If you’re looking to accelerate depreciation of your commercial building, from real estate to personal property, and reduce your current taxable income, you might want to consider employing cost segregation studies. Cost Segregation Services, Inc. provides engineering-based cost segregation analysis through a process that includes a one-time property analysis and tax savings review by professionals, unless significant renovations have been done. Their main objective is to improve your cash flow by optimizing your tax savings to grow your business. This is accomplished by studying how much tax should be reduced based on the total depreciated value of the property.
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Enjoy Cash Flow And Tax Savings With Cost Segregation Analysis with Todd Strumpfer
We are with Todd Strumpfer with CSSI Services. Todd’s website is BestCostSegregationServices.com. We are going to talk in some detail about how we can save companies money through cost segregation. Todd, how are we doing?
Doing well, thanks. I appreciate you having me here.
Why don’t you quickly tell me a little background of your company and the services. How long have you guys had been around? How long have you been in the industry?
Cost Segregation Services Inc. or CSSI is the firm and we’ve been around since 2003. Jim Shreve is the Founder of the company and still very much involved. He was instrumental in first bringing cost segregation, developing a method to do this for the typical building owner. We’ve done over 16,000 cost segregation studies in all 50 states. I had been involved with the company since 2009 and my role is to coordinate things between the building owner and the tax professional and our staff. I make sure everything gets done on time and that things run smoothly for the client.
From your website, there is a straight forward definition of what is a cost segregation study, “A cost segregation study is an engineering-based analysis that reclassifies or segregates real estate components and improvements between real and personal property in order to accelerate the depreciation periods from 39 to 27.5 years down to fifteen, seven or five years.” Is that a pretty good summary as far as how you explain things?
A commercial building depreciates over 39 years. A residential rental, like an apartment over 27.5 years. The IRS has said, “Certain parts of these buildings wear out faster than that.” As long as the correct study is done on the building, the owner is able to depreciate a lot of parts of the property quicker than the 39 years or 27 and a half years.
It’s engineering-based. How long does a study take, let’s say on a standard commercial type property?
A typical turnaround time is about six weeks. It gets a little longer during busy tax season. We can get it done a little shorter if we’re up against a deadline, but six weeks is pretty normal.
It seems like sometimes there’s some confusion for the study as far as that a lot of folks might think it’s just for new construction, but that’s not the case. What type of buildings qualify?
The only reason not to do it is if there’s no tax liability there. What we’re doing is we’re not giving the owner more deductions, we’re just giving them the deductions sooner. More deductions lower their tax liability. If they don’t owe taxes right now, maybe they want to wait and look at it the next year. Any kind of commercial building, as long as they’re paying US income taxes, it’s going to be a good thing to look at. There are some things as far as $300,000, and above is the benchmark dollar amount to look at. If they’ve owned the building more than fifteen years and they haven’t really put any improvement costs into it, they’d probably depreciated it enough already that we’re not going to be able to help them. Most of the clients we look at are going to fall into those ranges and numbers that we’re talking about.
When you say $300,000, are you talking about building value?
Building costs. If they purchased the building three years ago and they paid $350,000 for it, that’s going to fall under the range of a good candidate for us to look for them. We always do a free estimate as well.
Improvements are part of this. If they’ve done any updating, things like that?
What we look at for the estimate is what did they pay for it originally? What improvement costs have they put into it? How long they’ve owned it? What the use of the building is? Then we can run a conservative estimate of tax benefit for them. It doesn’t have to be a building they own, maybe it’s a dentist or chiropractor, they leased space, but they’ve put $200,000 or more into the leased space. That’s a good candidate for cost segregation as well.
I know some folks might say, “Is this something my CPA can do?” I know it’s somewhat more engineered-based, but can people’s current CPA do this?
To some extent, yes, but by and large, no. What I mean by that is a typical CPA isn’t trained in construction. They might be able to say, “You’ve got carpet. You’ve got cabinets,” and put them on a shorter depreciation life, but they’ll typically miss 30% to 50% of what an engineering-based cost segregation firm like ours will find for the owner. We’ve got a lot of studies after the accountant has done accounting-based cost segregation. We’ve taken a look at everything and found thousands of dollars more in tax benefit for them.
You guys are very focused as far as on the engineering aspect of what you’re analyzing, so that does make sense when you explain it like that. On your website, I’m trying to get a handle on savings or accelerated taxes as far as the benefits to the business owners. I see a lot of testimonials where they claim that you guys have saved them $200,000 to $300,000 in income taxes. Care to tell me what that means? Summarize your average study or your favorite success, maybe a couple of examples.
We do an estimate. It only takes about 24 to 48 hours to get that back and that’ll give them a more accurate picture. As far as rough numbers, probably a million dollars in property costs, but if they have cost segregation, they will save approximately $70,000. It’s more and less depending on how complex the property is. Self-storage buildings can be a lot simpler, a lot more simple than a high-end hotel. That’s roughly what we’re looking at. With the new tax law as well, depending on the time frame, that could be a whole lot more now because there’s 100% expensing of certain components of the property. It could be considerably more.
You mentioned the estimate that you guys provide. Is that like preliminary savings projection? How does that work?
Before any client is going to want to do a study with us, they’re going to want to get an idea of the expected tax savings benefit. We’ll run that based on how long they’ve owned the building, what the use of the building is, what they paid for it, plus improvement costs. It’s pretty simple to get an estimate and then we keep the estimate conservative. Nine times out of ten, once the actual study is done, the tax benefit is greater than what we originally estimated and they’re happy with that as well. The estimate will also detail what our fee would be to do the study. It’s a set fee or a fixed fee based on the complexity of the study. Smaller property, simpler property is going to be a lot less costly to get a study done than a high-end hotel.
They’ll have an idea upfront of what the potential savings is and what the fee for the study will be, which is nice when you’re evaluating the opportunity. How often should a company consider cost segregation? Is this a one-time deal? Every five years? Every ten years? What’s the turnaround on that?
It’s by and large a one-time thing. We can do a study right away when they buy or build the building. A lot of the studies we do, the owners own the property for several years actually. Once they’ve had the study done, they’re done as far as cost segregation goes until and unless they put in significant renovation costs. A lot of the hotel owners we work with, they’ll get a study done and then two or three years later, they’re updating everything and renovated and everything. We’ll do a follow-up study based on all of that. Unless they’re doing renovations and improvements, they don’t need to get a study done every certain number of years.
When we are re-categorizing things, is there a chance that this could increase a business owner or property owner’s chances of being audited?
There actually is no increase in chance of being audited. A lot of owners are concerned about that. If they’re paying less in taxes, are they going to be a target for an audit? If they’ve owned the property for more than a year, there’s a form called the 3115 Change in Accounting Method form that we will prepare as well. That’s an automatic approval for cost segregation, so the IRS doesn’t scrutinize all those. It’s automatically approved. If a client is audited, it’s not because it did cost segregation, but if they are, we’ll stand behind that as well. We have audit protection so we’ll defend our methodology and our numbers on behalf of the client if needed. It hasn’t come into play with the 16,000 studies that we’ve done so far.
16,000, that’s a lot of experience. Todd, I appreciate you being with us and giving us an insight into the cost segregation study realm. Very interesting and somewhat complex, but that’s why you got engineers doing it. Your website is www.BestCostSegregationServices.com. What are some other ways folks can get ahold of you?
My direct dial is (888) 303-4874 and my email is Todd.Strumpfer@CostSegragationServices.com
We appreciate you being with us on OverheadWatch.com and I hope folks can reach out to you to get some more information. Thanks for being with us, Todd.
About Todd Strumpfer
Todd Strumpfer helps commercial building owners reduce their income taxes with COST SEGREGATION. For every $500 K in building costs, Cost Segregation will reduce your income taxes by about $35 K. This means cash flow to the owner. He also helps business owners improve cash flow by upgrading their billing and collections process.