NTRG personnel will perform an on-site review and record a physical inventory of all furniture, fixtures, and equipment that is deemed Business Personal Property (“BPP”). Recording of all BPP will be accomplished by both manual and electronic means but, ultimately, all recording will be produced in a computerized and standard format report.

Overview

Much has been written about Cost Segregation Studies (CSS) recently in industry and CPA trade periodicals. So much so that it’s now a widely accepted tax planning strategy for owners of commercial property.

A CSS is an IRS-accepted asset-reclassification procedure that accelerates tax depreciation deductions. By using this strategy, owners of real property can lower their current income-tax liability and increase current cash flow. Simply put, certain real estate is reclassified from 39 years or 27.5 years of depreciable life to shorter-lived (5-, 7-, and 15-year) property for depreciation purposes. Because the study can recapture available depreciation from prior years, the benefits can be substantial.

History

Cost Segregation methodology is an offshoot from the “disallowed” component depreciation methodologies used up until the Tax Reform Act of 1986. In a landmark case, Hospital Corp. of America, (“HCA”) petitioned the tax courts stating that they were required to construct “special use” rooms with special HVAC, electric, etc. systems to run their medical systems and specialty testing instrumentation. In 1997, the Tax Courts ruled in favor of HCA’s petition which set the stage for allowing qualifying assets to be classified as 5-, 7-, & 15-year property. Since that time, dozens of additional court cases were decided in favor of this process, allowing many more assets to be reclassified as having a shorter depreciable life.

Cost Segregation Study Process

Our engineers will examine all design and construction documents, contractor payment requisitions, and other related data to determine the cost basis for every asset in the building. Next, our engineers will conduct an on-site study to identify, quantify, measure, and photograph all assets that may qualify for accelerated depreciation. Further, our team (site engineer, costing engineer, and tax specialist) will identify assets that qualify as ‘Specialized Use” (i.e. outside normal use of that property type).

Finally, a report is prepared which will contain (i) a narrative section describing the property classes in detail, (ii) a thorough costing analysis, and (iii) photographs of the assets to validate that an on-site evaluation was conducted and to identify the major assets being rescheduled. The CSS is provided to the CPA who then prepares the IRS forms “Change in Accounting Method” and submits the information to the IRS. This change is automatically accepted by the IRS (presumptive approval) and no amended tax returns are required.

Estimate of Benefits & Savings

The following chart exemplifies an actual “Before and After” CSS. The subject property is a hotel built in 1998 at a development cost of $3,440,000. The property was improved in 2001 for $375,000. The total depreciable basis for the property is $3,815,000.

The IRS allows a taxpayer to go as far back as 1987 to reclassify property. The benefit to the taxpayer is that the increased depreciation amount from prior years can now be recaptured in the next tax year. The chart below shows the impact of the recaptured amounts:

Results

The graph below shows the property amounts that were originally scheduled as well as those property allocations that were made after the CSS was performed. Prior to the CSS, 39-year property accounted for 100% of the depreciable items. The completed CSS shows that our engineers were able to identify and reallocate $1,793,000 or 47% of the assets to shorter depreciation schedules.

The information below shows the financial impact of the CSS in terms of potential taxes saved. Note: The Cash (tax) savings were determined by using a blended Federal & State tax of 43%. The NPV savings calculation was determined using a 6% discount rate.

Accelerated Property	$ 1,793,050
Additional Depreciation for 2003	$ 834,279
Cash (tax) savings for 2003	$ 358,740
NPV over years 1 - 10	$ 431,630

 

Summary

Cost Segregation is now an accepted procedure that years ago had only been available to Fortune 500 companies via the Big 4 accounting firms. Now, CPA firms throughout the nation are knowledgeable of and offering CSS’s to clients as an effective means to reduce their taxes. Further, the US Treasury Department seems to be tolerant of accelerated depreciation strategies to reduce taxes as evidenced by favorable rulings that have been issued within the last few years. Most notable were the stimulus packages released relating to accelerated and bonus depreciation.

Note: Bonus depreciation is pursuant to the "Job Creation and Workers Assistance Act of 2002" and allows for 30% bonus depreciation on qualified property contracted for and entered into service between September 11, 2001 and December 31, 2004. Bonus depreciation was increased to 50% on qualifying property contracted for and entered into service between May 6, 2003 and December 31, 2004. The "qualified property" is defined as 20-year property or less. Cost Segregation is an appropriate manner to determine assets qualifying as having lives less than 20 years.

Sales & Use: Audit and Compliance – S&U tax is a major burden for many companies currently doing business in multiple states and locations. In an effort to address the overpayment of taxes, NTRG performs a thorough review and audit of financial information and applies a strategic approach to (i) minimize overall sales and use tax, (ii) ease the administrative burden, and (iii) reduce the cost of compliance which can deliver results that will enhance the company’s bottom line.

Alleviate your frustrations by allowing NTRG’s tax professionals to assist you in the burdensome tasks associated with the collection and review of property tax bills. NTRG’s extensive experience and proven processes will be utilized in securing your tax bills from the proper taxing authorities, auditing those tax bills to ensure any discrepancies are identified, and transmitting the tax bills to you for processing.

Industrial properties often require a “forensic” approach to valuation and testimony in light of the complex nature of concluding a true market value. Simple depreciation of personal property assets and removal of “ghost assets” are not a sufficient end to this review and value determination. The NTRG team utilizes specialty techniques and methods that properly “bridge the gap” between depreciated value and true market value.

Internet-Based Software – NTRG’s Online Portfolio Management (OPM) System

NTRG has developed an in-house and proprietary application for the exclusive use of its employees, clients, and consultants. The OPM, a level III secure site with password authenticity, is available to NTRG clients as a way of accessing important property tax data including (as available):

• Assessment and Appeal Data
• Site Photos
• Maps
• Property Tax Statements
• Tax Savings Information
• Property Tax Budgeting Data
• Reports and Queries
• Data Sorts
• Site Maps

THE NTRG TAX ADVANTAGE

• We do not compete with other tax firms, we hire them
• We are not a “brokerage” firm for tax services, we directly manage the entire process to ensure that our Clients’ properties are matched with a consultant that will provide the necessary skills pertinent to a specific property type
• We have strict contractual relationships with every consultant and our relationships are based on performance and expertise
• Our internet-based property tax system is a unique feature in our industry and unparalleled
• Our “dual review” system has not been replicated by any other consulting firm
• We oversee each and every appeal and perform valuation sessions with our client
• We have the ability to conform our reporting and online data output to each client’s needs
• As tax firm principals, NTRG’s local consultants are dedicated professional and especially motivated by their results
• Our selection of consultants for each team is not based solely on location, but rather location and expertise
• We are able to dedicate consultants to an assignment or geographic area on an unlimited and as-needed basis

CONVENTIONAL TAX FIRMS VS. NTRG
Conventional National Firms			NTRG
THEY...	use regional offices to cover wide, geographic areas		WE...	use local expertise with local relationships
THEY...	typically employ “General Consultants” who are not experts in any particular property type		WE...	engage specialists and experts in specific fields of property valuation based on client needs
THEY...	must operate within the “four walls” of expertise in the firm		WE...	assemble each team from an unlimited pool of consultants based on expertise and knowledge of each property type
THEIR...	client’s properties are represented by a salaried staff member		OUR...	consultants are principals in their own firms and take real ownership of each assignment
THEY...	in regards to complex and mixed use type properties, use a conventional depreciation method to reduce assessments		WE...	engage specialists by class of property who have knowledge of the specific valuation issues of complex properties
THEY...	assign properties based on consultant availability and work load		WE...	assign properties based on expertise as well as local knowledge
THEY...	have lost many of their best consultants who left to form their own consulting businesses across the United States		WE...	utilize these “best in class” consultants across the nation to provide, true, local expertise for our client

 

Effect of the NTRG Advantage on Tax Savings

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