Cost segregation studies.The benefit of a cost segregation study Under United States tax laws and accounting rules, cost segregation is the process of identifying personal property assets that are grouped with real property assets, and separating out personal assets for tax reporting purposes. (CSS (1) See Cascading Style Sheets. (2) (Content Scrambling System) The copy protection system applied to DVDs, which uses a 40-bit key to encrypt the movie. ) is well known to many tax advisers (see Langely and Heard, Tax Clinic, "Cost Segregation segregation: see apartheid; integration. : A Genuine Tax Savings Strategy, TTA TTA Telecommunications Technology Association (Korea) TTA Teacher Training Agency (UK) TTA Triangle Transit Authority (Raleigh/Chapel Hill/Durham, North Carolina, USA) , April 2002, p. 215). Absent a CSS, newly constructed or purchased property often yields only modest depreciation deductions. By breaking out shorter modified accelerated cost recovery system Modified Accelerated Cost Recovery System (MACRS) A 1986 act that set out rules for the depreciation of qualifying assets, allowing for greater acceleration over longer periods of time. (MACKS) depreciation lives for personal property and 15-year land improvements from 31 1/2- or 39-year real-property depreciation, a CSS could greatly accelerate a building's tax depreciation. The new accounting-method-change rules set forth in Rev REV Revolution REV Reverse REV Reverend REV Revision REV Review REV Revised REV Revelations (bible) REV Reversal REV Revolver (Beatles album) REV Reverendo . Procs. 2002-9 and 2002-19 provide further reason for a CSS: they allow taxpayers who did not previously use a CSS to conduct one now for a building placed in service in an earlier year. Using a Sec. 481(a) adjustment, a taxpayer can take in one year all previously forgone depreciation that would have been available in prior years for a shorter-life property. The procedures allow taxpayers to request an accounting-method change up until a return's extended due date. This allows taxpayers to plan and secure additional deductions retroactively ret·ro·ac·tive adj. Influencing or applying to a period prior to enactment: a retroactive pay increase. [French rétroactif, from Latin after the close of the tax year. Considerations Even though a CSS is often an effective tax-planning tool, taxpayers should first consider whether their circumstances CIRCUMSTANCES, evidence. The particulars which accompany a fact. 2. The facts proved are either possible or impossible, ordinary and probable, or extraordinary and improbable, recent or ancient; they may have happened near us, or afar off; they are public or make a CSS advisable ad·vis·a·ble adj. Worthy of being recommended or suggested; prudent. ad·vis  a·bil . First, for less expensive building projects, a cost/benefit
analysis should be calculated, comparing a CSS's cost against the
net present value (NPV NPVSee: Net present value ) of the projected tax savings. Typically, a proposal to perform a CSS will include an estimated NVP NVP Network Voice Protocol NVP Nausea and Vomiting of Pregnancy NVP Name-Value Pair NVP National Vice President NVP Nominal Velocity of Propagation NVP N-Version Programming (multiple functionally equivalent program versions) as an attachment See attach a file. (see Exhibit 1). However, this calculation normally assumes the project will be held for a real property's full life (i.e., 311/2 or 39 years). If a taxpayer is planning a taxable sale of the property within a short time, justification justification In Christian theology, the passage of an individual from sin to a state of grace. Some theologians use the term to refer to the act of God in extending grace to the sinner, while others use it to define the change in the condition of a sinner who has received becomes difficult, because the benefits are in timing differences that will ultimately reverse (see Exhibit 2). Second, by carving out carving out Managed care adjective Referring to the practice of allowing healthy persons in small employer groups to buy lower cost health insurance policies, while workers who are sicker must buy more expensive high-risk pool coverage personal property from the building, a portion of the gain on any future sale could be taxed at ordinary rates as Sec. 1245 gain on personal property depreciation recapture depreciation recapture See recapture of depreciation. . Absent a recharacterization Recharacterization The treatment of a contribution as being made to another type of IRA instead of the IRA that the contribution was initially made. Notes: For instance, an individual may make a participant contribution to a Traditional IRA, but may later recharacterize of the property under a CSS, the real-property Sec. 1250 depreciation recapture rate would be only 25% for non-corporate taxpayers. Many practitioners attempt to mitigate mit·i·gate v. To moderate in force or intensity. mit i·ga tion n. this result by arguing that
the personal property's fair market value (FMV FMV - full-motion video ) at the sale date is
equal to or less than the depreciated Depreciated may refer to:
An asset that has already been charged with the maximum amount of depreciation allowed by the IRS for accounting purposes. fully depreciated Of or relating to a fixed asset that has been depreciated to a book value of zero. or the new buyer is conducting a CSS that quantifies a significant amount of the personal property's FMV at the sale date. The rate differential on a reversal reversal n. the decision of a court of appeal ruling that the judgment of a lower court was incorrect and is reversed. The result is that the lower court which tried the case is instructed to dismiss the original action, retry the case, or is ordered to change its of the depreciation could negate ne·gate tr.v. ne·gat·ed, ne·gat·ing, ne·gates 1. To make ineffective or invalid; nullify. 2. To rule out; deny. See Synonyms at deny. 3. the savings from the timing difference on the MACRS See Modified Accelerated Cost Recovery System. MACRS See Modified Accelerated Cost Recovery System (MACRS). depreciation. Third, the presence of personal property may make entering into a tax-deferred tax-de·ferred adj. 1. Of or relating to an investment that is not liable to taxation until income is withdrawn or an appointed date is reached. 2. Sec. 1031 like-kind exchange more difficult. If a taxpayer were to trade into real property with little or no personal property (e.g., unimproved land), the FMV of the personal property relinquished re·lin·quish tr.v. re·lin·quished, re·lin·quish·ing, re·lin·quish·es 1. To retire from; give up or abandon. 2. To put aside or desist from (something practiced, professed, or intended). 3. would be treated as boot (the real property received for the portion of personal property relinquished would not be like-kind and, thus, subject to tax). Even if improved property is exchanged for another improved property, taxable gain Taxable Gain The portion of a sale that is liable to taxation. Notes: When redistributing mutual fund shares that have increased in value, returns may be subject to taxation. See also: Capital gain, Income Tax could still result. Because the property consists of both real and personal property, a taxpayer is required under Sec. 1031 to separate the assets into exchange groups. Each exchange group comprises properties in either the same "general asset class" or "product class" as defined under the regulations. The difference between the FMV and the adjusted bases of the properties transferred within each exchange group determines that group's realized gain Realized Gain A gain resulting from selling an asset at a price higher than the original purchase price. Notes: There may be tax consequences for a realized profit. or loss. If the FMV of the properties received within the exchange group (less any excess liabilities assumed by the taxpayer that are allocated to that exchange group) exceeds the FMV of the properties transferred within the exchange group, gain will be recognized, to the extent realized. Losses, however, will not recognized. Fourth, if a taxpayer's trade or business activity is passive and already generating a suspended sus·pend v. sus·pend·ed, sus·pend·ing, sus·pends v.tr. 1. To bar for a period from a privilege, office, or position, usually as a punishment: suspend a student from school. loss, or the taxpayer has net operating losses Net operating losses Losses that a firm can take advantage of to reduce taxes. , the value of the accelerated tax deductions Tax deduction An expense that a taxpayer is allowed to deduct from taxable income. tax deduction See deduction. is greatly diminished di·min·ish v. di·min·ished, di·min·ish·ing, di·min·ish·es v.tr. 1. a. To make smaller or less or to cause to appear so. b. . Finally, if a taxpayer is exposed to alternative minimum tax (AMT See vPro. ), the benefit of a CSS decreases, for two reasons. First, the difference between AMT lives and methods for personal and real property is not as significant as that for regular tax purposes. For example, seven-year MACRS property (which approximates the double-declining-balance method) becomes 10-year, 150%-declining-balance property for AMT purposes, while a nonresidential Adj. 1. nonresidential - not residential; "the commercial or nonresidential areas of a town"; "community colleges are typically nonresidential" residential - used or designed for residence or limited to residences; "a residential hotel"; "a residential quarter"; "a real property's MACRS life increases only from 39-year to 40-year straight-line depreciation A method employed to calculate the decline in the value of income-producing property for the purposes of federal taxation. Under this method, the annual depreciation deduction that is used to offset the annual income generated by the property is determined by dividing the for regular and AMT purposes, respectively. The NPV of the tax benefits is decreased further, because the AMT rate would be much lower than Exhibit 1's assumed 40% regular rate used to calculate the tax benefit (see Exhibit 3). While a CSS on larger projects will pay for itself many times over, tax advisers should consider the circumstances discussed above in considering a CSS for less expensive building projects.
Exhibit 1: CSS: Cost/Benefit Analysis
With CSS
Percentage Depreciable
Property class allocated basis
7-year property 20% $200,000
39-year property 80% $800,000
Without CSS
Percentage Depreciable
Property class allocated basis
7-year property 0
39-year property 100% $1,000,000
Project cost $1,000,000
Tax rate 40%
PV factor 8%
Depreciation
Year 7-year 39-year with CSS
1 $28,580 $19,688 $48,268
2 48,980 20,512 69,492
3 34,980 20,512 55,492
4 24,980 20,512 45,492
5 17,860 20,512 38,372
6 17,840 20,512 38,352
7 17,860 20,512 38,372
8 8,920 20,512 29,432
9 20,512 20,512
10 20,512 20,512
11 20,512 20,512
12 20,512 20,512
13 20,512 20,512
14 20,512 20,512
15 20,512 20,512
16 20,512 20,512
17 20,512 20,512
18 20,512 20,512
19 20,512 20,512
20 20,512 20,512
21 20,512 20,512
22 20,512 20,512
23 20,512 20,512
24 20,512 20,512
25 20,512 20,512
26 20,512 20,512
27 20,512 20,512
28 20,512 20,512
29 20,512 20,512
30 20,512 20,512
31 20,512 20,512
32 20,512 20,512
33 20,512 20,512
34 20,512 20,512
35 20,512 20,512
36 20,512 20,512
37 20,512 20,512
38 20,512 20,512
39 20,512 20,512
40 856 856
Total $200,000 $800,000 $1,000,000
Depreciation
Year 7-year 39-year without CSS
1 $28,580 $19,688 $24,610
2 48,980 20,512 25,640
3 34,980 20,512 25,640
4 24,980 20,512 25,640
5 17,860 20,512 25,640
6 17,840 20,512 25,640
7 17,860 20,512 25,640
8 8,920 20,512 25,640
9 20,512 25,640
10 20,512 25,640
11 20,512 25,640
12 20,512 25,640
13 20,512 25,640
14 20,512 25,640
15 20,512 25,640
16 20,512 25,640
17 20,512 25,640
18 20,512 25,640
19 20,512 25,640
20 20,512 25,640
21 20,512 25,640
22 20,512 25,640
23 20,512 25,640
24 20,512 25,640
25 20,512 25,640
26 20,512 25,640
27 20,512 25,640
28 20,512 25,640
29 20,512 25,640
30 20,512 25,640
31 20,512 25,640
32 20,512 25,640
33 20,512 25,640
34 20,512 25,640
35 20,512 25,640
36 20,512 25,640
37 20,512 25,640
38 20,512 25,640
39 20,512 25,640
40 856 1,070
Total $200,000 $800,000 $1,000,000
Timing
Year 7-year 39-year difference
1 $28,580 $19,688 $23,658
2 48,980 20,512 43,852
3 34,980 20,512 29,852
4 24,980 20,512 19,852
5 17,860 20,512 12,732
6 17,840 20,512 12,712
7 17,860 20,512 12,732
8 8,920 20,512 3,792
9 20,512 (5,128)
10 20,512 (5,128)
11 20,512 (5,128)
12 20,512 (5,128)
13 20,512 (5,128)
14 20,512 (5,128)
15 20,512 (5,128)
16 20,512 (5,128)
17 20,512 (5,128)
18 20,512 (5,128)
19 20,512 (5,128)
20 20,512 (5,128)
21 20,512 (5,128)
22 20,512 (5,128)
23 20,512 (5,128)
24 20,512 (5,128)
25 20,512 (5,128)
26 20,512 (5,128)
27 20,512 (5,128)
28 20,512 (5,128)
29 20,512 (5,128)
30 20,512 (5,128)
31 20,512 (5,128)
32 20,512 (5,128)
33 20,512 (5,128)
34 20,512 (5,128)
35 20,512 (5,128)
36 20,512 (5,128)
37 20,512 (5,128)
38 20,512 (5,128)
39 20,512 (5,128)
40 856 (214)
Total $200,000 $800,000 0
Tax effect
of timing
difference
Year 7-year 39-year @ 40%
1 $28,580 $19,688 $ 9,463
2 48,980 20,512 17,541
3 34,980 20,512 11,941
4 24,980 20,512 7,941
5 17,860 20,512 5,093
6 17,840 20,512 5,085
7 17,860 20,512 5,093
8 8,920 20,512 1,517
9 20,512 (2,051)
10 20,512 (2,051)
11 20,512 (2,051)
12 20,512 (2,051)
13 20,512 (2,051)
14 20,512 (2,051)
15 20,512 (2,051)
16 20,512 (2,051)
17 20,512 (2,051)
18 20,512 (2,051)
19 20,512 (2,051)
20 20,512 (2,051)
21 20,512 (2,051)
22 20,512 (2,051)
23 20,512 (2,051)
24 20,512 (2,051)
25 20,512 (2,051)
26 20,512 (2,051)
27 20,512 (2,051)
28 20,512 (2,051)
29 20,512 (2,051)
30 20,512 (2,051)
31 20,512 (2,051)
32 20,512 (2,051)
33 20,512 (2,051)
34 20,512 (2,051)
35 20,512 (2,051)
36 20,512 (2,051)
37 20,512 (2,051)
38 20,512 (2,051)
39 20,512 (2,051)
40 856 (86)
Total $200,000 $800,000 0
PV of
tax effect
Year 7-year 39-year @ 8%
1 $28,580 $19,688 $ 8,762
2 48,980 20,512 15,038
3 34,980 20,512 9,479
4 24,980 20,512 5,837
5 17,860 20,512 3,466
6 17,840 20,512 3,204
7 17,860 20,512 2,972
8 8,920 20,512 819
9 20,512 (1,026)
10 20,512 (950)
11 20,512 (880)
12 20,512 (815)
13 20,512 (754)
14 20,512 (698)
15 20,512 (647)
16 20,512 (599)
17 20,512 (554)
18 20,512 (513)
19 20,512 (475)
20 20,512 (440)
21 20,512 (407)
22 20,512 (377)
23 20,512 (349)
24 20,512 (323)
25 20,512 (300)
26 20,512 (277)
27 20,512 (257)
28 20,512 (238)
29 20,512 (220)
30 20,512 (204)
31 20,512 (189)
32 20,512 (175)
33 20,512 (162)
34 20,512 (150)
35 20,512 (139)
36 20,512 (128)
37 20,512 (119)
38 20,512 (110)
39 20,512 (102)
40 856 (4)
Total $200,000 $800,000 $36,996
NPV benefit $36,996
Exhibit 2: CSS: Tuning Differences
With CSS
Percentage Depreciable
Property class allocated basis
7-year property 20% $200,000
39-year property 80% $800,000
Without CSS
Percentage Depreciable
Property class allocated basis
7-year property 0% 0
39-year property 100% $1,000,000
Project cost $1,000,000
Depreciation tax rate 40%
PV factor 8%
Recapture tax rate 25%
Depreciation Depreciation
Year 7-year 39-year with CSS without CSS
1 $28,580 $19,688 $ 48,268 $24,610
2 48,980 20,512 69,492 25,640
Total $77,560 $40,200 $117,760 $50,250
Tax effect
of timing
Timing difference
Year 7-year 39-year difference @ 40%
1 $28,580 $19,688 $23,658 $ 9,463
2 48,980 20,512 43,852 17,541
Total $77,560 $40,200 $67,510 $27,004
PV of
tax effect
Year 7-year 39-year @ 8%
1 $28,580 $19,688 $ 8,762
2 48,980 20,512 15,038
Total $77,560 $40,200 $23,801
Gain Gain
with CSS without CSS
Sale of property: $100,883 $50,250 $(50,633)
$(12,658) $(10,852)
NPV benefit $12,948
Exhibit 3: CSS: AMT Scenario
With CSS
Percentage Depreciable
Property class allocated basis
10-year property 20% $200,000
40-year property 80% $800,000
Without CSS
Percentage Depreciable
Property class allocated basis
10-year property 0%
40-year property 100% $1,000,000
Project cost $1,000,000
AMT rate 28%
PV factor 8%
Depreciation
Year 10-year 40-year with CSS
1 $15,000 $19,200 $34,200
2 27,760 20,000 47,760
3 23,580 20,000 43,580
4 20,040 20,000 40,040
5 17,480 20,000 37,480
6 17,480 20,000 37,480
7 17,480 20,000 37,480
8 17,480 20,000 37,480
9 17,480 20,000 37,480
10 17,480 20,000 37,480
11 8,740 20,000 28,740
12 20,000 20,000
13 20,000 20,000
14 20,000 20,000
15 20,000 20,000
16 20,000 20,000
17 20,000 20,000
18 20,000 20,000
19 20,000 20,000
20 20,000 20,000
21 20,000 20,000
22 20,000 20,000
23 20,000 20,000
24 20,000 20,000
25 20,000 20,000
26 20,000 20,000
27 20,000 20,000
28 20,000 20,000
29 20,000 20,000
30 20,000 20,000
31 20,000 20,000
32 20,000 20,000
33 20,000 20,000
34 20,000 20,000
35 20,000 20,000
36 20,000 20,000
37 20,000 20,000
38 20,000 20,000
39 20,000 20,000
40 20,000 20,000
41 800 800
Total $200,000 $800,000 $1,000,000
Depreciation
Year 10-year 40-year without CSS
1 $15,000 $19,200 $24,000
2 27,760 20,000 25,000
3 23,580 20,000 25,000
4 20,040 20,000 25,000
5 17,480 20,000 25,000
6 17,480 20,000 25,000
7 17,480 20,000 25,000
8 17,480 20,000 25,000
9 17,480 20,000 25,000
10 17,480 20,000 25,000
11 8,740 20,000 25,000
12 20,000 25,000
13 20,000 25,000
14 20,000 25,000
15 20,000 25,000
16 20,000 25,000
17 20,000 25,000
18 20,000 25,000
19 20,000 25,000
20 20,000 25,000
21 20,000 25,000
22 20,000 25,000
23 20,000 25,000
24 20,000 25,000
25 20,000 25,000
26 20,000 25,000
27 20,000 25,000
28 20,000 25,000
29 20,000 25,000
30 20,000 25,000
31 20,000 25,000
32 20,000 25,000
33 20,000 25,000
34 20,000 25,000
35 20,000 25,000
36 20,000 25,000
37 20,000 25,000
38 20,000 25,000
39 20,000 25,000
40 20,000 25,000
41 800 1,000
Total $200,000 $800,000 $1,000,000
Timing
Year 10-year 40-year difference
1 $15,000 $19,200 $10,200
2 27,760 20,000 22,760
3 23,580 20,000 18,580
4 20,040 20,000 15,040
5 17,480 20,000 12,480
6 17,480 20,000 12,480
7 17,480 20,000 12,480
8 17,480 20,000 12,480
9 17,480 20,000 12,480
10 17,480 20,000 12,480
11 8,740 20,000 3,740
12 20,000 (5,000)
13 20,000 (5,000)
14 20,000 (5,000)
15 20,000 (5,000)
16 20,000 (5,000)
17 20,000 (5,000)
18 20,000 (5,000)
19 20,000 (5,000)
20 20,000 (5,000)
21 20,000 (5,000)
22 20,000 (5,000)
23 20,000 (5,000)
24 20,000 (5,000)
25 20,000 (5,000)
26 20,000 (5,000)
27 20,000 (5,000)
28 20,000 (5,000)
29 20,000 (5,000)
30 20,000 (5,000)
31 20,000 (5,000)
32 20,000 (5,000)
33 20,000 (5,000)
34 20,000 (5,000)
35 20,000 (5,000)
36 20,000 (5,000)
37 20,000 (5,000)
38 20,000 (5,000)
39 20,000 (5,000)
40 20,000 (5,000)
41 800 (200)
Total $200,000 $800,000 0
Tax effect
of timing
difference
Year 10-year 40-year @ 28%
1 $15,000 $19,200 $2,856
2 27,760 20,000 6,373
3 23,580 20,000 5,202
4 20,040 20,000 4,211
5 17,480 20,000 3,494
6 17,480 20,000 3,494
7 17,480 20,000 3,494
8 17,480 20,000 3,494
9 17,480 20,000 3,494
10 17,480 20,000 3,494
11 8,740 20,000 1,047
12 20,000 (1,400)
13 20,000 (1,400)
14 20,000 (1,400)
15 20,000 (1,400)
16 20,000 (1,400)
17 20,000 (1,400)
18 20,000 (1,400)
19 20,000 (1,400)
20 20,000 (1,400)
21 20,000 (1,400)
22 20,000 (1,400)
23 20,000 (1,400)
24 20,000 (1,400)
25 20,000 (1,400)
26 20,000 (1,400)
27 20,000 (1,400)
28 20,000 (1,400)
29 20,000 (1,400)
30 20,000 (1,400)
31 20,000 (1,400)
32 20,000 (1,400)
33 20,000 (1,400)
34 20,000 (1,400)
35 20,000 (1,400)
36 20,000 (1,400)
37 20,000 (1,400)
38 20,000 (1,400)
39 20,000 (1,400)
40 20,000 (1,400)
41 800 (56)
Total $200,000 $800,000 0
PV of
tax effect
Year 10-year 40-year @ 8%
1 $15,000 $19,200 $2,644
2 27,760 20,000 5,464
3 23,580 20,000 4,130
4 20,040 20,000 3,095
5 17,480 20,000 2,378
6 17,480 20,000 2,202
7 17,480 20,000 2,039
8 17,480 20,000 1,888
9 17,480 20,000 1,748
10 17,480 20,000 1,619
11 8,740 20,000 449
12 20,000 (556)
13 20,000 (515)
14 20,000 (477)
15 20,000 (441)
16 20,000 (409)
17 20,000 (378)
18 20,000 (350)
19 20,000 (324)
20 20,000 (300)
21 20,000 (278)
22 20,000 (258)
23 20,000 (238)
24 20,000 (221)
25 20,000 (204)
26 20,000 (189)
27 20,000 (175)
28 20,000 (162)
29 20,000 (150)
30 20,000 (139)
31 20,000 (129)
32 20,000 (119)
33 20,000 (110)
34 20,000 (102)
35 20,000 (95)
36 20,000 (88)
37 20,000 (81)
38 20,000 (75)
39 20,000 (70)
40 20,000 (64)
41 800 (2)
Total $200,000 $800,000 $20,954
NPV benefit $20,954
FROM CURT J. WELKER, CPA (Computer Press Association, Landing, NJ) An earlier membership organization founded in 1983 that promoted excellence in computer journalism. Its annual awards honored outstanding examples in print, broadcast and electronic media. The CPA disbanded in 2000. , PKF PKF Peace Keeping Force PKF Pannell Kerr Foster (accounting firm) PKF Park Falls, Wisconsin (Airport Code) , SAN DIEGO San Diego (săn dēā`gō), city (1990 pop. 1,110,549), seat of San Diego co., S Calif., on San Diego Bay; inc. 1850. San Diego includes the unincorporated communities of La Jolla and Spring Valley. Coronado is across the bay. , CA |
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