Client: Developer-Operator of 36 Major Midwestern Hotels
Challenge: Perform Cost Segregation Analysis of Hotel Construction
A company that develops, manages and operates three dozen first-rate hotels and other properties for investment and real estate firms turned to AccuVal for tax planning strategies after completing construction on a new $11 million hotel in the Midwest. As it had on three previous occasions, the development company asked AccuVal to conduct a cost segregation analysis to identify capital assets that would qualify for accelerated depreciation under the Modified Accelerated Cost Recovery System of the Internal Revenue Code (IRC) of 1986, as amended.
A cost segregation analysis is best performed when construction is completed and before full operations begin. It demands broad experience in construction methods, materials and techniques as well as a thorough understanding of IRC statutes and all relevant tax court cases. When a cost segregation analysis is executed properly, it can provide an immediate and material cash flow benefit by maximizing the amount of capital costs that can be classified as personal property under the IRC accepted method. If some of the building's assets are determined to be nonstructural components, they may be segregated out and reclassified for accelerated depreciation over five, seven or 15 years, rather than the 39-year depreciation period for true real estate structures. The accelerated depreciation expense lowers taxable income, thereby lowering a company's federal income tax burden.
AccuVal conducted an on-site inspection of the property and its assets and reviewed invoices, construction drawings and specifications. We separated assets into real estate, tangible personal property and nonstructural land improvements in accordance with the Modified Accelerated Cost Recovery System, our knowledge of the key decisions in tax court cases and our direct experience. Our review excluded land and intangible assets.
Through AccuVal's due diligence and analysis, the company will be able to depreciate approximately 33 percent of its total capital asset investment over the accelerated five-, seven- or 15-year tables. The results of our analysis provided the taxpayer with an estimated after-tax net present value benefit of more than $750,000 (based on a 38 percent total tax rate and a 7 percent cost of funds).
Decades of tax consulting and appraisal experience. An intimate understanding of tax laws. First-hand knowledge of construction design and engineering. The insight to help companies maximize their competitive positions in the marketplace. That's The AccuVal AdVantage™ at work.