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Three Things Building Owners Need To Know To Reduce Their Taxes - AZ Business Magazine June 2010

Three Things Building Owners Need To Know To Reduce Their Taxes

In today’s economy everybody is looking for ways to improve their cash flow, especially as it relates to real estate. Implementing tax-saving strategies is certainly a way to help cash flow in the current year, and in some cases these strategies will provide benefits for years to come. While there are numerous strategies for lowering taxes, three of the more popular current items for building owners are outlined below.

Repair and maintenance deductions
The difference between deductible expenses and capital expenditures can mean significant tax savings for property owners who perform regular maintenance and repairs. The key is when certain costs can be considered expenses that are deductible from current income.
Generally, taxpayers must capitalize expenditures that:

  • Substantially prolong the life of the property.
  • Materially increase the value of the property.
  • Adapt property to a new use.
  • “Put” the property into a useful condition.
  • By contrast, taxpayers may be able to deduct expenditures for:
  • Routine maintenance.
  • Incidental repairs.
  • Equipment and materials that “keep” the property in an ordinary, efficient operating condition.

In most cases, taxpayers will reduce taxes by classifying an expenditure as a repair and taking the current deduction, rather than recovering the cost through depreciation. The IRS has recently adopted more liberal standards for expensing large-ticket items previously considered capital investments.
The difference between repair and maintenance, and capital improvement can be subtle. For example, the wooden shingles on a building are damaged. Replacing the roof with new wooden or asphalt shingles would be considered maintenance and repairs, and it would not have to be capitalized. However, upgrading to a maintenance-free roof system with an expected lifespan of 50 years would have to be capitalized as a long-term improvement to the building.

Many building owners have improperly classified maintenance and repair costs as capital expenditures, creating opportunities to go back and reclassify certain expenditures and recover previously paid taxes.

To claim the deduction, the building owner must submit Form 3115 to request an automatic change in accounting method. The accounting change allows the taxpayer to claim a current-year deduction for expenditures that should have been a deduction in a prior year.

Cost Segregation
Under IRS guidelines, most buildings constructed, purchased or renovated since 1986 are eligible for a cost segregation study. The goal of the study is to make sure business owners are using the appropriate depreciable life for their assets. A cost-segregation study allows a building owner to change the useful life of certain assets and take advantage of any tax savings that may result.

The standard depreciation period for most commercial buildings is 39 years. When buildings are constructed (or renovated) many companies incorrectly use the 39-year depreciation life, even though parts of a building should be depreciated over a much shorter period. Special use items, such as floor coverings, fixtures, and specialty electrical and HVAC equipment, often can be depreciated over a shorter term. It is best to complete a cost-segregation study in the year a building is acquired, although the IRS does allow adjustments to prior depreciation deductions. If the proper amount was not claimed in prior years, depreciation not previously claimed is now allowed as a deduction in the current year by filing Form 3115.

Section 179D Energy Efficiency Deduction
This popular deduction allows the owner of a commercial building to qualify for deductions of up to $1.80 per square foot for buildings that are constructed or renovated to reduce total annual energy use.

The primary beneficiaries are owners or lessees of commercial property and certain residential buildings. Government buildings, such as schools and universities, courthouses, jails, and office buildings, also may qualify. However, since government entities do not pay tax, the deduction can be transferred by written delegation to a tax-paying entity, such as an architect or engineer.

Qualified property owners are able to claim the $1.80-per-foot deduction for buildings constructed or renovated to save 50 percent or more of total annual energy costs as determined by national engineering standards.

Energy savings must be achieved by constructing or retrofitting any of the envelope, interior lighting, or heating, cooling and hot water systems. A building not meeting the 50 percent savings requirement may still qualify for a portion of the deduction. Before the 179D deduction can be claimed, the property owner must obtain independent certification of energy savings from a professional engineer or third-party contractor using software qualified by the Department of Energy.

Arizona Business Magazine June 2010

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Wealth Managers Can Diagnose And Treat Battered Financial Confidence

If the past several quarters have taught us anything about wealth management, it’s the importance of routine maintenance, diagnosis and treatment of our portfolios — even if they are ailing. Much like the consistent faith we place in our doctors for our health, so too must we place trust in our wealth management advisory teams.

Oftentimes, it is the most difficult periods that strain our trust and twist our thoughts. When managing your wealth, don’t let fear or uncertainty guide you. Wealth management is not a product, or even a series of products, but a long-term strategic approach to assisting clients through comprehensive planning, solutions and personalized service.

Just as you wouldn’t seek a dermatologist for a kidney ailment, your selection of a wealth management clinician should be based on a long-standing track record of success in certain specializations. Similarly, seek financial institutions with strong, proven stability and those that are regulated and monitored by federal oversight agencies. Finally, successful wealth management relies on the integration of banking, financial planning and investment management with professionals on client-focused teams working together to develop and implement the strategies clients need to meet their goals.

Bad economy, good opportunities
The past six months have prompted fearful retreats to the sidelines when it comes to managing portfolios. Like ignoring a persistent cough, simply brushing the problem aside will lead to further difficulty down the road. The toughest economic times often provide the biggest opportunities, but a bold and confident approach is required. A back-to-basics approach that examines the variability of returns by asset class — a long-trusted wealth management strategy — can be best suited for those who have lost confidence in their portfolio management.

Wealth management as a field has changed rapidly over the past decade. The advents of technology, the integration of a global economy and a better-educated investor have caused an evolution in the industry. The recent economic crisis simply highlighted this new reality. It also illustrates why your wealth management team should consist of those with differing areas of expertise. There are several upside factors to working with larger, established wealth management institutions. Besides a strong track record of success and regulatory oversight by the U.S. government, larger networks of wealth managers offer precise insight on how to best manage your money.

Ask questions such as: Should I invest in foreign markets? What are the best times to buy commodities and what kinds? How much cash should my portfolio have?

While one wealth management adviser can answer these questions broadly, the better analysis and decisions will come from members of your team who are experts in each sector of investment and have access to the latest, most up-to-date analytics and data.

Assessing your goals
Another key element to assess — and this is truer today than ever before — is your risk tolerance. This answer doesn’t come easily, but ask yourself a few key questions: When do I want to retire? What is my desired quality of life during retirement? What kind of estate am I planning to leave for my children and family?
By educating yourself on your expectations, you can clearly report your needs and desires to your wealth management team and, in turn, they can come up with various strategies and tactics for your portfolio.

Also, expect these goals to change. An investor just starting a family is in a far different financial place than an executive in his 50s and vice versa. Your wealth management team must fluidly advise you on what your portfolio should look like at different phases of your life. A trusted adviser and a seasoned plan is needed for every stage of the wealth management cycle: accumulation, growth, transfer and preservation.

Much like that patient/doctor relationship, education is paramount. Good physicians lay out clear, professional advice on the best way to care for your health. The best doctors will also advise you to seek second and third opinions. You should do no less with your portfolio.After all, you’ve worked hard to build a healthy portfolio.

For me, wealth management has been nearly a four-decade process of learning and building relationships with my clients. They trust me much like they trust their doctor. It’s a cycle of service that continues to evolve. As you would with your health, use the expertise of your most trusted confidants to help lead your decision making — it will pay off in the long run by keeping you healthy, wealthy and wise.