Bedford's Engineering Process
The process that we use to conduct a cost segregation study involves both the Art and the Science of engineering. There are three disciplines that, when combined, produce a repeatable outcome. The three disciplines are:
- Facility engineering - design, costing and construction
- Tax knowledge (understanding all the depreciation rules - from tax court cases and IRS directives)
- Corporate finance
We leverage our expertise in the three disciplines while using engineering judgment (the Art) to identify significant percentages of assets from 39-year depreciation schedules to 5, 7 & 15-year schedules.
The Art of our Engineering Process, however, is another matter. The "Art" of engineering is difficult to explain in words and is only developed after years of training and experience. Much like the CPA who has specialized in corporate tax matters for 30 years... our engineers have a "feel" for the macro or important issues. For example, a junior accountant working for a year at a small local accounting firm couldn't be expected to understand all the nuances of a large and complicated corporate tax matter. However, a senior tax manager at a regional firm with lots of resources and with 30+ years expertise could be expected to understand the big picture issues and all the subtleties.
In our field of cost segregation, we are the equivalent of the 30+ year experienced, technically competent CPA mentioned above. Further, our "Engineering Process" helps to ensure that our engineers identify and reallocate ALL eligible assets. This process ensures that we are providing our clients with the highest reallocation (tax savings) available in the industry.
It is noteworthy that a significant percentage of the value of a cost segregation study is often hidden behind the walls. Items such as special electrical, plumbing, HVAC, etc. are often behind the walls and qualify as accelerated property. Therefore, a skilled and experienced engineer is required to extract the maximum yield from a cost segregation study.
An analysis of the assets and costs to be reallocated in a cost segregation study should be conducted by a qualified engineer who has significant experience performing cost segregation studies. Why? Because a trained engineer is solely qualified to identify, qualify and value all the assets. It is our professional assessment that approximately 20% - 35% of the assets that qualify for acceleration will not be identified without a trained engineer conducting the study.
While there are many easily identifiable assets that are included in a cost segregation study, the five items listed below are but a small sample of the asset issues that require a trained engineer:
- The assessment of structural vs. non-structural assets:
- An assessment of structural and non-structural assets is made on the facility to determine if an asset qualifies for accelerated depreciation, i.e., non structural assets can be depreciated faster than structural. An engineer can make a justifiable classification of a feature with the conclusion that the item is not related to the operation and maintenance of the base building.
- An assessment on the level of excess in an electrical, mechanical or plumbing system can be made to determine what portion is required strictly for the operation and maintenance of the base building structure. Very often this excess capacity is designed into the system to be able to accommodate the special needs of the business.
- There are numerous assets in most facilities that can be accelerated solely because of their "use". Electrical services to manufacturing or process related equipment, special plumbing or ventilation equipment dedicated to support the operation of equipment should be assessed to determine their extent.
- There are assets such as parking, curbing, shrubs, walls, fences, lighting systems, drainage systems can be priced and accelerated. For example, storm water collection systems qualify as a land improvement and perhaps 95% is "invisible". As a result, if plans and drawings are not available, the engineer must reconstruct the entire system on paper and then price it.
- A percentage of the construction related soft costs can be reallocated to the shorter depreciable schedule. These soft costs will usually amount to 14% - 20% of the total projects cost and may be reallocated on a proportional basis to 5, 7 and 15 year property. These costs will often include General Conditions and Contractors Profit and Overhead. For example, a hotel with a $4,000,000 depreciable cost basis may have $600,000 in "soft" costs - (15%). If our engineer is able to accelerate 40% of the total project costs, then 40% of the soft costs ($600,000) can be accelerated. In this example, $240,000 of soft costs would be available for accelerated depreciation.
Summary - Engineering Process:
Because a cost segregation study is really an engineering and financial analysis activity, the IRS strongly suggests that a third party qualified engineering consulting firm perform the study. The IRS stated the following in a memorandum, "Most tax practitioners do not have the necessary expertise to conduct a cost segregation study which is acceptable to the IRS. The standards for such studies are high (see LTR 199921045). Thus, it is generally advisable to work with an outside consultant who specializes in this area."
Bedford engineers are technically competent in this specialized field to satisfy the "expert witness" requirements, should the IRS or their engineers ever challenge the study.
In summary, our "Engineering Process" ensures that we identify all the qualifying assets. As a result, our CPA clients have told us that we deliver the highest tax savings yield and most thorough, comprehensive & detailed report in the industry. In fact, that's our goal? setting the technical excellence standard for the industry. That's validated over and over again by the fact that our client CPA firms (who in aggregate employ thousands of CPA's) engage us to do their cost segregation work.