Monday, May 14, 2012

Isn't it Time You Reduced Your Income Tax Liability

If you are the owner of a commercial building that you bought, built or renovated since 1987, you are eligible for and should be taking advantage of a little known income tax strategy that allows you to:
1. Properly classify your building assets according to IRS guidelines,
2. Accelerate the depreciation on these properly classified assets,
3. Significantly increases your depreciation expense,
4. Significantly reduces your income tax liability, and
5. Dramatically increases your cash flow.
Now why wouldn't you want to do this? At the very least, why wouldn't you want to know more about this opportunity?
Of course, you must be thinking "what does this translate to in terms of actual dollars"? Well, as a general rule, every million dollars of cost basis in your commercial property yields $70,000 to $100,000 in tax savings (increased cash flow) to you.
You can also take advantage of this tax strategy even if you bought, built or renovated your commercial property in the past. You can use a feature called "catch up" depreciation which allows you to claim the accelerated depreciation, in your next tax filing, from the date of ownership - no returns to amend.
Best of all, ANY commercial property qualifies for this tax strategy. Especially now during these tough economic times, it is an intelligent way to increase your cash flow allowing you to use that tax savings for important business activities or for any purpose you chose. Of course, if you "flip" properties or do not intend to retain ownership for five years, you would probably not use this strategy. Under some circumstances, owners will use a 1031 exchange as an exit strategy thereby deferring capital gains and depreciation recapture issues into the new property's cost basis.
You may be thinking that your CPA (or other tax advisor) is already doing this for you. Most likely that is not the case since research shows that this tool is used only 5% - 10% of the time. CPAs and other tax preparers may not be aware of this tax strategy or may not routinely perform the study because it involves real estate appraisal methodology and specialized engineering knowledge outside the scope of a typical tax practice. They typically contract these studies to third party qualified engineering firms. On occasion, CPAs will "cherry pick" certain obvious cost items from the cost detail on a new building; however, when compared to actual study results they leave significant dollars on the table.
Let's look at this from another way. Let's say you have a child care center with a cost basis of $2,391,000 and an ownership date of November 2002. On your 2008 tax return (because that is the next filing opportunity), you stand to have a tax reduction of $209,199. This is very nice cash flow benefit realized because of the "catch up" depreciation provision. A study to provide this benefit would only cost you a tax deductible fee of $6,400. It seems like a no-brainer to me. The type of property and length of ownership will affect the benefit realized in any particular year.
It is important to point out that if the depreciation expense creates a net operating loss, the net operating loss can be carried forward until it is used or you could amend up to two prior year's returns and recapture previously paid taxes.
What is really happening is that your property's assets have been reclassified into 5- and 15- year depreciation periods instead of it all being depreciated over the traditional 39 years. It also makes assets available for earlier write-off.
Does this just sound too good to be true? Well, it's not. You may be wondering if this cash flow panacea can be legal. Of course it is. The legal basis comes from the US Tax court 109 T.C. 21 decision. In this precedent setting case, the IRS claimed that the Hospital Corporation of America (HCA) owed them over $800,000,000 in taxes. The case was decided in favor of HCA on August 24, 1997 by Judge Tom Wells. So, YES it is legal. In fact, cost segregation has become an IRS approved tax strategy.
I hope it has become clear that if you haven't taken advantage of this terrific tax strategy, you should. If you have any questions or would like additional information, please visit [].
If you would like a complimentary cash flow forecast for your property, just give me a call me at 866-625-9392 or email me at If you email me, please include your contact information and 1) the type of commercial property, 2) the cost basis and 3) the date of ownership. I will usually be able to provide the forecast within a day.
Resource info: Tom Stevens has been involved with Cost Segregation studies for over four years and has been able to create increased cash flows for clients all over the country. Located in Suwanee, GA, Tom can be reached via e-mail at or by phone at 866-625-9392. More information can be found at []