myths

We'd like to address the top ten myths we come across when communicating
with clients, potential clients and teaming partners.

My accountant probably did one.
Unless it was done subsequent to May 13, 1996 when the tax laws changed,
then you are probably depreciating your assets incorrectly. In the case of
purchased buildings, if you do not have a specific appraiser’s report or a
professional who has construction cost estimating expertise using national
industry costing manuals such as RS Means or Marshall and Swift breaking
out the various building components, then you definitely did not have a cost
segregation study performed on the building.

A cost segregation study won’t save any money.
This is true only if the entity or pass thru entity is losing money and has no
ability to either carry back or carry forward the losses generated.

Otherwise, the savings generally range from 35% to 46% of the additional
depreciation generated from the study. For example, if a cost segregation
study results in additional depreciation of $1,000,000, then a taxpayer in
the 46% tax bracket would save $460,000 in federal and New York state
taxes over four years.

We don’t have any assets to reclassify.
Generally, 20-55% of building costs can be reclassified to shorter depreciable
lives.

Our chances of being audited will increase.
Not according to the IRS. You are filing an automatic change in accounting
method which the IRS has pre-approved assuming the form is filed correctly.
In addition, the IRS has issued a publication to follow in order to properly
record the changes in depreciable lives. Keep in mind that you are going
from an incorrect method to a correct method and the changes made are
generally black and white issues within the tax code.

There is no support if the IRS does perform an audit.
There are over 75 IRS rulings, procedures and court cases which allow for
cost segregation studies. We provide a report that details every change with
applicable support and documentation. Walker Bryce & Associates has spent
over 1,000 hours researching cost segregation studies and performed
hundreds of such studies.

We will get the deduction in the future anyway.
Absolutely correct, however, a cost segregation study in effect gives you an
interest free loan from the government for the first 15 years which you will
then repay interest free over the remaining 25 years. Who do you want
holding your money? There are also advantages to doing a study if the
building is going to be sold or upon the death of a building owner.

We are in an alternative minimum tax (AMT) situation and/or the
cost segregation study will put us in one.
Congratulations! You are probably flush with cash. If this does occur, the
savings will be at the 28% federal tax rate and not the 35% to 39% tax rate.
Of course the amounts are large enough so it shouldn't matter. In addition,
the AMT taxes can be used against regular taxes in future years.

My CPA has segregated percentages of construction costs based on
invoices or contractors application for payment, so our company is
already benefiting.
Without the contractor/engineer expertise coupled with the tax law
guidance, there will likely be valuable tax benefits left on the table. More
importantly, this methodology will not withstand IRS scrutiny.

A cost segregation study will complicate estate planning.
It might, however, the rewards of performing a study have great financial
benefits if the owner of the building dies before the building is fully
depreciated. Due to the “step-up in basis” rules, it is one of the rare times a
taxpayer can “have his cake and eat it too.” If done properly, a cost
segregation study is an estate planning home run.

There is no negative impact to not performing a cost segregation
study.
This is an incorrect assumption. IRS regulations require that a taxpayer
compute depreciation on what is allowed or allowable.

Therefore, if you improperly depreciate a 7-year asset over 39 years, the IRS
could disallow the depreciation on the asset beginning in year 8. In addition,
if the building is sold the IRS could increase the gain by reducing the basis in
the building by the depreciation that should have been taken in prior years,
but was not.

*Assumes federal tax rates between 28% and 39% (maximum
marginal rate) and approximately 7% New York state taxes.