continued. This method could potential help offset the recent increase in payroll tax, higher healthcare costs and increase in general expenses.

Cost segregation is the process identifying personal property assets that are grouped with real estate property assets, to separate out personal assets for tax reporting purposes.

Cost segregation is a cash flow improvement strategy that accelerates depreciation deductions to reduce, or even eliminate, federal and state income taxes. To this end, on April 3, 2013, the IRS updated the cost segregation information on its website, at irs.gov/businesses/cost segragation.

A cost segregation study is an engineering-based approach to identify assets within a building that can be reclassified as personal property assets, in order to shorten depreciation time on these assets for tax purposes. The cost segregation study maximizes the inherent tax benefit of real estate by identifying, quantifying, and separating the personal property from the land improvement components of the property, resulting in a depreciation lives of five, seven and 15 years, using accelerated depreciation.

We find on average, the taxpayer's cash flow (present value) is increased by 20% for each dollar that is reclassified. For example, a property with a cost of $5 million may see a cash flow benefit of a least $200,000, if 20% of costs are reclassified. “Our experience has shown that typically between 15 and 40% of the building’s overall cost can be reclassified to a shorter recovery period,” Mr. Picarillo continued.

Personal assets are generally nonstructural elements, such as wall covering, carpeting, lighting, furniture, portions of the electrical systems, and external improvements such as landscaping and sidewalks. These can often be depreciated over five, seven or 15 years rather than 39 years (or 27.5 years for residential rental properties). This difference can significantly alter a business’ tax burden.

“The tax benefits can be applied to almost all commercial property types including: warehouses, shopping centers, medical buildings, restaurants, hotels and resorts, manufacturing facilities, high-tech facilities, office buildings, automotive dealerships, multifamily buildings, and assisted living facilities… just to name a few, added Steve.

Accountants typically depreciate buildings over a fixed-time frame. This is not a reflection on the quality of your accountant, but it is a reflection on cost-effectiveness. Many accountants believe, with good reason, that individual cost segregation studies may not be cost-effective for most businesses. While there is nothing wrong with this, it however lengthens the time frame for the depreciation to take full effect. As long as you hold on to personal property for the duration of the scheduled depreciation, and the personal property remains in service for the same, the net result will be the same. It's just a question of timing.

The bottom line is why would you want to pay more in federal and state taxes then you actually have to? If you're like most people, you do not want to pay more than your fair share of taxes. Contact us or visit our website at creativeadvisorygroup.com today for more information on cost segregation and other cost savings solutions that may help you increase your company's bottom line. This article, in full is available on stevepicarillo.com in the blog section.

About the author:

Steve Picarillo is a globally recognized financial executive, corporate analyst, accomplished author, an expert on cost savings, global banking, the economic environment as well as financial statement management.

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