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Money doesn't grow on trees, but it could be hidden in the walls

What would you say if someone offered you a dollar in exchange for a dime?   To the skeptic, that statement would sound too good to be true.

Yet tax professionals at Groen, Kluka & Company, P.C. in Troy, Mich. can help provide a service that can return $1 in tax savings for every ten cents you spent on the service. Known as cost segregation , this service brings significant, IRS-recognized tax savings to building owners interested in retaining cash.

Even the skeptics are convinced.

It is generally understood that carpeting and cabinets are classified as personal property for Federal Income Tax purposes in order to capture the cash flow benefits associated with shorter depreciable lives. Typically, this amounts to less than 3% of a building's component costs.

Meanwhile, the remainder of the facility is assigned a depreciable life of 39.5 years (27.5 years for multifamily facilities). A comprehensive and appropriately documented cost segregation analysis maximizes a building's tax benefits by identifying, classifying and segregating a much larger percentage of a building's assets for accelerated depreciation for Federal Income Tax purposes -- This means three, five, sometimes 20 times more savings than the 3 percent found in cabinets and carpeting.

These are many items that a cost segregation specialist looks for when working to identify tax savings in a building. Questions that such a specialist would ask include:

• Is there more than one power source in your office?
• Do the walls in your office penetrate the ceiling tiles and are they load bearing?
• Is the decorative paneling in your reception area and conference room glued, nailed or hung on the wall?
• Is your cooling system oversized in order to cool your data processing room?
• Do you have a kitchen?

A "yes" to any of these questions indicate the need for cost segregation.

Cost segregation specialists perform a non-intrusive yet detailed engineering study of a building's walls, flooring and ceiling, its plumbing, electrical, lighting, telecommunications, heating and cooling systems. For the maximum benefit to the client, the professionals prefer to work from building plans and costs documents rather than strictly relying on a building tour.

Pre-planning makes the facility walkthrough much less intensive and is a better way to identify the maximum number of building components into short-term depreciable categories. Comprehensive documentation means less reliance on national cost manuals to arrive at the costs of the building components. Together, pre-planning and good documentation provide a better fee for service since the costs segregation professionals won't need to spend as much time on the assignment. That translates to added savings for the client.

The assets are grouped under several ADR classifications, including:

• Office Furniture, Fixtures, and Equipment,
• Information Systems,
• Land Improvements,
• Manufacture of Electronic Components, Products and Systems,
• Distributive Trades and Services, and
• Personal Property With No Class Life

The costs segregation professionals then identify which components of each system that, according to Federal Tax law, can be assigned accelerated tax lives of five, seven or 15 years rather then the straight-line 39.5 years (27.5 years for multifamily facilities). These savings drop right down to your bottom line.

It is important to have a good relationship with an established, experienced cost segregation provider so that if the IRS should inquire about your cost segregation study three or more years down the line, your provider is willing and able to stand behind their work.

A good cost segregation study is based on well-founded interpretations of the Internal Revenue Code Sections, applicable court cases, and revenue rulings.   The cost segregation professional should have the ability to demonstrate the relationship of the analysis to relevant laws, rulings and precedents as support for the positions recommended in qualifying components as accelerated depreciable property.

Ralph Consola, Vice President of Marshall & Stevens, a recognized leader in valuations and financial consulting serving clients from around the world, contributed to this report.