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Engineering Business Services

Cost Segregation Studies

“Engineering-based methodology for maximizing federal tax depreciation on newlyconstructedor acquired buildings as well as your existing real estate holdings”

We want to thank you for your interest in BDO Seidman, LLP’s cost segregation services. This handout has been prepared to provide you with a brief overview of cost segregation services so that you will have a reference concerning the material that was discussed. Our cost segregation studies are performed by professional engineers with design/construction experience who work hand-in-hand with BDO Seidman, LLP’s tax partners. The cost segregation study is completed in order to maximize the federal tax depreciation to be claimed on your facilities whether they are newly constructed or acquired. You also have the opportunity to perform these analyses on facilities placed in service in prior years without the need to amend past tax returns.

The primary goal of these studies is to identify all property that qualifies for shorter federal tax depreciation lives (5-, 7-, or 15-year life as opposed to the 39 years required for buildings). The direct benefit from the analysis is increased depreciation in the early years of the ownership of the facility resulting in increased tax savings and more available cash for other uses.

The engineers from BDO Seidman, LLP are willing to provide you with a proposal for performing this analysis after reviewing some very basic information concerning your facility. Their proposal will identify the estimated tax savings to be realized the first year, the net present value of the tax savings over the remaining tax life of the facility and the professional fees associated with performing the analysis. Our fees are not contingency based, but rather based on the hours required to do their work. Additionally, BDO Seidman, LLP provides a benefit-to-cost ratio in the proposal which will provide a multiple of our fee in tax savings the very first year. The proposal is provided to you at no cost so there is no real risk in determining the magnitude of the tax savings that would be realized as a result of their analysis. With a significant return on your investment provided the very first year it appears to us to be an easy decision to request the proposal.

The positions taken by BDO Seidman, LLP’s engineers with regard to property classifications are well documented and supported in the report provided as part of the study. Our studies have consistently withstood IRS scrutiny with an aggressive but defendable approach to asset classification.

We have provided the following table to show you the significant savings available through the proper classification of building assets as 5-, 7-, or 15-year property as opposed to leaving the property classified as part of the building (39-year life with straight-line depreciation required). The following table shows the benefit to be gained from the proper classification of only $100,000 in assets as 5-, 7-, or 15-year property.

Benefits / 5-Year Property / 7-Year Property / 15-Year Property
Increase in First Year Depreciation / $ / 18,600 / $ / 12,900 / $ / 3,700
First Year’s Tax Savings
(Assumes 35% federal tax rate) / 6,500 / 4,500 / 1,300
Net Present Value of Tax Savings
(Using 7% interest rate over 39 years) / 18,800 / 17,200 / 10,700

As you would expect based on the above, the savings can be very substantial depending on the size and specific nature of the projects.

It is important to point out these additional items:

  • This methodology applies to both newly constructed buildings as well as to the acquisition of existing buildings.
  • Bonus depreciation on qualifying properties within new construction and tenant improvements may be available to you if your construction contract was signed after September 11, 2001 and the property is in service before January 1, 2005.
  • With the issuance of Revenue Procedure 96-31 (as modified by Revenue Procedures 97-27, 97-37, 98-60, 99-49, 2002-9, and 2002-19), a taxpayer can review and change the depreciation classifications of assets placed into service in prior years without the need to amend past tax returns. This is very important to taxpayers who have not taken full advantage of the accelerated deprecation available to them from their other real estate holdings. In order to take advantage of this opportunity, the taxpayer must file a Form 3115, Application for Change in Accounting Method, which identifies the depreciation adjustment. The entire depreciation adjustment can now be taken in the current tax year. BDO Seidman, LLP will assist you in the proper filing of the Form 3115 and provide you with the tax support necessary to defend the position taken regarding the correction of previously misclassified assets.

BDO Seidman, LLP’s engineering group has distinguished itself on a national basis by helping our clients realize significant tax benefits, and believe we will be able to provide similar benefits to your company. We would encourage you to contact us if you are interested in obtaining a proposal regarding any of your current real estate holdings or planned new construction/acquisitions. An information sheet has been attached for your review which identifies the information we need to develop a proposal for your facilities. We look forward to talking with you concerning this value-added service and the opportunity to work with you to maximize the federal tax depreciation available regarding your real estate holdings.

If you have any questions concerning our cost segregation services, please call Tom Doane, or his assistant, Mary Tesnar, at 616-774-7000.

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Required Information for Cost Segregation Proposal/Study

In order for us to estimate the tax benefits to be gained from performing a cost segregation study of your facilities we need to know how much of the following information is available for our review. Those items preceded by an asterisk are needed to prepare our proposal for services. This form can be duplicated for each facility to be reviewed:

Facility Name: ______

Description of the building (i.e. office, warehouse, manufacturing, etc.)______

Please select either category 1, 2, or 3 and fill in the information regarding your property.

1.New Construction

*Copy of most recent contractor’s pay application (including schedule of values) / Yes / No
Copies of any contract change orders / Yes / No
*Complete set of design drawings (e.g., site, architectural, structural, etc.) / Yes / No
Listing of direct purchases not included in the general contractor’s cost such as building permits, design fees, legal, equipment/furniture purchases, etc. / Yes / No
Is owner an AMT taxpayer / Yes / No
Anticipated in-service date
Method of financing (e.g., tax exempt or not)
Client’s tax rate and year-end

2.Acquisition of Existing Building

*Copy of real estate appraisal / Yes / No
*Copies of any available drawings or floor plans / Yes / No
Copies of any original construction invoices / Yes / No
Copy of site survey / Yes / No
Copy of tax assessment in effect at time of acquisition / Yes / No
*Purchase price documentation / Yes / No
Date of acquisition
Client’s tax rate and year-end

3.Analysis of Buildings Placed in Service in Past Years (1988Forward)

*Copy of current fixed asset listing with federal tax depreciation lives identified / Yes / No
*Any available building plans / Yes / No
Any original cost data from construction contractor, or the closing documents if an existing building was purchased / Yes / No
Real estate appraisal if building was purchased / Yes / No

Please note that this is a “wish” list, and not all of this information may be available. Our study can still be completed if none of this information is available. If construction plans are not available for the building in question this does not mean the study cannot be completed. Without construction plans we would simply require a longer site visit in order to acquire the necessary information to complete our analysis. We will take good care of the information provided to us and return the important documents (e.g., drawings, appraisals, etc.) upon completion of our analysis.

All information can be mailed to the following address:

BDO Seidman, LLP

Attn.: Thomas A. Doane, P.E.

99 Monroe Ave., N.W.

Suite 800

Grand Rapids, Michigan 49525

Telephone: 616-774-7000

Fax: 616-776-3680

If you have specific questions concerning your real estate holdings, please call one of the engineers listed below. All of them can be reached at the telephone number listed above.

Thomas A. Doane, P.E., Principal / Mark Zettell, P.E., Sr. Manager
Brian Tank, Sr. Manager / Brian Mitrzyk, Manager
Jim Rathbun, P.E., Manager / Duane Dunlap, P.E., Manager
Greg Bajt, Manager / Steve VanSlyke, P.E., Manager
Robert McPherson, Manager / Mark Anderson, Manager
Mike Thue, Manager / Dan McIntyre, Marketing
Doug Curtis, Manager / Jerry Loucks, Manager

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