Tax Benefits of A Cost Segregation Study

Preface: A cost segregation study identifies and reclassifies personal property assets to accelerate the depreciation expense benefit for taxation purposes, reducing current income tax costs. The primary goal of a cost segregation study is to identify all construction-related costs that can be depreciated over a shorter tax life (typically 5, 7 and 15 years) than say the 39 years for non-residential real property. 

Tax Benefits of A Cost Segregation Study

Business and individual taxpayers that build or acquire nonresidential real property, e.g. warehouses, manufacturing space or residential rental property, e.g. rental unit(s) have an opportunity to reap tax benefits with a reduction of the depreciable calendar period recovery on the assets which are qualifying building components. Certain assets may qualify for shorter depreciable lives and recovery periods under MACRS depreciation. The reduction of the qualify building component asset lives provides accelerated deductions to offset income under the current Tax Cuts and Jobs Acts tax regime.

Many taxpersons have mistakenly included the costs of such qualifying components in the depreciable basis of the building and the tax benefits and cost are therefore recovered over a longer depreciation period. A nonresidential real property is depreciated over a 39-year life and a residential rental property is depreciated over 27.5-years. Certain building components may qualify for a reduced recovery period over 5-years, 7-years, or 15-years.

Some examples of building components include: parking lots, sidewalks, curbs, roads, fences, storm water management, landscaping, signage, lighting, security and fire protection systems, removable partitions, removable carpeting and wall tiling, furniture, counters, appliances and machinery (including machinery foundations) unrelated to the operation and maintenance of the building, and the portion of electrical wiring and plumbing properly allocable to machinery and equipment that is unrelated to the operation and maintenance of the building.

A taxperson may engage a CPA specialist to conduct a cost segregation study to identify the separately depreciable components and their depreciable basis. Ideally, a cost segregation study should be conducted prior to the time that a building is placed into service (i.e., when it is under construction or at the time of purchase). However, a cost segregation study can be completed after a building is placed in service. Even if a detailed cost segregation study is impractical, a practitioner should carefully consider whether there are any obvious land improvements and personal property components of a building that can be separately depreciated over a shorter recovery life.

After the fact? The change(s) to the depreciation lives require either an amended return or an accounting method change (if two years after the property is acquired or placed in service). The reporting to the IRS includes the change of basis, depreciable lives, and any adjustments for the impact of the depreciation acceleration from the date placed in service to the year of the method change. Certain restrictions apply in certain instances, and you are advised to consult with a tax advisor on the possible tax benefits before beginning a cost segregation study for your real estate holding(s). This includes factoring the holding period of the real estate and management of possible depreciation recapture costs.

If you have built or acquired a nonresidential real property, e.g. warehouses, manufacturing space or residential rental property, e.g. rental unit(s) recently, please discuss the benefits of a cost segregation study with your tax advisor to obtain maximized tax benefits.

How Retailers Can Navigate Inflation’s Hazards

Preface: Navigation during times of inflation for business owners is often not as easy as adhering to textbook models. Yet with the right a toolkit of management knowledge you can reduce the risk of indecisive or wrongly assumed decisions on  both inventory management and pricing on changing costs of sales. The following blogs from 2008 provides a historic perspective on re-emerging inflation hazards.

A Precarious Road: How Retailers Can Navigate Inflation’s Hazards

That new thinking can begin with inventory. According to Gérard Cachon, a professor of operations and information management, from the 1990s to 2005, minimizing inventory was seen as a key to success. “The whole mindset has been, ‘Let’s get rid of it.’” But that was when most prices were stable or declining. Today, he says, it’s not as clear that this is the best strategy. In fact, some retailers may want to start holding much more inventory than they did in the past as a way to hedge against future price increases. “Of course … it’s a little risky to hold inventory that might [lose value], especially perishable goods and fashion-oriented goods… but to the extent [retailers] know that prices will be rising over time, they will start to try to hold more inventory.”

…….Grocers typically put more emphasis on their store brands during an inflationary period as a way to offer the customer a better deal without cutting into their own margins, he explained.

…….As complex as some of these adjustments might seem, Cachon is confident that retailers will adapt more quickly than in previous inflationary periods, such as during the 1970s oil shocks. He says retailers now have much more information because of bar coding and other technologies that allow them to track their goods from suppliers to the checkout line. “Retailers are much more flexible and agile than they used to be.

Read the entire article here:

A Precarious Road: How Retailers Can Navigate Inflation’s Hazards

Highlights of the American Rescue Plan Act

Preface: Nature gives to every time and season some beauties of its own.” – Charles Dickens.

Highlights of the American Rescue Plan Act

Credit: Donald J. Sauder, CPA | CVA

The $1.9 trillion American Rescue Plan Act (ARPA) was signed into legislation on Thursday, March 11th, as a Covid-19 relief measure. This Act expands some key relief features for those tax persons needing funding program support for both businesses and individuals. 

While the minimum wage for employees of $15.00 per hour was not encapsulated in the legislation, we will highlight the following business and individual tax program provisions of the ARPA in this blog.

Individual Tax Program Highlights

Firstly, ARPA approves cash stimulus for eligible individuals and dependents. This one-time stimulus payment will be $1,400 or $2,800 per those filing taxes jointly, with an additional $1,400 for each qualifying dependent. This cash stimulus is subject to phase-out for tax-persons starting at $150,000 of AGI filing together and entirely phase-out above $160,000. For heads of household tax persons, phase-outs begin at $112,500, and for individual tax persons, $75,000. The calendar arrival of these program payments is in the process of scheduling.

Additionally, ARPA is committed to assist more financially disadvantaged children by providing legislated program expansion of the child tax credit (CTC). For 2021 tax-year, the CTC will increase to $3,000 per dependent and $3,600 for qualifying dependents below six. This CTC credit phase-out will begin at $150,000 for tax-persons filing jointly and $112,500 for heads of household tax persons. 

Unemployment Insurance Compensation the was set to expire March 14th has been extended to September 6th. This renews the $300 per week program assistance for tax persons and makes the first $10,200 not taxable for 2020 for those tax persons with an AGI below $150,000. 

The Earned Income Tax Credit (EITC) will be scaling eligibility to tax persons from age 19 without caps for those from 64 years of age or older. EITC maximums will increase from $4,220 to $9,820, providing relief program assistance for qualifying tax-persons. 

Dependent Care Assistance (DCA) has a temporary program shift for 2021 to increase credits for qualifying dependent care from $3,000 to $8,000 for one dependent and $6,000 to $16,000 for two or more qualifying dependents.

Business Tax Program Highlights

The Payroll Protection Program (PPP) loans have received $7.25B in additional funds and broader eligibility for non-profits.

Restaurant Revitalization Fund (RRF) provides $28B in funds for grants to restaurants and foodservice businesses in the industry of serving food and drinks. Specific eligibility rules apply. 

ARPA also includes housing-related assistance with an appropriated $21B for those tax persons who need program funds to pay rent or utilities, including funding to support rural renters, homeowners, and other at-risk tax persons.

March 11th, 2020, the World Health Organization declared Covid-19 a global pandemic and it has a seeming similarity to spring we can learn from a Mark Twain quote. “In the spring, I have counted 136 different kinds of weather inside of 24 hours.

The Six Mistakes Executives Make in Risk Management

Preface: Nassim Taleb (who wrote the best-selling books Fooled by Randomness and The Black Swan) and his coauthors argue that conventional risk-management textbooks don’t prepare us for the real world.

For instance, no forecasting model predicted the impact of the current (2008) economic crisis. Managers make six common mistakes when confronting risk:

They try to anticipate extreme events, they study the past for guidance, they disregard advice about what not to do, they use standard deviations to measure risk, they fail to recognize that mathematical equivalents can be psychologically different, and they believe there’s no room for redundancy when it comes to efficiency.

Companies that ignore Black Swan (low-probability, high-impact) events will go under. But instead of trying to anticipate them, managers should reduce their companies’ overall vulnerability.

The Six Mistakes Executives Make in Risk Management