FEATURED ARTICLE

Cost Segregation is a powerful, IRS defined method to reduce federal income tax liabilities for owners of virtually all types of real property. Demonstrative candidates include industrial, commercial and multi-family developers; manufacturers, office, supermarket and shopping center owners, as well as assisted living home and resorts owners to name just a few. The objective of the study is to identify, value and segregate the real and personal property assets in order to maximize depreciation for federal income tax purposes.

The study may also be utilized to assist management in properly accounting for deductions related to the abandonment or retirement of purchased assets. This includes a determination of the magnitude of the owner-provided tenant improvements available for abandonment write-off, as applicable under IRS Section 168(i) (8).

In addition to reducing federal income tax liabilities, other potential benefits derived from a Cost Segregation study are reducing sales tax exposure and/or assist property tax management. For example, some states grant tax exemptions for tangible personal property used in the manufacturing process or research and development. These type assets are typically identified and valued as part of a study.

The potential federal tax benefit or payback for identifying 39-year real property as 5-year personal property is approximately 22 cents for each dollar re-classified. For a reclassification as 7-year personal property, the approximate benefit is 18 cents for each dollar re-classified. The approximate benefit for re-classification of 15-year property is 10 cents for each dollar re-classified.

The current MACRS (Modified Acceleration Cost Recovery Systems) and property classifications for Federal Income Tax purposes are outlined in the 1986 Tax Reform Act (TRA 86) Cost Recovery Systems and the Omnibus Budget Reconciliation Act of 1993, along with the Internal Revenue Service Code. These guidelines identify items considered to be Section 1245 (5-7 year life) and Section 1250 (ADR midpoint life of 27.5 years or more) property.

Current law holds that any addition or improvement to nonresidential real property already in service is depreciated using the straight-line method over a 39-year recovery period. If the addition or improvement to non-residential property can be categorized as tangible personal property, MACRS depreciation is calculated using the shorter recovery periods, (usually 5 or 7-years) and applicable accelerated methods. The determination of whether an addition or improvement is properly classified as tangible personal property or nonresidential real property depends on if the property constitutes a "structural component" of a building as defined by Treasury Regulation Section 1.48-1(e)(1). Additional guidance can be obtained from the numerous tax court cases and revenue rulings dealing with Section 1245 and Section 1250 depreciable property including leasehold improvements.

Cost Segregation is most commonly associated with properties recently purchased or new construction. However, through "catch-up" depreciation, owners who have purchased, constructed, expanded or renovated properties can re-classify assets and claim the proper depreciation back to 1986. The benefit can then be taken in the year of the current return.

Now is the time to start thinking about conducting a cost segregation study in order to take advantage of this powerful tool for the 2007 tax year. Our Accelerated Cost Recovery service is conducted by professionals with years of experience helping taxpayers bridge the gap between construction and accounting in an effort to maximize tax savings. Please contact us for more information.

IRS Cost Segregation Audit Technique Guide

CASE & POINT

Does a taxpayer seeking a reduction in real estate assessment based on external obsolescence need to prove the cause of the obsolescence as well as the effect and quantity of the obsolescence on the subject property?

This is the question recently addressed by an Arizona Court of Appeals in Eurofresh Inc., v. Graham County. The three-judge panel unanimously concluded that, as a matter of law, a taxpayer claiming external obsolescence must offer probative evidence of the claimed obsolescence as well as assert the quantity and demonstrate the actual effect of the obsolescence on the subject property.

Eurofresh, Inc., is the owner of a 168-acre hydroponic tomato greenhouse in Willcox, Arizona. In 2003, when the greenhouse covered only 120 acres, the County assessed the subject at some $36,200,000 for tax year 2004. During 2004, Eurofresh added an additional 48 acres under glass, prompting an increase in assessment to some $52,000,000 for tax year 2005. Eurofresh successfully appealed the assessments to Tax Court resulting in revised assessments of some $22,300,000 and $33,000,000 for tax years 2004 and 2005 respectively.

The decision of the Tax Court was shaped largely by the appraisal of Eurofresh Inc.'s expert. The expert argued that the value of the subject property was essentially equal to its replacement cost minus forty percent. According to the expert, the forty percent reduction was attributable to external obsolescence.

The forty percent depreciation figure was established by use of the market extraction method. The expert conducted a study of three recent greenhouse sales. After determining the replacement cost for each of the three greenhouses and adjusting for physical depreciation, he found that each subject sold for between 40 and 58 percent less than the adjusted replacement cost. This difference, according to the expert, represented a "market-wide" external obsolescence, and as such conservatively applied 40 percent depreciation to the Eurofresh greenhouse.

On appeal, the County did not disagree that external obsolescence may be identified through the market extraction method and appropriately applied to an adjusted replacement cost. They did argue that as a matter of law, Eurofresh was burdened with not only presenting probative evidence of external obsolescence, but also that the obsolescence had an actual effect on the value of the subject property.

In reviewing the Tax Court's decision, the Arizona Court of Appeals leaned heavily on decisions of several sister states that addressed the issue of external obsolescence. Consistently, the body of case law suggested that taxpayers were burdened with not only identifying external obsolescence, but also quantifying the obsolescence and showing a real nexus between the obsolescence and the loss in value of a subject property.

This body of case law was reviewed in conjunction with the appraisal of the Eurofresh expert. At no point in his report did he offer sufficient evidence as to the cause of the external obsolescence. In addition, he failed to demonstrate any nexus between the external obsolescence and its impact on value of the subject property.

Based on its findings, the Arizona Court of Appeals reversed the findings of the Tax Court and affirmed the County's original assessments for tax years 2004 and 2005.

Read The Case Here

TAXING ISSUES

December Appeal Deadlines

MD - 12/31 If out of cycle

OR - 12/31

KS - 12/20 Or prior to 1st installment - Payment Under Protest

NY - Buffalo, Oswego

MA* MD* ME* NH* WI* CANADA*

January Deadlines

NV - 1/13

NY -Amsterdam, Lakawana, Syracuse, White Plains

HI* MA* MD* ME* NM* NY* CANADA*

*Dates Vary - Check Jurisdiction

Addressing The Constitutionality Of Tax Incentives
In the case of Blinson V. North Carolina the North Carolina Court of Appeals upheld a superior court's decision dismissing the plaintiffs claim that certain economic tax incentives were unconstitutional. Much like the case of Cuno v. DaimlerChrysler the basis of the case was the constitutional basis of tax incentives. However, unlike Cuno, the court found that the plaintiffs had standing, but dismissed the case on its merits.

Read The Case Here

Contractual Allocation Of Purchase Price To Goodwill Rejected
In the case of St. Bernard Self-Storage, L.L.C. v. Hamilton Cty. Bd. of Revision The Ohio Supreme Court affirmed the decision by the Board of Tax Appeals, finding that a portion of the purchase price that was contractually allocated to goodwill constituted a part of the value of the real estate.

Read The Case Here

Michigan Business Tax Revisions - H.B. 5408
The passage of H.B. 5408 makes various revisions to the Michigan Business Tax (MBT). The changes include repealing the use tax on services, the addition of an annual surcharge to the MBT, changes to various credits and adds potential refunds.

Read The Bill And Analysis Here

Maine "Business Equipment Tax Reimbursement" Program
The Maine "Business Equipment Tax Reimbursement" forms are due by December 31st. If you have not started the process, which involves having the 801 Forms signed by the local tax assessor an extension to March 3rd 2008 can be obtained. Complete instructions and forms for this personal property tax reimbursement can be found here.

Florida Property Tax Reform
S.B. 4-D, signed by Governor Charlie Crist, would amend Florida's Property Tax system. Changes would include personal property exemptions and a limit on assessed value increases for nonhomestead property. The amendments are subject to Voter approval in January or, possibly, November 2008.

Read More Here

Indiana Clarifies Assessment Appeals Issues
The Department of Local Government Finance and the Indiana Board Of Tax Review have released a memo clarifying their positions regarding various issues dealing with real property assessment appeals. The issues include the use of appraisals and distressed sales.

Read The Memo Here

Preparing For The 2008 Personal Property Compliance Season
It's time to prepare for the 2008 personal property tax compliance season. The month of December s a good time for the following preparation work:

· Update your tax return calendars for new locations and closed locations.

· Open files for new locations.

· For closed locations send a letter to the tax assessors to inform them that a location is closed and to remove it from the tax rolls. This can save time during the filing season and eliminate receiving tax forms that you don't need.

· For new locations call the tax assessors to confirm the correct taxing jurisdiction and due dates for both the returns and property tax bills.

· Work with your fixed assets manager in removing ghost assets from the ledgers before December 31st.

· 2008 is the last year to file the Ohio personal property tax returns and the list percentage will decrease to 6.25% from 12.50% in 2007. This means your Ohio personal property tax bills will dramatically decrease from last year. You might want to review your 2008 personal property tax budget.

Please contact us to discuss additional preparation that can make the coming year more efficient and productive.

STATE AT A GLANCE - Pennsylvania

Dates, guidelines & procedures. What you need to know at a glance.