Basic Facts of Cost Segregation

Cost Segregation Study Tax Reporting

Cost Segregation

Cost segregation is a process which involves separating personal property assets from real property assets for the purpose of shortening the time of depreciation and reducing tax liability. In a cost segregation study, assets are classed together according to their depreciation period. Cost segregation has the potential to save building owners large sums of money because it enables certain costs to be depreciated over a much shorter period of time (5, 7 or 15 years) than they normally would be (27.5 or 39 years).

Personal Property Assets

Certain elements of a building may be categorized as the “personal property” of the owner as opposed to real property for tax purposes. For instance, non-structural elements – such as wall covering, carpet, lighting, certain parts of the electrical system and others – may be categorized as personal property in most instances. Certain types of land improvements – such as landscaping and sidewalk improvements – may also be categorized in this manner. When categorized in this fashion, these elements will have relatively shorter “useful lives” than they otherwise would have, and consequently owners may have a reduced tax burden and may take advantage of depreciation deductions.

Typically, cost segregation studies are financially prudent for buildings which have been bought or remodeled for over $200,000. Cost segregation studies can be performed on any building which has been bought, constructed, expanded or remodeled since 1987. Hence, studies can be performed “retroactively” on buildings which are not newly completed.

Cost segregation can be a tremendous positive force for business owners as it can give them access to cash much more quickly than would otherwise be possible. In the world of business, timing is of immense importance, and so taking earlier deductions can literally alter the whole direction of a company’s long-term future.

Cost Segregation Studies

The IRS scrutinizes cost segregation studies very thoroughly. This is because such studies can – and frequently do – translate into many thousands of dollars in tax savings. When hiring someone to perform a cost segregation study, it is important that your hire be well-informed not only on the relevant architectural and engineering specifications but also on the applicable law. Simply hiring a construction engineer or architect with no prior experience with cost segregation analysis is unadvisable. There are heavy penalties imposed by the IRS when cost segregation is used improperly and so it imperative to hire a qualified specialist to perform the analysis.

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As we’ve seen, cost segregation has the potential to save business owners lots of money. To learn more about cost segregation, curious readers should view the following presentation by Huddleston Tax CPAs principal and founder, John Huddleston

The Tax Benefits of the Legal Profession

Law Profession Tax Tips

Tax Tips for Lawyers

Few occupations receive as much attention as the legal profession. Lawyers hold a high position on the occupational totem pole and are regularly portrayed as characters in a variety of media – films, television shows, books and others. Historically, the legal profession has possessed a considerable amount of prestige and many of our most talented citizens aspire to work in law in one capacity or another. Along with prestige, the legal profession has also been regarded as one of the surest routes to financial success. As it turns out, there are a variety of tax benefits lawyers may utilize to strengthen their financial condition. In this article we will discuss several of these benefits.

In order to develop their practice, lawyers regularly conduct formal business discussions with prospective clients and other professionals. Occasionally, these discussions occur just before or after some form of entertainment (such as a show, sporting event, etc.). Fortunately for lawyers, these entertainment expenses are deductible. However, under section 274 of the Internal Revenue Code, lawyers must comply with multiple requirements in order to deduct these expenses: they must be able to thoroughly substantiate the expenses (i.e. who was entertained, when did the entertainment occur, etc.), and they must also prove that there was a clear association between the entertainment and the business discussion.

Travel expenses incurred by lawyers are also deductible. As with entertainment expenses, travel expenses must be fully substantiated. The IRS is quite strict about these types of deductions and so it is imperative that lawyers keep excellent records of every individual expense.

Lawyers have to conduct a lot of research throughout the course of their practice and as a consequence they spend considerable sums on books, periodical and research software. The cost for books and subscription services which have a useful life greater than one year may be depreciated over a five year period; software is not considered depreciable and must be amortized over a three year straight line period. If a lawyer purchases books, periodicals or software on an annual subscription basis – thus making these materials accessible for one year at a time – then these expenses would be deductible in the normal fashion.

Another tax issue which lawyers must be aware of relates to client based expenses. It is not uncommon for lawyers to advance money to clients or to incur expenses on direct behalf of clients. If money is advanced to the client, this is treated as a loan for tax purposes and so it cannot be deducted. However, there is an important exception to this rule: if a lawyer incurs expenses on behalf of a client as part of normal operating procedure and then fails to receive reimbursement then these expenses become deductible. An example of this would be expenses such as postage and photocopies. These expenses are supposed to be charged to clients, but if a lawyer is somehow unable to collect payment for them then they may be written-off as “bad debts.”

These are just a few of the tax perks available to lawyers. In addition to these benefits, lawyers also need contemplate other tax related issues such as entity selection (or business structure), client trust funds, client-related expenses, accounting methods and others as well.

To learn more, view the presentation given by our CPA Lance Hulbert.

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For more information please view the following video presentation

How to Determine Which Filing Status is More Beneficial

Unfortunately, most people cannot choose their tax status when it comes to filing taxes. Your status is determined by your current set of life circumstances and your income. If you are unmarried without children, you must file as single. If you are a single parent, you can claim yourself as head of household. Only married couples have a choice as they are able to either file jointly or separate.TaxesFilingStatus

Single

Being single typically carries the most tax liability as you cannot claim the same credits or deductions that many of your tax counterparts claim. As your income increases, portions of it will be taxable under a progressive tax system, increasing the amount you owe as you progress in your career.

Head of Household

A single parent has the benefit of claiming dependents on his or her tax form, as well as certain deductions and credits which can significantly reduce their tax burden. However, a head of household is subject to the same progressive tax system as someone who is classified as single.

Married

Those who are married can file their taxes either jointly or separately, but this choice is largely dependent on which status will benefit them the most. There are some situations in which it is actually more beneficial for each married partner to file separately.

Widower

If you lost your spouse within the past two years, you can still file jointly for this year’s taxes and take advantage of the benefits which married couples may receive.

Discovering how to reduce your tax liability is the best way you benefit from your filing status.

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Five Tax Benefits for Sole Proprietors

Sole proprietors are in a good position when it comes to tax because they have a range of benefits exclusive to them. If you are a sole proprietor and you aren’t yet claiming these five tax benefits, you are missing out on a lot of money.HomeOfficePic

  1.      Health Insurance Deductions

The big benefit you have is you can deduct contributions to your health insurance package for you, your spouse, and any dependents. No other type of business enables you to do this. This deduction can make a substantial impact on your finances.

  1.      Business Expenses

Any business expenses, such as the cost of gas and business lunches, can be deducted from your tax return. Make sure you keep any receipts and other documentation in case you are selected for an audit at a later date, though.

  1.      Home Office Deduction

It’s still possible to claim a home office deduction from working out of your home. Many sole proprietors can use the tax deduction to cover their household bills.

Do beware of how much you claim on this deduction. The IRS is really clamping down hard on frivolous deductions on home offices.

  1.      Self-Employment Taxes

Sole proprietors have to pay these taxes for themselves. You are not having money withheld from your paycheck so you have to pay via estimated taxes throughout the year so Uncle Sam can take his cut.

  1.      Personal and Business

To the annoyance of the IRS, the biggest tax benefit is that you can blur the lines between personal and business expenses. Just make sure you keep accurate documentation, as sole proprietors are prone to heavy IRS scrutiny.

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Who Gains from the Electric Car Tax Benefit?

Electric car tax benefits may seem like a green initiative to improve the world. Strange though this may sound, such an impression is actually far from accurate. When we look into the details of these benefits, we can see that the people who benefit the most are high earners.ElectricCarTax

Let’s take a look at why this is the case.

The Numbers

60% of the $18 billion delivered in clean energy tax benefits went to the people earning six figures a year between the years of 2006 and 2012. Only 10% of these tax credits went to families earning under $75,000 per year.

While this includes a variety of green tax breaks, the biggest proportion were those involving electric cars.

Why Did this Happen?

There are many reasons why this may happen. The reality is electric cars are expensive and only wealthier households can afford to buy them new. The used car market isn’t yet prominent enough to allow low income households to fully participate.

Hence, by its very nature, the electric car tax break is geared toward higher income households.

Does this Represent a Fundamental Flaw?

On the face of it, this is just another tax cut for the rich. Nevertheless, expect it to get better. Electric cars continue to decline in price. As the technology improves, there is a high chance that this will all change in the coming years. People can expect to see tax credits extended to a greater number of people as this sector becomes more affordable for the poor and middle classes.

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Huddleston Tax CPAs of Seattle & Bellevue
Certified Public Accountants Focused on Small Business

(800) 376-1785
40 Lake Bellevue Suite 100, Bellevue, WA 98005

Huddleston Tax CPAs & accountants provide tax preparation, tax planning, business coaching, Quickbooks consulting, bookkeeping, payroll and business valuation services for small business. We serve Seattle, Bellevue, Redmond, Tacoma, Everett, Kent, Kirkland, Bothell, Lynnwood, Mill Creek, Shoreline, Kenmore, Lake Forest Park, Mountlake Terrace, Renton, Tukwila, Federal Way, Burien, Seatac, Mercer Island, West Seattle, Auburn, Snohomish and Mukilteo. We have a few meeting locations. Call to meet John Huddleston, J.D., LL.M., CPA, Tawni Berg, CPA, Jennifer Zhou, CPA, Jessica Chisholm, CPA or Chuck McClure, CPA. Member WSCPA.