Cost Segregation: A Quiet Revolution
Reprinted from Currency, a publication of Grant Thornton LLP
Gil Mitchell, West Region Director of Cost Segregation Practice
Grant Thornton LLP
Chicago, IL
www.grantthornton.com
There’s a quiet cost savings revolution taking place in the banking industry. When accounting firms work with banks that are building, purchasing or renovating commercial facilities, associated costs can be identified and classified into shortened depreciable lives, thereby potentially realizing hundreds of thousands of dollars in savings.
These savings can be identified with a cost segregation study, which separates certain property used in a business or for the production of income, and achieved through accelerated annual depreciation deductions. Real property - buildings and their structural components, such as walls, ceilings, windows and central air conditioning or heating systems - is depreciable over 39 years. Personal property - items used as part of manufacturing, producing or delivering a bank’s or company’s services, such as copiers, computers, furniture and communications equipment - is depreciable over 15, seven or even five years.
Bank buildings often consist of numerous interior and exterior components that can be classified into five-year property, such as teller stations, bank vault doors, security systems, carpeting and special lighting. In fact, of the various industries that benefit from cost segregation, the banking industry yields one of the highest percentages of results (along with manufacturing, wineries and golf courses).
A cost segregation study can also help banks identify and realize savings for past purchases, expansions, renovations and leasehold improvements in cases where depreciation deductions were understated. Office renovations, remodeling, upgrades to parlcing lots and sidewalks, and even a portion of architectural fees can be reclassified. In order to claim the accelerated deductions, the bank usually files a change in accounting method with the Internal Revenue Service under the automatic consent procedures.The bank can then claim all of the missed depreciation in one year without having to amend tax returns.
By conducting a comprehensive analysis of a bank’s capital expenditures and reclassifying assets into their shortest permissible depreciation categories, taxpayers can identify substantial, longterm tax savings. For example, each $1 million in assets reclassified from a 39-year to a five-year depreciable life typically results in more than $200,000 in net present value savings.
Unique approach
Given the large footprint of many banking chains, accounting firms may streamline their cost segregation srudies by using statistical analysis, i.e., they may look at a handful of branches and extrapolate the results. A coefficient of error is then applied to the percentages.
Grant Thornton has assisted a number of financial services companies with cost segregation studies. One banking company that took advantage of this particular strategy had acquired about 300 branches in a previous year that had not been checked for capital cost reclassification. Instead of analyzing each branch, which would have required an enormous amount of man hours, cost segregation professionals examined an appropriate sample and applied the findings to all 300 branches.
There has been a great deal of expansion in the banking industry in recent years, so a slowdown may be inevitable. A cost segregation srudy is a good way for banks to find hidden savings and increase cash flow, helping to offset a potential slowdown. Banks can accelerate depreciation, pay less tax and keep retained earnings. The costs are typically pennies on the dollar - 10 percent or less of the resulting savings.
Conclusion
With the slowdown of the real estate market and financial difficulties looming for some lending intuitions, it would be wise to prepare. A cost segregation study can bring in additional cash through tax savings without affecting financial statements. This will better position you for financial success in the future. A wise banker will join this quiet cost savings revolution and call his cost segregation professional today.
This document supports Grant Thornton LLP’s marketing of professional services, and is not written tax advice directed at the particular facts and circumstances of any person. If you are interested in the subject of this document, we encourage you to contact us or an independent tax advisor to discuss the potential application to your particular situation. Nothing herein shall be construed as imposing a limitation on any person from disclosing the tax treatment or tax structure of any matter addressed herein. To the extent this document may be considered to contain written tax advice, and written advice contained in, forwarded with, or attached to this document is not intended by Grant Thornton to be used. and cannot be used, by any person for the purpose of avoiding penalties that may be imposed under the Internal Revenue Code. Grant Thornton LLP.
Reprinted from Currency, a newsletter for bank executives, Vol. 9, No. 4.
