Posts Tagged ‘tax’

By John J. Cummings, JD

 
Alright, so you just bought or built a commercial property. Maybe it’s a 70-room hotel or a 5-star resort or even an enormous office complex. Whether you spent $5 million or $500 million, chances are really good that you need to do a proper cost segregation study to ensure maximum and optimal acceleration of depreciation (maximum up front tax deductions and saving). You already know this in theory. But, depending on the type of property you’re depreciating, you may not realize that you are also throwing money away if you don’t properly segregate the assets within that building for future renovations and abandonment deductions that result from those renovations. Additionally, accelerating tax deductions without proper support could put you in the penalty box with the IRS, when it’s easy to avoid that trap.

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TAX FLASH:  If there is a net loss generated from the cost segregation study, that loss can be carried back.  A net operating loss (NOL) is the excess of business deductions (computed with certain modifications) over gross income in a particular tax year. The loss can be deducted, through an NOL carryback or carryover, in another tax year in which gross income exceeds business deductions.

In general, NOLs may be carried back two years and forward 20 years. However, if the taxpayer qualifies, the NOL can be carried back as far as 3, 4 or 5 years. The NOL is first carried back to the earliest tax year for which it’s allowable as a carryback or a carryover, and is then carried to the next earliest tax year. A taxpayer may elect to forego the entire carryback period for an NOL and instead carry it forward. This is significant because if there is tax dollars paid in prior years and the cost segregation study takes a company from being profitable for tax purposes to being in a net operating loss situation, the company can obtain tax refunds from the tax years still open by statute.

Was a Cost Segregation Study or Energy Study rule out due to a Net Operating Loss at the personal tax level of the shareholder/partner? Depending on the size of the client’s Individual Retirement Account (IRA) proposing a potential ROTH IRA conversion of their IRAs could provide not only significant income tax planning opportunities, but also can provide an avenue for a study to be viable.

With the recent turmoil in the stock market, many people would rather not think about taking a hard look at investment strategies for retirement. However, with current legislation that came into effect in 2010, along with possibilities of tax rates increasing in the near future, taxpayers can make some smart choices now that can really pay off at retirement age.

Gross Income Limitation Removed

Prior to 2010, individuals can only convert a traditional IRA to a Roth IRA if their modified adjusted gross income is $100,000 or less. For 2010 and forward, taxpayers can convert their traditional IRAs (and funds from certain other eligible retirement plans) to a Roth IRA with no gross income limitation. Therefore, no matter what the income level of the individual was, the Roth IRA conversion is available. The new legislation also removed the requirement for married couples to file jointly to be able to make this conversion.

Traditional IRA vs. Roth IRA

Most people are familiar with IRAs. Some are even aware that there are two kinds of IRAs: traditional IRAs and Roth IRAs. In a traditional IRA, participants can contribute $5,000 per year ($6,000 if age 50 or older). Whether or not the contribution is deductible depends upon the adjusted gross income of the taxpayer(s). If you are allowed to deduct the contribution, then any distributions – including your original contributions plus earnings – are taxable. If you are not allowed to deduct contributions, then only the earnings portion of any distribution is taxable.

In a Roth IRA, contributions are not deductible. However, all distributions – whether from original contributions or earnings – are not taxable. Therefore, taxpayers who convert a traditional IRA to a Roth IRA will not need to pay tax when the Roth IRA distributions are made. Also, a Roth IRA has no minimum distribution requirement when the account holder turns 70 1/2, as does a traditional IRA.

Tax Considerations

The initial conversion does have tax effects. An IRA conversion is treated as a taxable distribution, taxed as ordinary income at your marginal tax rate. Although this accelerates the taxable income that you would eventually pay on distributions from a traditional IRA, the future appreciation in the account grows tax-free. Also, for conversions made in 2010, a taxpayer can spread the income over two years: 2011 and 2012. This gives the taxpayer time to put aside money to pay the tax due without having to liquidate any of the retirement account assets.

After 2010, conversions can be made, but the tax will be due with the tax return filed for the year of conversion. Keep in mind that after the tax on the conversion is paid, all of the growth in the account can be distributed tax-free after the taxpayer reaches age 59 1/2. (Please note that there is also a five-year holding period that must be reached before tax-free distributions of earnings can be made.) Also, if you convert at the beginning of a tax year (say January 2010), you have until you file your tax return for that year (up to October 15, 2011 if you extend your 2010 tax  return) to recharacterize the converted funds if the account balance declines.

How does this relate to Cost Segregation Studies?

If you have a large IRA that can be converted to a ROTH, the deductions that a cost segregation study or energy study would provide, excess deductions can be used to offset the income earned on the ROTH conversion.

For example, if you have a personal net operating loss of $500,000 and an IRA of $700,000 the whole account could be converted and $200,000 additionally would be offset from the excess deductions provided by a cost segregation study or energy study.

For more information, please contact Engineered Tax Services by dialing 800-236-6519 or email info@engineeredtaxservices.com

West Palm Beach, FL, January 28, 2010 – Engineered Tax Services, a nationally licensed engineering firm that marries the science of engineering with the principles of tax and accounting, announced today that their course, “Energy Tax Credits for Architects”, has been approved by the U.S. Green Building Council to be part of the Council’s national course catalog. The firm’s Chief Executive Officer, Julio P. Gonzalez, developed the course to help architects take advantage of energy tax credits, incentives and deductions. A webinar program is currently being scheduled and will be announced shortly. Engineered Tax Services (ETS) offers a similar online and in-house course designed specifically for accountants and is also registered as an education provider through the National Association of State Boards of Accountancy (NASBA).

“The Energy Policy Act offers tremendous opportunities to architects and they need to be aware of the significant tax benefits available to them through their professional trade,” stated Mr. Gonzalez.  “We are committed to green practices and partner with architects nationally to provide independent, third-party certification as required by the IRS to help them take advantage of these tax incentives and deductions.”

ENERGY TAX CREDITS

Architects are eligible for a Federal tax benefit of up to $1.80 per square foot for the design of energy-efficient public buildings placed into service after January 1, 2006. Benefits originally awarded to architects through the Energy Policy Act of 2005 (EPACT) have been extended by the federal government through December 31, 2013 with the support of the American Institute of Architects.

ETS has provided thousands of energy tax certifications since 2005. Handling over 50 certifications every month, they have perfected the process by working closely with the Internal Revenue Service on a regular basis. Their precise documentation meets and exceeds the standards required by the Department of Energy and the IRS and has consistently withstood the toughest scrutiny.  ETS is a member of the U.S. Green Building Council (USGBC). With the most innovative and highest-quality LEED and green building knowledge and training, the approved USGBC educational courses helps green building professionals across all market sectors build the capacity to build their careers.

ABOUT THE U.S. GREEN BUILDING COUNCIL

The U.S. Green Building Council (USGBC) is a Washington, D.C.-based 501(c)(3) nonprofit organization committed to a prosperous and sustainable future for our nation through cost-efficient and energy-saving green buildings. USGBC works toward its mission of market transformation through its LEED green building certification program, robust educational offerings, a nationwide network of chapters and affiliates, the annual Greenbuild International Conference & Expo, and advocacy in support of public policy that encourages and enables green buildings and communities.

ABOUT ENGINEERED TAX SERVICES

Engineered Tax Services (ETS) is a nationally licensed engineering firm with professionally staffed engineers who marry the science of engineering with the principles of tax and accounting to arrive at financial solutions that result in increased cash flow, minimized tax payments and increased return on investment.  ETS engineering professionals have over 100 years of combined experience in energy modeling. The ETS team consists of multi-disciplinary professionals including Professional Engineers (PE), LEED Accredited Professionals (AP), Certified Public Accountants (CPA) and architectural professionals. ETS specializes in providing a wide spectrum of engineered accounting solutions such as energy tax credits, cost segregation studies, energy audits, carbon footprint certification and insurance appraisals.

CONTACT:
Julio Gonzalez

Engineered Tax Services

Office: 1.800.236.6519

Cell: 561.358.7858

email: jgonzalez@engineeredtaxservices.com

website: www.engineeredtaxservices.com

Energy Tax Benefits for Commercial Properties to be Focus of Seminar March 18 in Fort Lauderdale

Energy tax benefits that are important to commercial building owners, real estate investors, tenants, architects, engineers, contractors, property management companies and accountants – including some very valuable ones that must be instituted before April 15 – will be the subject of a special seminar Wednesday, March 18 from 7:45 a.m. to 9:30 a.m. at The Tower Club, One Financial Plaza in Fort Lauderdale.

Ten local businesses have joined forces to present the seminar as a service to the local real estate and building community. In addition to promoting energy efficiency, they want to help the area’s commercial real estate industry understand what the new tax laws offer so they can reap the maximum tax benefits for energy-efficient building design, construction, upgrades and renovations.

The cost to attend “Understanding and Taking Advantage of the IRS Energy Tax Benefits – Go Green and Get Green ($1.80/sf),” is only $15 per person, and includes a continental breakfast. Space is limited. Reservations may be made by contacting Jennifer Reck of Danto Builders at (954) 229-2006 or Jennifer@dantobuilders.com by March 11.

Congress has already extended valuable energy tax benefits through 2013, and it may increase them from $1.80 per square foot to $3 per square foot later this year. The seminar will cover what these tax benefits are, who they affect, and how to go about achieving them and then applying for them. The seminar is especially vital for anyone involved in any energy-efficient construction that was completed in 2006, because they must complete an energy tax certification before their 2008 tax filings or the tax benefits they would have gained for 2006 may be lost forever. Energy tax benefits can be carried forward 15 years.

“The most often overlooked tax benefit relative to the Energy Policy Act extension is the tax benefits construed for commercial building owners,” said Julio Gonzalez, chief executive officer of Engineered Tax Services, the seminar’s keynote speaker. “Real estate investors can now reduce the payback period in investing in energy-efficient components with the added benefit of deducting up to the entire expense of these assets immediately, versus depreciating these assets over 39 years. The Energy Policy Act of 2005 includes a tax deduction for investments in energy-efficient commercial building property designed to significantly reduce the heating, cooling, water heating, and interior lighting energy costs. To be eligible, the energy-efficient commercial building property must be placed in service between Jan. 1, 2006 and Dec. 31, 2013.”

The certification process, five alternative ways a building may qualify for the energy tax benefits and a host of other related topics will be covered at the seminar, including public utility rebates and insurance savings for these same energy-efficient upgrades and construction.

“Contractors, architects and engineers who are the primary individuals responsible for the energy-efficient design of public buildings like public schools will be thrilled to learn that a hidden gem within the Energy Policy Act is that Congress allows the deduction to be allocated to the ‘person primarily’ responsible for designing the property, in lieu of the public entity,” Gonzalez said.

Representatives of the other companies hosting the seminar – Danto Builders & Companies, Spinnaker Group, Logical Green, JMWA Architects, All Energy Electric, Hill York, Levy Realty Advisors, Berkowitz Dick Pollack & Brant and Seitlin Insurance & Advisory Services – will answer questions following Gonzalez’s presentation. FPL representatives for the energy-efficient commercial rebate programs will also be available to answer questions.

For more information:
Debbie Danto, Danto Builders
Tel.: (954) 229-2006
E-mail: ddanto@dantobuilders.com

Many people thought the 2005 Energy Tax Credits were going to expire this year, but the bailout plan extended them to 2013. As a result, substantial opportunities continue to await clients of those CPAs who understand how to take advantage of these tax benefits. The California Society for CPAs will conduct a webinar in conjunction with Engineered Tax Services on November 06, 2008 from 11:00am – 1:00pm PST (Registration at 11:00am) to educate members on the significance these benefits can have in terms of tax savings for their clients.

In a state like California, where sustainability and conserving energy is such an important part of doing business, any CPA who knows how to identify these opportunities will be at a decidedly competitive advantage. Julio Gonzalez, CEO of Engineered Tax Services, Inc., is an expert on the Energy Tax Credit Act and will guide webcast participants through the intricacies of the law. After the webcast, participants will assume a stronger role when working with contractors and property owners as they gain the maximum tax benefits for their clients.

“This month Congress approved, and the President has now signed into law, a measure that will help keep America’s energy efficient commercial building, emerging wind, solar and geothermal industries in business. This is a major and most significant legislation approved by Congress this year to help address the energy conservation issues in the United States” stated Julio Gonzalez, CEO of Engineered Tax Services. “Engineered Tax Services is excited to work with the California Society of CPAs to provide an educational course that discusses the crux of these important tax incentive programs needed to spur energy efficiency and renewable energy in the United States and I’m very proud that Engineered Tax Services has been at the forefront in educating the CPA community on these energy efficient tax programs” added Julio Gonzalez.

This webcast is free to qualifying California Society 08-09 VP members.

Cost Segregation Services are IRS-sanctioned techniques allowing businesses to accelerate depreciation on their facilities. In short, Cost Segregation Services and Cost Segregation Studies can substantially reduce income taxes by increasing depreciation allowances. However this process is a little more complicated than simply deciding to reallocate assets or claim a shorter depreciation period and then running the numbers yourself. According to IRS guidelines, a properly performed cost segregation study is based on a detailed engineering analysis. It requires a team of architects, engineers and accountants to be effective.

Show Me the Money

The following table details the results of a Cost Segregation Study for a company with annual income of $10M.

In this example, current year savings after a Cost Segregation Study is $800,000. This savings can be reinvested in the business or put to use in other investment activity.

So are the savings worth the effort? Well, typically 25 to 40 percent of the assets within a property can be reclassified. This allows you to recover costs over a shorter period of time, which in turn creates a substantial tax savings.

Cost segregation studies analyze Sec. 1250 based assets, which are bound to a traditional 39-year depreciation group, and reassigns specific eligible assets into Sec. 1245 property which most often enjoys a three, five or seven year depreciation. The cost segregation process, based on an engineering study and in accordance with strict IRS audit guidelines, often reduces taxable income thereby resulting in an increase in cash flow. These newly freed funds may be utilized for purposes that are more productive.

Isn’t it time you got a preliminary cost segregation feasibility study with proprietary software designed to analyze your properties and their depreciation schedule options? Call us to schedule a more in-depth discussion of this service today. Of course, there will be no fee associated with this meeting.