Cost Segregation PartnerSHIPS

CPA's

An E&M cost segregation study will provide a precisely segregated report, thus enabling CPA's to achieve the maximum legal tax benefits for their clients.

CPA's possess an intimate knowledge of the individual tax situation of their clients and must stay abreast of the latest tax laws that affect them. CPA's who have clients with real estate holdings should educate them on a subject that can reduce their tax liability. An understanding of the benefits of cost segregation and an affiliation with a nationally recognized cost segregation provider such as E&M can prove to be invaluable to a client’s overall portfolio, as well as to the CPA firm itself.

Cost segregation specialists do not replace the essential role the CPA plays in tax planning and preparation. Cost segregation firms are not a source of competition, but instead are a complimentary resource, enabling CPA's to attract new clients and enrich relationships with existing ones. Working together with a cost segregation specialist, CPA's can provide an additional value-added service to their clients.

In effect, cost segregation studies provide more precisely segregated property information, enabling the accountant to achieve the maximum tax benefit allowed by law. In order to realize the maximum depreciation benefits permissible under the recent tax law changes, the IRS requires that engineering-based studies be performed. Most CPA firms lack either the necessary tax expertise to properly segregate the different types of property or the engineering expertise necessary to analyze construction drawings and conduct engineering cost estimates. The E&M team has experts in both engineering and tax.

In fact, Ernst & Morris focuses exclusively on providing these services and, therefore, have the in-house expertise necessary to prepare the study and the detailed supporting documentation in accordance with strict IRS regulations. The CPA understands the IRS filing requirements and, once the study is complete, prepares the forms that must be filed with the related tax return.

Brokers

Brokers can utilize cost segregation to differentiate themselves in the marketplace by showing their clients they have taken that extra step to maximize the return on their investment.

Commercial real estate investors are constantly seeking ways to increase the cash flow generated from their projects. Cash flow is often one of the critical factors they consider in the decision to purchase property. By accelerating depreciation deductions and deferring federal and state income taxes through an E&M cost segregation study, the property owner is able to significantly increase their cash flow. Consequently, brokers have the perfect opportunity to introduce their clients to cost segregation.

The introduction of cost segregation during the purchase process means property owners don’t have to wait to recover costs until they have owned a property for several years. Brokers have the ability to set their clients up to receive the full benefits of cost segregation during their first year of ownership. This provides owners with additional cash they can use for future investments, resulting in repeat business for the broker. Brokers have to be resourceful in order to develop new business and build client relationships. An E&M cost segregation study can be just the cutting-edge tool you’ve been looking for.

1031 Exchange Accommodators

Cost segregation and 1031 exchanges are two of the most valuable tax-planning strategies available to commercial real estate owners today. Through proper tax planning, both tax deferral techniques can be used on the same property in order to obtain the maximum tax benefits.

Both strategies are used to defer taxes and therefore improve cash flow. Cost segregation and 1031 exchanges can be performed on every type of commercial real estate property. Both techniques also encompass complex areas of tax law and necessitate the use of specialists.

Any 1031 exchange requires a “Qualified Intermediary” to perform the transaction and ensure proper execution. Cost segregation studies require a knowledgeable engineering consulting firm, such as E&M, to perform and validate the study. In turn, the specialists must work closely with the commercial property owner’s accountant or other tax advisor.

When used in combination, the two techniques require an understanding of both the tremendous upside and the potential recapture issues in a subsequent exchange. 

With proper planning, the two methods can be integrated effectively and provide a tremendous opportunity for taxpayers to defer income taxes into future periods, thus maximizing cash flow in the current period. In order to use cost segregation and 1031 exchanges together successfully, the property owner’s tax advisor must be well versed in the tax laws of both techniques and understand how they apply to the individual investment strategy of the client.

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General Contractors

For contractors, two things are essential in order to maximize the benefits from a cost segregation study:

1) A good relationship with the project owner
2) Cost data required to complete the study

The last thing most building owners would expect is to be introduced to tax savings strategies from their general contractor, but in doing so, the contractor may find the competitive edge they need to win a project. Most contractors are missing the specialized engineering and tax expertise to achieve the tax benefits for the owner. That is where a partnership with E&M, an engineering-based cost segregation specialist, comes in. 

An E&M cost segregation study enables building owners to increase their cash flow by accelerating depreciation on their newly constructed or renovated facilities. Therefore, a contractor can easily establish a competitive advantage during the negotiation process by introducing the concept of cost segregation to their clients.

Cost segregation is a method of adding value to the bid proposal and ensures that a client’s cash flow remains strong enough to fund current and future construction projects. Offering the services of a cost segregation specialist is an innovative technique general contractors can use to distinguish themselves from the competition.

Building Owner

While accountants are becoming more and more active in reviewing options for depreciating real estate, in many cases the owner needs to take the lead role in proposing cost segregation as a mechanism to reduce and defer federal taxes. If you are an active investor or a real estate professional, you are entitled to deduct additional depreciation.

Once you obtain the preliminary analysis, you should consult your accounting professional, since he/she will be completing and signing your tax return. In many cases, it makes sense for the accountant, the property owner, and the cost segregation advisor to meet and discuss the options and issues.

It is wise to keep the owner’s CPA or tax preparer included throughout the process. For older properties, the CPA may need to complete a Form 3115 to submit with the tax return so the owner can realize savings on items not previously depreciated - without filing an amended return.

The best time to obtain a cost segregation study is when you build or purchase a property. Documentation is most readily available for performing a study and a contemporaneous property inspection can be performed to best document results. However, there are options to perform a cost segregation study for property which has previously been developed or purchased.

Both large and small owners of income property or owner-occupied commercial property can benefit from a cost segregation study. Commercial properties with a cost basis of at least $200,000 will likely see a material benefit in excess of the cost from a cost segregation study. In fact, owners of single-family rental homes can probably achieve worthwhile benefits by obtaining a cost segregation study.

As owners are preparing for federal tax filings, many are tapping into this opportunity to lower their federal taxes. Even general partners who are not paying federal income taxes should use this depreciation method since K-1s will reflect lower taxable income to benefit their limited partners.  Contact us directly to discuss this valuable opportunity.

Preparing a cost segregation study requires only a small time commitment from the owner. This minimal time investment results in substantial tax savings, which are both conservative in approach and well documented.