Segregate Your Property And Save

By John Logar and Richard Teichner, CPA, CVA

Cost Segregation is a process that allows building owners to segregate costs attributable to various components of depreciable business real estate, resulting in shorter tax depreciation periods than what is otherwise allowed without applying the cost segregation rules. When applying the specific Internal Revenue Service guidelines for segregating costs of real property, the tax savings can be very significant.

Typically, the cost of buildings and improvements is depreciated over 27.5 years for residential rental property and 39 years for nonresidential property. Personal property, typically furniture and equipment, and certain non-structural improvements are normally depreciated over periods of either 5, 7 or 15 years. An in-depth study of the components of the real property can result in "segregating out" many other items that qualify as personal property and thus would be subject to the shorter depreciation periods.

Expenditures for new, expanded, or recently purchased buildings are either "facility-related" (depreciable over 27.5 or 39 years) or "process-related" (depreciable over 5 or 7 years). Land improvements like fences, roads, sidewalks and other pavement, and certain landscaping are depreciable over 15 years. The cost segregation analysis identifies the non-facility costs and thus establishes the justification for the shortening of the depreciation periods.

Cost segregation also is allowable for real property placed in service as far back as 1987-even if the year is "closed" for tax purposes. By applying for an automatic change of accounting method you can claim, in the current year, additional depreciation deductions attributable to prior years. Until recently, any additional depreciation from prior years had to be spread over four years, i.e., in the current year and over the next three years. Since you can now realize the tax savings in one catch-up year, those savings that flow directly to the bottom line and the resultant improvement in cash flow is even sooner than before.

The cost segregation process involves analyses from engineering, architectural, financial and tax perspectives, with the result being the allocation of the total building and improvement cost to the various segregated depreciable components. During the process, a variety of documents, such as building plans, construction contracts, permits, invoices, and various other cost and construction records, must be examined and evaluated. A detailed report must be prepared, and kept on hand, that is consistent with requirements established by the Internal Revenue Service.

A cost segregation study can be an expensive proposition, however, in the right situation the economic benefit can be so great that the expense of the study is only a small fraction of the benefit. You should know that the expense for conducting a study for old construction can be greater than for recently constructed property, since the necessary records and other documentation are generally more difficult to obtain and analyze.

Besides the shorter depreciable lives available for land improvements mentioned above, some examples of other items which have been successfully classified as personal property and are allowed shorter lives include carpeting; strippable vinyl wall coverings; window treatments; interior ornamentation, including molding, millwork, trim, finished carpentry, and paneling which is not integrated into the construction of the building; moveable partitions; counters, cabinets and shelving; specialized windows (e.g., bank teller's window); signs and lettering; raised floors; false balconies and other exterior ornamentation; emergency power generators; security lighting, emergency lighting and decorative lighting; specialized equipment and machines (e.g., kitchen equipment or factory machines), including electrical distribution systems and plumbing to the extent used for specialized equipment and machines, fire protection and air filtration systems dedicated to the equipment and machines, as well as HVAC and air conditioning units installed for the purpose of meeting the temperature or humidity requirements essential for the operation of machinery or equipment (e.g., computers, the processing of foodstuffs). In addition to material and labor costs of these items, indirect costs, such as architectural, engineering and permits fees, can be allocated to these items.

Sometimes the cost segregation analysis can result in as many as hundreds or even thousands of separately depreciable components, particularly in complex structures such as factories, hospitals and restaurants. In addition, experience has shown that buildings and improvements with a value as low as $1 million have the potential to provide substantial tax advantages.

To find out more about cost segregation or if you have any questions about the process, please contact Barnard, Vogler & Co.

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Bad News For Split Dollar Life Insurance Arrangements

By Denise Lewis and Richard Teichner

Split-dollar plans have been around for quite some time. These arrangements are used to finance the purchase of life insurance.

A split-dollar life insurance arrangement is typically used as part of an executive compensation package, whereby premiums are paid by the company on a policy that insures the life of its employee, the executive. At a later date, the executive can take over ownership of the policy by reimbursing the company for only the amount of premiums the company had paid, even though the cash value of the policy may be much greater.

Split-dollar arrangements also are used for gift and estate planning purposes, whereby a trust or family partnership might pay the premiums for a family member's benefit.

The split-dollar arrangements have come under heavy attack in recent years from the Treasury Department and the IRS, who have recently issued rulings that essentially eliminate the tax benefits. Any new split-dollar arrangement created on or after September 17, 2003, as well as any existing arrangement materially modified after that date, will be subject to new rules that essentially require cash value build-up in the policy to be taxable to the insured person. In addition, for existing split-dollar arrangements, a transfer of a policy will be subject to tax on the previously untaxed build-up in cash value. However, there is some relief if the arrangement was entered into prior to January 28, 2002. An election can be made, on or before December 31, 2003, to convert all premiums paid by the owner to loans, from the owner to the insured. Such loans must bear interest.

As you can see, the rules relating to split-dollar arrangements are somewhat complex. If you wish to have more information about these rules and how they might affect you, please call us at Barnard, Vogler & Co.

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$118 Million In Credits Returned

According to the IRS, 115,000 advance child tax credit checks were returned as undeliverable this summer. If you didn't receive your check, you have until December 5 to claim this payment. After the December cut-off, you will have to wait and claim the credit on your 2003 tax return.

In addition to the undeliverable advance child tax credit checks, more than 92,000 “regular” tax refund checks came back to the IRS as undeliverable. If you were expecting money that you haven't recieved, contact the IRS. Information is available at www.irs.gov

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Tech Tips: Fighting Spam

Here are some steps you can take to protect yourself from junk email known as spam:

1. Do not respond to spam or attempt to unsubscribe from spam emails. Often the “unsubscribe” feature is simply a method for verifying that your email address is valid. You will most likely receive more spam as a result.

2. Only give your real email address to those from whom you want to receive mail. Before you submit your address to a website, check to see if their privacy policy allows them to sell your address.

3. Don’t post your email address on your website without encrypting it somehow.

4. Use an ISP that filters spam. AOL, MSN, Yahoo!, Earthlink and most other ISPs filter well, but some do not. Make sure you know your ISPs policy.

5. You could use a spam-filtering program. Unfortunately, most are judged ineffective, so shop around before you purchase one.

6. Use a unique email address. Spammers sometimes use “dictionary attacks” to sort through possible name combinations at large ISPs or email services, hoping to find a valid address. By using a creative address you may avoid these attacks.

7. You could use a “disposable” address. Create an address that you use for offers, newsgroups, chat rooms or other places you may be exposed to spammers and have the mail directed to your main email address. If the disposable address begins to receive spam, you can shut it off without affecting your permanent address.

You can find out more about fighting spam on the web at www.spam.abuse.net/ or www.ftc.gov/.

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Check Your Withholding and Estimated Tax Payments

The 2003 Tax Act reduced the individual marginal tax rates. In addition, income from certain qualifying dividends and long-term capital gains have a new, preferential income tax rate of 15%. Since the reduced tax rates are effective as of the beginning of 2003 (after May 5 for capital gains), many taxpayers may have had too much tax withheld or may need to adjust their 2003 estimated tax payments.

The income tax withholding tables that apply to wages were revised at mid-year, decreasing the amount of income tax paid through payroll withholding. In light of this, if you were counting on a predetermined amount of withholding to arrive at your 2003 estimated tax payments, you may fall short. We encourage all taxpayers to review their projected estimated tax payments to ensure they are protected from underpayment penalties.

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Client Profile: Gyford Productions

By Ed Adkins

Tradition and family meet cutting-edge designs at Gyford Productions. On one hand they are a family owned and operated business that develops well-crafted furniture and displays from years of tradition. On the other hand they are an innovative company, pushing the limits of style with amazing contemporary designs. With 15 years of history in Reno, Gyford Productions is an illustration in family teamwork. Steven Gyford, his wife Valerie and their children left California in search of healthier air, less traffic, and a home for their display business. They started off selling museum and portable tradeshow exhibits. Now, joined by their son Darren who creates their Computer Aided Designs (CAD) and their daughter Joanne who develops their artwork and marketing, they manufacture their own line of furniture and displays called Standoff Systems. Standoffs are pieces used to hold Plexiglas or glass in front of artwork in museums for protection. "We were looking for a certain product that we couldn't find on the market, so we developed it," says Steven Gyford. What they have developed is a furniture and display line that uses the standoff components to create a unique and modern look. The furniture is constructed from aircraft-grade aluminum standoff components combined with a variety of materials such as acrylic, metal, glass, wood, colorful laminates and fabric. Gyford's creations have been used by the Smithsonian, CNBC's War Room, Porsche dealerships, GM, Nike and NASA. Anyone interested in these functional and modern designs can find Gyford Productions at 891 Trademark Drive in Reno, or via the web at www.standoffsystems.com.

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Employee Profile: Richard Teichner, CPA, CVA

As many readers may have already seen from our ad in the Reno Gazette-Journal, Richard is the newest addition to Barnard, Vogler & Co., joining the firm as a Director. Richard decided to trade Los Angeles for Reno citing a better quality of life. Richard says he doesn’t miss the clutter from the “endless array of buildings and concrete and the unrelenting traffic jams.” After looking at a number of cities, Richard says that he and his wife, Cris, found that Reno offered the kind of environment and people they had been looking for. Since moving to Reno, he says that he greatly appreciates the warm and good-natured people that live in northern Nevada. “We feel that we haven’t given up anything by leaving Los Angeles, but instead are fortunate to live in a setting with beautiful scenery and clean air.” Richard says these things give the Reno area “a sense of calmness and tranquility.” Richard also has found a great fit with Barnard, Vogler & Co. As Director of Litigation Support and Business Valuation Services, he brings not only his 36 years of accounting, tax and consulting experience to the firm, but also his background in litigation support and valuation services. Besides being a CPA, Richard is also a Certified Valuation Analyst (CVA). Business valuations are often needed in situations such as gifting and estate planning, and acquiring or selling businesses. Before moving to Reno, Richard was a partner with Moss Adams, the tenth largest accounting firm in the nation, where he headed the litigation consulting services area of practice in the Los Angeles office. Now that he and his wife are just about settled in, Richard says he plans to take up both some new and old activities, such as hiking, golfing and skiing. When he’s not in the office, he enjoys going to the gym and spending time with his wife and their two yellow labs, Hiya and Chief.

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