MCFA 23 | Tax Savings

 

Cost is one of the most important key factors of success in any type of business, and it goes hand in hand with savings. Doing a cost segregation study to make sure you maximize your tax savings is always a good practice, which in turn can assist in achieving your financial goals. Michelle Mackerdichian, the Operations Manager of KBKG, a specialty tax firm, joins Athena Paquette Cormier to explain what cost segregation is, and why you should take advantage of this tool. Covering a wide variety of classes in real estate, she discusses how her company can help you with your tax savings while providing real life experiences of their clients as examples.

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Save $10,000 More In Taxes Than The Average Investor With Michelle Mackerdichian

I’m here with Michelle Mackerdichian. She is the Operations Manager and Business Development Manager for a specialty tax firm called KBKG. She’s here to talk to us investors about what is cost segregation and how we can put more money in our pocket through this tool that we have available to us. Welcome, Michelle. I’m glad you were able to join me finally.

Thank you so much for having me. I’ll give you a little background on KBKG. I’ve been at KBKG for the past few years. We’re headquartered in Pasadena, California and we have offices in Illinois, New York, Georgia and Texas. Since 1999, we’ve successfully conducted thousands of studies nationwide and our team has performed on facilities ranging from 10,000 square feet, 10 million square feet, resulting in the deferral of hundreds of millions of dollars in tax savings. We also have highly qualified engineers and tax professionals on staff. I’ll give you a brief overview of what it is to have your CPA hire from us.

Could you tell us a little bit about your background? How does someone come to be in this business? I’m sure you didn’t wear your tutu at five years old and say, “One day, I’m going to be a cost seg expert.” What’s your educational background and how did you come to discover this area?

I was a Broadcast Journalism major. I went to Cal State Northridge. I graduated a little bit ago. I did TV for five years. I’m rusty right now, I haven’t done it in years. That’s my background. I was a Broadcast Journalism student with an emphasis in Finance and Philosophy. I worked at a bunch of different companies and did office managerial work and whatnot. I was editing for a company out in Abu Dhabi. I’ve done that a little bit as well. One of my friends works at KBKG and she told me that they were hiring. I was one of the first few people in the business development team and we have over twenty people in business development here at KBKG. I’ve been here for quite a while and I’ve had to learn everything from scratch and you can too. That’s a little background on me. I had to learn everything.

How long did KBKG existed?

Since 1999.

It’s not a new company.

We have a bunch of specialty tax service lines. We range in deductions to credits. We have cost segregation studies, research and development tax credits, energy tax incentives, repair versus capitalization and IC-DISC export incentives. If you’re doing import-export outside of America, you can take advantage of IC-DISC. Cost seg and R&D tax credits are our bread and butter here. I’ll give you a little basic analogy. When you go to your general doctor and your doctor says, “You have a heart condition,” you’d go see a cardiologist. KBKG is a specialty tax consulting firm. What we do is we’re the cardiologists for the CPA. Your CPA will say, “It looks like you have a portfolio of real estate. You need a cost segregation study because you’re planning on holding onto the property for more than ten years,” for example. We will send an information request form to you or your CPA and they will fill out the basic information with the property address, square footage, when you purchased the building, if you’ve done improvements on it and whatnot and your federal tax depreciation schedule if the property was acquired in prior years. We will get that information and we’ll prepare a benefit estimate for you so you could see how much you can accelerate in depreciation in the first five years.

I know everyone hears cost segregation here and there, but they don’t know the meaning of it. Cost segregation is a process of segregating and identifying personal property assets that are grouped with real property assets. We’re taking the lighting, the cabinetry, the fixtures and whatnot, and we’re putting it on a five-year property. Depending on the type of property you have, it could be a straight line of 39 years if it’s a commercial property and If it’s a hotel or a residential rental property, you depreciate in 27.5 years. We’ll take a bunch of items that are personal property and we’ll accelerate it into five years. It’s hard to understand. I wish I could do a screen share and show you what we do. That’s what we do.

You can go as far back as 1987. The amount of depreciation you could take on an asset is limited to the asset’s basis. Cost segregation accelerates depreciation of an asset but it doesn’t increase or decrease the amount that is to be depreciated over time. Although you can go back to 1987, a good identifier of a cost seg benefit is the remaining basis left on the property and how many years left to depreciate the property. You’re accelerating depreciation.

The bottom line is instead of stretching this commercial property that you can depreciate, instead of doing that in 27 years, that might be accelerated into five years. That’s five times more.

That’s what we’re doing. I know a lot of people have residential rental properties and whatnot. We’ve created a software called the Residential Cost Segregator, and that is for properties with a building base of less than $500,000. If your basis is less than $500,000, it’s about $399 for a report. Instead of paying upwards of $5,000 to $25,000 for a study to be performed on your properties, because it’s an engineer-based study, you could base the two for $400 if it’s less than $500,000 in price.

If I heard you right, you can do a cost seg right away when you buy the building or any point in time. Are you saying, when you buy it is the best time? What’s the best time to do one of those?

You could do it anytime. We have investors that before they purchase a property, they’ll ask us to do a cost segregation study. They’re like, “It’s worth it for our investors to see the actual savings.” Before they buy it, what is $5,000, $10,000 when you’re trying to acquire a property that’s $50 million for example? We have clients that do it before they acquire property as well.

It sounded to me not everything can be cost segregated because you said it’s personal property versus real property.

It’s personal property and land improvements as well. A lot of CPAs will put the actual one-line item and their depreciation schedule at 39 years. Whereas when we take a look at the property, land improvements can be accelerated to fifteen years. They should be in the fifteen-year property line item. We see a lot of that as well.

What would be an example of a land improvement?

Asphalt for example.

If you’re going to redo the driveway, that can be depreciated faster. What’s an example of the five-year depreciation? What types of things would fall in that category?

Five-year property is kitchen cabinets, track lighting, specialty plumbing, some appliances too, paneling, decorative lights.

Cost segregation studies can show your investors their actual savings before they even buy. Click To Tweet

What kind of property can you do a cost seg on? Most of my people are real estate investors, but that could cover many things. What types of buildings would be eligible for costing?

We could do apartment buildings, retail stores, restaurants, office buildings, manufacturing facilities, research and development, wineries. We have a bunch of wineries up and down the coast and grocery stores, hotels, warehouses. Other projects include shopping malls, airports, sports facilities, we’ve done a few of those big ones, golf courses. We have a casino client as well. There’s auto dealership, health care facilities, medical centers, industrial buildings, distribution centers, auto service centers and much more.

If people even have a duplex, they could do it on a duplex.

If the basis is less than $500,000, they should go to our Residential Cost Segregator.

I’m a client of KBKG. They did a study for me in 2013. I remember in 2013 they said, “You should only do this on a property that’s more than $1million.” You’re saying that’s not correct.

Minus the land, it could be $1 million. That’s how much you paid for the property. If the building basis is less than $750,000, it wouldn’t make sense for you to do a cost segregation study on that. If the cost and benefit ratio isn’t high enough. That’s for clients that have the building basis of less than $500,000. That is why we went ahead and created our own software so our clients with big portfolios of residential rental properties can get a benefit from it.

Here in Southern California, the property value for a duplex could be $600,000 to $1 million. If your property is less than $500,000, you’re saying you can do a cost seg?

Yes. If your building basis is less than $500,000, you could do the Residential Cost Segregator, which is the software on our website. If it’s more than that, then we’ll have to take a look and we’ll do an in-depth high determination of the actual benefits. We’ll put together a proposal for you and you can see the cost and benefit ratio and all the upfront depreciation.

If someone calls you up and said, “I’ve got this portfolio of property. Can you look at my cost basis?” and determine whether some properties might be worth doing and some might not.

It depends on what they have inside the property like if they have a lot of plumbing or electricity, for example, warehouses. It’s a good idea to do a cost seg study on a warehouse but it’s just a box. You’re not getting as much benefit in five years that’s in your property.

Who’s the most ideal client who can use these cost seg things?

Real estate, manufacturing, restaurants, those are all great for cost segregation. If you purchase the property and you’ve done massive improvements on it, we can do cost segregation on the acquisition piece, on the improvements piece and possible retirements. You can get a lot of benefits in that and do tax reform as well. A 100% bonus depreciation is applicable for assets acquired after September 27, 2017 through 2022. The rate fee is down by 20% each year after that. Bonuses are also available for used property. Bonus is you get to double the amount. You get to write off 100% of anything that’s 20% or less.

What would be an example of that?

Before September 27, 2017, if you acquired a property you don’t get bonus depreciation on it. As of September 27 throughout the year 2022, anything with twenty-year life or less on a cost segregation study, will get 100% bonus depreciation. People are able to write-off millions of dollars. This is the best time to do it, especially if you’ve acquired a property after September 27. If you’ve acquired a property around that time, you have to have a written binding contract after September 27. We have articles on this that I could send you, so you can read in more detail. It’s a little complicated but you get more bang for your buck now than you would have last year, if you acquired property this year and going forward.

You’re saying that the properties you’ve already owned don’t fall into this bonus depreciation?

Yes, they don’t.

For new purchases, run to the KBKG. How does that affect when you exchange a property? Let’s say I do this and few years from now, I decide to exchange the property. How would I do that?

We’re assuming that you’re exchanging your property to a bigger property. In this situation, there would be catch-up depreciation

Unless you get a cost seg on your new property and you match your personal property the amount that matched the new property, then you might not have any catch-up.

There could be a recapture issue here.

MCFA 23 | Tax Savings

Tax Savings: If the cost to benefit ratio isn’t high enough, it doesn’t make sense to do a cost segregation study.

 

It’s generally not a good idea to do a cost seg in such a short amount of time afterward.

That’s good to know. It could be a complication that’s hard to get around.

For cost segregation studies, you want to be holding onto the property for a while.

Is there a minimum?

If you’re holding on to the property for seven years, it’s a good idea.

Can you begin a new building? When you buy a building, can you do a new cost seg on that one?

Absolutely. It gets a little complicated. We have clients give us the 1031 basis calculations and we’ll help them out with that as well. That is something that we do before. Let’s say a client says, “I bought this property but I want to exchange it into another property. Does it make sense to pass cost segregation? Should I hold on to that property?” We’re going to do high-level analysis of that as well.

You probably coordinate with the exchange companies.

No, we do the calculation in-house. When we talked about tax reform, I want to talk about 179 expensing. New items can be expensed under Section 179 and you’ll find them noted on our cost segregation studies for example roofs, the HVAC systems, fire protection alarm systems and security systems. It’s only for commercial properties and only for improvements made after the building was first placed in service. That’s something to notate. We do have articles on that as well that I could send over to anyone that’s interested.

You can’t write off improvements that the previous owner did to the property. Is that what you’re saying?

We cannot do that.

Are there companies that you know that has paid their business? Is there anything that comes to mind?

We had clients that were in net operating losses. After 2017, the NOLs generated may be limited to 80% of taxable income. Depending on the tax pair, they can no longer be carried back. However, NOLs created in 2017 that carry forward can offset 100% of taxable income in future years. It may need to track pre and post 2018 NOL separately. I’ll give an example here. If the taxpayer does not need deductions in 2017 but paid $100,000 in taxes the prior year, if they do a cost segregation study for the 2017 tax year, they will create $500,000 NOL they can carry back and get $100,000 refund. The remaining $400,000 of net operating losses carries forward and offsets 100% of taxable income in future years. This opportunity is not available in 2018. It’s a good thing to notate.

A lot of people use cost segregation and estate planning. This is another article that we’ve been talking to a lot of our clients about that’s been important. When a building owner dies, it’s unfortunate but it does happen. When a building owner dies and the property is inherited, any gains built up during the descendants’ life are forgiven. The beneficiary receives a step up, which means the property’s tax basis is reset to fair market value on the date of death and the depreciation starts all over again. This provides an opportunity to apply a cost seg study on the decedent’s pre-stepped-up basis creating a permanent tax deduction. That’s something that a lot of people have been doing. We wrote an article on that too, which I can send over. This is the primary topic when we visit CPA offices and they always ask us about that.

Are you saying that if someone inherited property, they probably should check with you if they should do some cost seg?

Absolutely.

It’s almost like they bought the property.

Yes.

That is interesting and not many people know that.

It’s a great article. We’re published in Accounting Today as well.

If you're choosing a one-man shop for cost segregation because it's cheaper, it might come out more expensive when you get audited. Click To Tweet

A lot of times, we talk about the home runs. Can you think of an example where you have someone in the home run and the client to do the cost seg?

We’ve had a couple of issues where CPAs have done their own cost seg study for a client and they get an audit. What ends up happening is they’ll give us a call and say, “My CPA was audited. We need help. Please take a look at this and see if you can help us.” We’ll take a look at the depreciation schedule and we’ll try to see what happened, what they accelerated and what they did with. Were they too aggressive?

What we do is when we go out to a property, we have engineers that go out and they take a look at the property and look at all the components. They’ll look at the electrical and whatnot. A lot of CPAs don’t have that background. They’ll take a look at property and say, “This looks like it’s five years old. This looks like it’s fifteen years. This looks like it’s seven years.” They’ll give their client all these write-offs and their client gets audited and then they’re like, “I thought those would qualify for five-year, fifteen-year.” It’s dangerous as well.

When someone comes to a company like KBKG, if their CPA comes to us, and we always connect with CPAs or controllers or CFOs and whatnot. When they come to us, they usually show us their depreciation schedule or they’ll give us their old cost segregation study. They’ll say, “I got audited once. I’m scared. I want to be as non-aggressive as possible. I want to correct this.” We’ll go in there and will correct the study. That’s something that we do for a few clients that have had that experience of an audit. We are certified with the ASCSP, which is the American Society of Cost Segregation Professionals. Having that expertise goes a long way. When we do have the IRS, take a look at the client’s property, they see our stamp and they’re like, “ASCSP.” They know that we’re following the code. Most of our engineers at the top are on the board of the ASCSP. It’s something to notate as well.

I thought it was required to have an engineer do this report. It sounded like you were saying to make it up.

It’s recommended to do it by an engineer.

It’s not required.

Yes, it’s not. Some things to consider when you’re choosing a cost segregation provider is you should find someone that’s certified cost seg professional that has the CCSP designation to evaluate the resume and bio of the people signing the report because some people don’t have the credentials on our website and it’s a little dangerous. Our partners here all have Big 4 expertise. They do come from Big 4 backgrounds. They’ve done projects on Fortune 500 companies and they have worked on big portfolios and whatnot. We have that background when it comes to choosing a cost seg provider. You should consider how long the firm has been doing cost seg and how many they have performed. How long they’ve been in business? Because if you’re choosing a one-man shop for cost segregation because it’s 50% cheaper for example, it might be 50% more expensive when you get audited and if they’re no longer around.

You have to consider the experience of tangible property regulations as well to see if they’ve done work in that and consider who you want defending you if the study goes into an IRS audit. You should always ask for references from clients that have gone through an audit. That’s something that you should keep in mind. Low cost or small providers don’t have the same resources as the ones that are bigger. If you have a study that you want to perform in Texas, we have an office in Texas. It’s easy for us to get to Texas. We have an office in Manhattan, so if it’s somewhere in the city, we can easily take care of that.

What types of experts are on your team? I’m hearing this as an accounting thing, but it’s an engineering thing. Who exactly is on the team at KBKG?

We have engineers, attorneys, people with business degrees and they’re Master’s in Engineering. That’s our background here. We have people with a CPA background. If you have a tax question and your CPA might call and say, “We have this tax situation. Can you help me out?” “Of course, we can.” We can have someone on our team who can assist you.

What is in a cost seg report? I saw it and it reminded me of an appraisal. It reminded me of a phase one report. It looks a little bit like that. What exactly do they do and what does it look like? What is content of this report that makes it strong if you do get audited?

I can also send you an example of that. We have every single component of the building. We take a look at the in-depth components of every single asset. We break everything down to as much detail as possible. We take photos of electrical panels and we look at the plumbing. We go in-depth so we can get as much of a benefit for our clients as possible. That’s what we do. We provide a benefit estimate. Our benefit estimate is extremely conservative. We like happy clients. We try to go above and beyond when it comes to our studies.

If I remember, you’re counting the light switches and the linear feet of how much baseboard and the air conditioners. I couldn’t believe all the audits. You did a report for me on a fourteen-unit apartment building in Long Beach. I was like, “I would never think that all this stuff is in that building.” You have to break it down that way to justify this schedule of what’s depreciated, how fast and all that.

You see how complicated our report is. A CPA doesn’t have the time, the willpower, the engineering expertise. She’s not going to waste this time going into a building and trying to figure out little electrical and all the little quirks that come with the building. That’s why they hire us and we work hand-in-hand with them.

That’s what you asked for the schedules. That’s important.

We put together a downloadable version. Your CPA can download it into their software and it’s in there. You don’t have to manually sit there and put everything in.

Do you have the report of their service?

We always send the final report to our clients and ask them the best time to review the final report with them. We go over line-by-line if you have any questions. Usually, a CPA will see our reports and say, “Everything is simple. I plug it in and I’m done with it.” The only problem we might have an issue is the building basis and that’s when the CPA and the client have to come to us and let us know what the basis numbers would be for that property.

It seems this cost segregation can break them in and could turn them into a business.

MCFA 23 | Tax Savings

Tax Savings: When a building owner dies and a property’s inherited, any gains built up during the descendant’s life are forgiven.

 

You save money on your taxes and you buy another building. That’s exactly what happens here. It’s great tax savings. You’re constantly saving and you’re putting money into another building.

Do you have any parting thoughts?

You’ll have my email address up if you have a property that you’re considering doing a cost seg study. It would make sense if you have an offering memorandum for a building and go ahead and shoot me an email with the building base, the purchase price, acquisition date and whatnot. My team could put together a proposal for you. It’s complimentary. We’ll put something together and you could see if it makes sense, if you’re considering buying a building or if you’re considering doing improvements on a building and whatever it may be. If you’re like, “Does this even make sense to even do cost seg with this residential rental?” I could help you out.

How would someone get ahold of you? What’s your phone number, email or website? It sounds like you have a lot of great content and white papers and stuff on your website.

You can subscribe on our website. If you go to KBKG.com, you can click subscribe and you can go ahead and subscribe to our thought leadership. We always put out thought leadership in tax in sites and whatnot. Whenever something comes out, we’re usually the first to publish. My email address is MichelleM@KBKG.com.

Hopefully, we demystify a little bit what cost seg is. It’s great for me. I’ll give you an example. On my tax return, I have buildings that cashflow and the depreciation is almost done. That’s great that they cashflow, but then I would owe tax. I bought this other building, did the cost seg with you guys on it and it offsets the income on the other. It’s a wash, there’s no tax due. With some people, they probably need more but I was happy that it worked out that way.

It’s great and plus, if you’ve acquired a property after September 27, you can get a 100% bonus and get the write-offs. Who wouldn’t want to do that?

Thanks for sharing your thoughts. Thanks to the expert guy in the background for helping us.

I pulled him in. You’ll never know what people might ask.

He’s like the Wizard of Oz. We were glad he was there behind the curtain. Thank him for us. Hopefully, we’ll talk soon and see you live soon. Do you have any upcoming events like live events that you would be speaking at?

We have webinars. If you go to KBKG.com/webinars, you could see we have an intro to cost segregation with impacts of tax reform. I briefly touched on it, but if you want an in-depth understanding of how tax reform is impacting cost segregation, you could watch that. We’ve got a bunch of new ones coming up. This summer is a great time to catch up on your webinars and if you have to get the CP credits, we do provide educational as well. You can see all of our articles and all the backgrounds of all of our leaders here.

I’m going to check that out.

Our next webinar is on our cost segregation software tools. Towards the end of June is when all of our webinars will be starting.

Thanks for joining me, Michelle. I’m happy you finally got your computer connected. We got connected. That’s awesome. We’ll have Frank Ralph on Investors Corner. He’s the fifth-largest owner of mobile home parks in the US. He has 300 parks. He has 32,000 lots, 4,000 park-owned homes and his valuation is somewhere around $1 billion at this point. He’s going to share his story from the beginning and how he got interested. He was in billboards before that. He’s had a lot of experience with real estate, but how did he end up in mobile home parks? He’s going to explain why you should consider investing in mobile home parks. Maybe you’ll also need the cost seg people.

We’ve done cost seg on mobile home parks as well, many of them, a lot of RV parks and mobile home parks.

You should join me. Everyone should join us for Frank Ralph, the Owner of the Mobile Home Park University. He’s going to share all his thoughts on why his asset type is the one you should invest in. Thanks again, Michelle, for joining me and enlightening us on cost seg.

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About Michelle Mackerdichian

MCFA 23 | Tax SavingsMichelle Mackerdichian is a Director for ICS Tax residing in Columbus, Ohio. Originally a Los Angeles native, Michelle has been in the tax consulting industry since 2013. Michelle is proficient in numerous tax planning strategies, including cost segregation studies, fixed asset reviews, the R&D tax credit, and the 179D/45L energy efficiency tax incentives. She has helped identify tax strategies that have reduced her clients tax liabilities by millions.

Michelle has a bachelor’s degree in Journalism from California State University, Northridge. While attending CSUN, she was the executive producer of KCSN News, won two Golden Mic awards, and hosted red carpet events. In April 2018, she was published in the Angeleno magazine in the Society & Culture section in “On The Scene”. She is a member of the Armenian Professional Society and volunteers for the Armenian National Committee of America (ANCA Western Region). In her free time, she loves to travel, ski, cook, and try new restaurants.

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