Tax Talk 101:

1
Tax Talk 101

• Finding Hidden Dollars to Improve Cash Flow

2
Tax Talk 101Finding Hidden Dollars to Improve
Cash Flow

• Presented to CREW Network
• Presented by Karen J. Koch, CPA, MT
• Date October 1 2, 2009

3
Todays Discussion
Presentation Outline

• State of the Industry
• Tax Strategies
• Case Study

4
State of the Industry
5
State of the Industry

• Whats going on?
• Balance sheet values for real estate
• Banks are not lending money
• Investors are holding properties longer
• Green initiatives are becoming more popular
• Cash flow is a highly valuable resource

6
State of the Industry

• Recently enacted legislation
• Economic Stimulus Act of 2008 (Feb 2008)
• 50 special (bonus) depreciation allowance
• Section 179 expensing
• Emergency Economic Stabilization Act of 2008 (Oct
  2008)
• 700 billion Troubled Asset Relief Program
• Energy Improvement and Extension Act of 2008 (Oct
  2008)
• Renewable energy incentives
• Transportation domestic fuel security
• Energy conservation efficiency

7
State of the Industry

• Recently enacted legislation (contd)
• Tax Extenders and AMT Relief Act of 2008 (Oct
  2008)
• Qualified leasehold, restaurant retail
  improvements
• Research credit extended and modified
• New markets tax credit extended
• American Recovery and Reinvestment Act of 2009
  (Feb 2009)
• Extended section 179 expensing
• Extended special (bonus) depreciation
• Energy efficiency and renewable energy incentives

8
State of the Industry

• Why you need to know about these tax strategies
• Make sure you are not leaving serious tax
  benefits on the table
• Not just for newly constructed or newly acquired
  assets
• Maximize temporary incentives
• CPAs / tax advisors sometimes overlook
  opportunities
• Great asset management tool
• Maximize benefits through the life of the real
  estate asset
• Maintain an accurate fixed asset schedule

9
Tax Strategies
10
Tax StrategiesIntroduction

• Basic tax strategies
• Accelerated depreciation
• Energy tax credits deductions
• Utility rebates incentives
• Timely write-off of retired assets

11
Tax StrategiesAccelerated Depreciation
12
Tax StrategiesAccelerated Depreciation

• Accelerated Depreciation
• Renewable energy assets are classified as 5-year
  property
• Solar, geothermal and wind property (since 1986)
• Fuel cells, microturbines and solar hybrid
  lighting (EPAct 2005)
• Geothermal heat pumps, combined heat and power,
  and small wind (October 2008)
• Qualifies for bonus if bonus requirements are met

13
Tax StrategiesAccelerated Depreciation

• Bonus Depreciation
• Deduct 50 of qualified basis in first year
• Remaining 50 depreciated as otherwise allowable
• Mandatory unless you officially elect out
• Same for Alternative Minimum Tax (AMT)
• Effective dates (1/1/08 12/31/09)
• 12/31/10 for Long Production Period Property
• Only available on Qualified Property

14
Tax StrategiesAccelerated Depreciation

• Bonus Depreciation (contd)
• Qualified Property meets all of the following
  four requirements in the first taxable year
• Description of Property
• MACRS property with a recovery period of 20 years
  or less
• Computer software as defined in sec. 167(f)(1)
• Water utility property
• Qualified leasehold improvement (QLI) property
• Original use begins with taxpayer after 12/31/07
• Acquired after 12/31/07 as long as no written
  binding contract was in effect before 1/1/08
• Placed in service before 1/1/10 (before 1/1/11
  for long production period property)

15
Tax StrategiesAccelerated Depreciation

• Qualified reuse and recycling property
• 50 bonus depreciation
• Any machinery and equipment exclusively used to
  collect or recycle reusable and recyclable
  materials
• Effective for acquisitions after 8/31/2008
• MACRS property with a useful life of at least 5
  years
• Original use begins with taxpayer
• Not subject to adjustment for AMT purposes

16
Tax StrategiesAccelerated Depreciation

• Smart meters and grid systems
• Tangible personal property used in the
  transmission and distribution of electricity is
  generally assigned a recovery period of 20-years
  (Class 49.14)
• Property placed in service after 10/3/2008 is
  assigned a 10-year recovery period

17
Tax StrategiesAccelerated Depreciation

• Qualified Improvement Property
• Leasehold, Restaurant Retail
• Special 15-year straight line depreciation
• Opportunities to combine with bonus

18
Tax StrategiesAccelerated Depreciation

• Qualified Leasehold Improvement Property (QLI)
• Determining factors
• Made pursuant to a lease
• That part of the building is to be occupied
  exclusively by the lessee
• Placed in service more than 3 years after the
  date the building was first placed in service
• Can be combined with Bonus
• Available since 9/11/01 in some form (39-yr w/
  Bonus or 15-yr)
• Structural and common area improvements do not
  qualify

19
Tax StrategiesAccelerated Depreciation

• Qualified Restaurant Property
• Determining factors
• More than 50 of the building's square footage is
  devoted to preparation of meals and seating for
  on-premise consumption of prepared meals
• Placed in service more than 3 years after the
  date the building was first placed in service
• Can be combined with Bonus except for 2009
• Available since 10/22/04

20
Tax StrategiesAccelerated Depreciation

• Qualified Restaurant Property 2009 changes
• 3-year old building rule no longer applies
  therefore newly constructed properties are
  eligible
• Does not exclude used properties therefore can be
  applied to acquisitions

21
Tax StrategiesAccelerated Depreciation

• Qualified Retail Improvement Property
• Any improvement to an interior portion of a
  building which is nonresidential real property
  if
• Such portion is open to the general public
• Used in the retail trade or business of selling
  tangible personal property to the general public
• Placed in service more than 3 years after the
  date the building was first placed in service
• Cannot be combined with Bonus
• Structural and common area improvements do not
  qualify

22
Tax StrategiesAccelerated Depreciation

• IRC 179 Expensing
• Designed to help small businesses
• Allows taxpayer to expense up to 250,000 of
  1245 property
• Purchase of new or used assets for use in trade
  or business
• Increased level available through 12/31/09
• Phase-out limit raised to 800,000 of 1245
  property
• When taxpayer exceeds limit they must make a
  dollar for dollar reduction in the amount of
  their 179 deduction
• 900,000 of 1245 reduces available 179 by
  100,000
• 1,050,000 of 1245 eliminates available 179
  deduction

23
Tax StrategiesAccelerated Depreciation

• NOT eligible for 179 Expensing
• Property used predominately outside U.S.
• Property used in the furnishing of lodging
• Apartment house, dormitory, nursing home
  anything that provides lodging on a non-transient
  basis.
• Property used by tax exempt organizations
• Unless to produce UBTI (Unrelated Business
  Taxable Income)
• Property held for the production of income
• i.e. Rental properties (apartments, office,
  retail, etc.)

24
Tax StrategiesEnergy Tax Credits Deductions
25
Tax StrategiesEnergy Credits Deductions

• Introduction to energy credits and deductions
• Complicated area for tax compliance
• Business owners and many tax advisors are unaware
  of the credits or grants available
• Often an application and/or a certification
  process
• Will change design and construction well into the
  future

26
Tax StrategiesEnergy Credits Deductions

• IRC 179D - Energy Efficient Building Deductions
• Energy Policy Act of 2005 (EPAct 2005) enacted
  IRC 179D
• First year tax deduction available for qualified
  property
• Requires blend of tax, design and engineering
  knowledge
• All about up front design
• Certification for EPAct is different than LEED

27
Tax StrategiesEnergy Credits Deductions

• Basic eligibility requirements for 179D
  deduction
• Placed-in-service after 12/31/05 and before
  1/1/14
• Must reduce total annual energy costs by specific
  amount compared to a Reference Building under
  ASHRAE 90.1-2001
• Must be certified by properly licensed engineer
  or contractor in jurisdiction where building in
  located

28
Tax StrategiesEnergy Credits Deductions

• Benefits available with 179D deduction
• First year deduction of up to 1.80/ sf
• 0.60/sf in three categories (interior lighting,
  HVAC and building envelope)
• Cannot exceed total cost of energy efficient
  improvements

29
Tax StrategiesEnergy Credits Deductions

• Good candidates for 179D deduction
• Newly constructed building of at least 40,000 sf
• Renovation projects (especially lighting
  retrofits)
• Regional and national chains with multiple
  locations
• Benefits available for architects engineers
• Primary designer may claim the deduction with
  government owned buildings (federal, state,
  local)
• Schools, municipal facilities, etc.

30
Tax StrategiesEnergy Credits Deductions

• Renewable electricity production tax credit (PTC)
• Expands the types of facilities that produce
  electricity to qualify for the credit
• Wind
• Closed- or open-loop biomass
• Geothermal energy
• Small irrigation power
• Municipal solid waste
• Qualified hydropower production
• Solar energy

31
Tax StrategiesEnergy Credits Deductions

• Renewable electricity production tax credit
  (contd)
• Credit of 2.1 cents per kilowatt hour for wind,
  closed-loop biomass, geothermal and solar
• Others reduced to 1.0 cent per kilowatt hour
• Generally available for 10-year period beginning
  with in-service date after Aug 8, 2005
• Extended through 2013 (some exceptions)

32
Tax StrategiesEnergy Credits Deductions

• Renewable electricity production tax credit
  (contd)

33
Tax StrategiesEnergy Credits Deductions

• Energy credit (investment tax credit)
• Extended and expanded through 12/31/2016
• Applied to system cost (includes installation
  costs) of eligible energy property placed in
  service during the tax year
• 30 credit extended for solar property, fuel cell
  property, and microturbine property
• Three new categories eligible for the energy
  credit
• Combined heat and power system property (10)
• Small commercial wind property (30)
• Geothermal heat pump systems (10)
• Can offset the alternative minimum tax

34
Tax StrategiesEnergy Credits Deductions

• Special temporary election for certain qualified
  energy production facilities
• Taxpayer may claim 30 energy credit portion of
  the investment tax credit in lieu of the
  production tax credit after 12/31/08
• Qualified facilities include
• Wind facilities placed in service in 2009 through
  2012
• Facilities eligible for the production tax credit

35
Tax StrategiesEnergy Credits Deductions

• Grants in lieu of tax credits
• Treasury is authorized to give grants for
  specified energy property placed in service in
  2009 or 2010 in lieu of tax credits
• Specified energy property includes
• An electricity production facility that is
  otherwise eligible for the renewable electricity
  production credit or
• Qualifying property otherwise eligible for the
  energy investment credit
• Application process must be received by
  10/1/2011

36
Tax StrategiesEnergy Credits Deductions

• Tax credits grants in lieu of tax credits (ARRA
  2009)

Geothermal Property that meets definitions of
qualified property in both 45 48 allowed
either 30 credit or 10 credit but not both.
For fuel cell property the maximum amount of the
payment may not exceed an amount equal to 1,500
for each 0.5 kilowatt of capacity. For
microturbine property the maximum amount of the
payment may not exceed an amount equal to 200
for each kilowatt of capacity.
37
Tax StrategiesEnergy Credits Deductions

• Advanced energy manufacturing tax credit (Sec
  48C)
• Mfg facilities that support generation and
  conservation
• Application period begins 8/14/09 short window
• 30 credit for new, expanded, or re-equipped
  energy mfg projects
• Treasury will award 2.3 billion in tax credits
  (7.7 billion in investments)

38
Tax StrategiesEnergy Credits Deductions

• Special financing available
• Energy property financed by subsidized energy
  financing or industrial development bonds
  special basis reduction has been eliminated
  after 12/31/08
• DOE loan guarantee program
• 6 billion to issue loan guarantees
• Target to large, renewable energy projects

39
Tax StrategiesEnergy Credits Deductions

• Bond financing
• Clean Renewable Energy Bonds (CREBs) - 2.4
  Billion
• Qualified Energy Conservation Bonds (QECBs) -
  3.2 Billion
• Allocated to state based on population
• State allocates to large local governments
• Not subject to Dept of Treasury application or
  approval
• Applies to both types of bonds
• Issued by electric cooperatives, government
  entities, etc.
• Theoretically at 0 interest rate
• Borrower pays back principal only
• Bondholder receives federal tax credits in lieu
  of the bond interest

40
Tax StrategiesUtility Rebates Incentives
41
Tax StrategiesUtility Rebates Incentives

• Utility and state rebates
• Many utilities and states offer some form of
  rebate program
• Can be multiple rebates for a single energy
  project
• Application of rebates to each design to assure
  best solution
• Process typically includes pre-approval,
  pre-inspection and post-inspection
• Compliance reporting
• Track rebates to make sure they are collected

42
Tax StrategiesUtility Rebates Incentives

• Utility and state rebates (contd)
• Important to partner with experienced
  professionals
• Rebate programs change frequently
• Temporary bonus-rebate dollars could be added
• Programs may run out of funding soon
• Opportunity to negotiate with utilities and
  governments

43
Tax StrategiesUtility Rebates Incentives

• Rebate map of USA

44
Tax StrategiesTimely Write-off of Retired Assets
45
Tax StrategiesTimely Write-off of Retired Assets

• Asset Retirement Studies (ARS)
• Focus on assets that are included in a
  significant renovation
• Allows taxpayer to write-off adjusted basis of
  retired assets
• Timing is criticalmust conduct analysis before
  assets are removed
• Intent can be an issue with acquired properties
  and needs to be determined
• Must know the single asset cost
• Need detailed cost analysis to properly identify
  single asset costs within a building

46
Tax StrategiesTimely Write-off of Retired Assets

• ARS - Lighting Example
• 100,000 of lighting costs that were placed in
  service 10 years ago are being removed and
  retired as part of a lighting retrofit
• Accumulated depreciation of 25,800
• Adjusted basis of 74,200 can be deducted in the
  year retired
• Produces 25,970 of current year tax savings at
  35 rate
• Specific costs of assets retired must be known in
  order to write-off adjusted basis

47
Case Study
48
Case Study

• Integration of multiple strategies
• Improve ROI and reduce payback period
• Enhanced benefits available if planned properly
• Each requires special expertise and knowledge
• Timing is critical

49
Case Study

• Project description
• 275,000 square foot distribution/ warehouse
  facility
• Acquired and placed-in-service June 2005
• Cost basis 18,000,000
• 3MM expansion including lighting retrofit
  February 2009
• Replaced 440 fixtures with a total cost of
  154,000

50
Case Study

• Combining strategies
• Steps in 2008
• Cost segregation look-back study
• Asset retirement study for planned lighting
  renovation in 2009
• Filed application for utility rebate available
  for lighting retrofit
• Steps in 2009
• Cost segregation study on improvements
• EPAct study
• Rebate claimed
• Reduced operating expenses

51
Case Study

• Cost Segregation
• 2008 look-back study
• Accelerated 4,500,000 (25)
• 1st Year Tax Benefit 800,000
• 481(a) 2,004,021
• 10 Year NPV Benefit 920,000
• 2009 new improvements (w/ bonus)
• Accelerated 660,000 (22)
• 1st Year Tax Benefit 145,000
• 10 Year NPV Benefit 180,000

Warehouse / Distribution
Estimate of first year savings based on a 35
tax rate. Estimate of the 10-yr net present
value savings based on a 35 tax rate and a 6
discount rate.
52
Case Study

• Asset Retirement Study
• Adj. Basis 147.49/ fixture
• Total Adj. Basis 64,895
• 1st Year Tax Benefit 22,713

Warehouse / Distribution
Estimate of first year savings based on a 35
tax rate.
53
Case Study

• EPAct Study
• Eligible for 0.60/ sf deduction
• Total s/f 335,000
• Total lighting cost 232,000
• Maximum deduction 201,000
• Actual deduction 201,000
• 1st Year Tax Benefit 70,350
• Utility rebate
• 50/fixture x 440 replacement fixtures
• Total rebate 22,000

Warehouse / Distribution
Estimate of first year savings based on a 35
tax rate.
54
Case Study

• Combined benefits of from lighting projects
• ARS, EPAct Study and Utility Rebate
• First year savings over 115,000
• Paid for 49.6 of lighting costs
• Operational Savings
• Over 80,000 per year
• Payback period
• Less then one year

Estimate of first year savings based on a 35
tax rate. Estimate based on current utility
rates of 0.10 per kWh
55
Case Study

• Final Summary of Benefits
• 1st Year Tax Benefit Over 1,000,000
• 10 Year NPV Over 1,700,000

Warehouse / Distribution
Estimate of first year savings based on a 35
tax rate. Estimate of the 10-yr net present
value based on a 35 tax and 6 discount rate.
Assumes current utility rates of 0.10 per kWh
56
Thank You!

• Karen Koch, CPA, MT
• [phone] kkoch_at_bedfordcostseg.com
• Dont forget to sign up for our free e-newsletter
• The Bottom Line
• 800.257.8962 www.bedfordcostseg.com