Real Estate Incentives for Manufacturing & Distribution

Terri S. Johnson: Thanks, Avi. I'm Terry Johnson. I'm a partner at Capstan Tax Strategies. I have been doing real estate tax incentives all of my career focused primarily on cost segregation and energy incentives that we'll be talking about. Today. We have a strategic relationship with EisnerAmper, actually their in-house cost eg practice and work very much in collaboration with them on this practice area.

Travis Epp: Today's presentation, as you see on the agenda, we'll primarily focus on cost segregation studies and section 179D. Both of these topics illustrate how entity may be able to arrive or derive or accelerate tax savings. In addition to discussing the topics, both Avi and Terry will also provide a number of examples. As you have questions throughout the presentation, please feel free to include them in the chat and we will get to them at the end. To get started, we will throw it over to Avi. I

Avi Jacob: Thank you very much, Travis. So as Travis mentioned, the two main items that we're going to be discussing today are cost segregation and 179D deduction and how they interplay together for our clients and how we can maximize the savings for our clients in terms of taxes from a retail manufacturer's distribution company's side of things. So I'm going to start off with the cost segregation and I'm going to explain what it is and then go through some of the benefits that clients can get from cost segregation. So what is cost segregation? Cost segregation is an engineering based study where the IRS approves where the engineer goes into a site a property and they're able to identify and break down different assets that can be accelerated into shorter useful lives for depreciation purposes. So commercial properties generally typical use 39 year tax wise. So what happens is when a client invests in their manufacturing facility, whether it's through a renovation or through a new facility that they purchased or a newly constructed facility, they would have to depreciate that facility over 39 years.

However, what the cost segregation studies purposes is having an engineer go down to the site and identify different assets that can be accelerated into different buckets that would allow you to take that depreciation deduction in the earlier years. So by carving out or segregating the assets with the shorter wives, depreciation of those assets are accelerated and we could take those deductions earlier in the process and get the tax savings now, so that way we have more cashflow in the earlier years of owning the property. So when we're dealing with our manufacturing companies, something that's a small light manufacturing, more of a warehouse, we generally see between 10 to 30% of the assets are able to be reclassified. Whereas when we're dealing with heavy machinery, heavy manufacturing, we could see as much as even 30 to 50% that gets accelerated. And what's important to recognize about this is that, so on the first side, depreciation is a deduction, but it's not a cash deduction.

We've already spent the money in order to get that expense. It's a matter of when the timing is that the IRS allows us to take that deduction for cash we've already spent. So by utilizing depreciation as a deduction by accelerating it, we're creating this non-cash deduction in the earlier years of the life. So we're really creating cashflow a on the side that we don't have the same tax liability that we're now offsetting with this additional deduction. Now, very important to point out, depreciation in cost act does not yet increased. Our basis remains the same for tax purposes, however, we're accelerating it into the earlier lives. So how do we do this? So when we go down, when the engineer goes down to the facility, they look for three main components and that's where they're really breaking out the assets. So the first component is the real property, the building that would be roof, a wall windows foundation, anything that relates to the building structure that keeps it intact, that would be still depreciated over 39 years.

However, with our properties, many of them have specialized HVAC units, they have overhead cranes, hyperdense foundation pads, reinforced flooring, even a mini kitchen in an office building or some of the furniture in an office that can get moved into us called tangible personal property. Not to be confused with personal property that we would use as our own personal property, but rather from a tax standpoint. Personal property is the designation that's used for assets that can be depreciated over five or seven years. So by looking at the real property of the building and carving out that tangible personal property, including that machinery, we're able to now take instead of depreciating over five years on a straight line, we're able to push those benefits into the earlier years of the lifecycle. Now the other carve out that we do is the land improvements. Now, the land improvements are the external assets of the property, and that would be if you have a large paved parking lot.

So a lot of our manufacturing companies, they do have some level of facilitating delivery and transport of the goods that they're working with. That would be included within the land improvements because that is something that's external to the building, but it still has depreciable life. Now, similarly, even landscaping. So say you have a big green grass meadow on the property or even a small retaining wall, or if you have a pond that's on your property, those are all assets that then go into the 15 year land improvements. So it's important that land improvements is separate from land, but at the same time it could still be considered part of the land improvements. So you're not just stuck with, okay, I have all this raw land outside, it's getting non depreciated. The engineers are trained to identify and price out according to the IRS methodology, what can be depreciated in a faster and more accelerated bucket.

So now where did this become more of a hot topic? A lot of our clients have been more aware of it in the most recent future, in the most recent past. And that's what the introduction of bonus depreciation, that's what really changed a lot of it. And that happened with the tax Cut and Jobs Act where there were a few things that changed it. So firstly, we had bonus depreciation came into play even though it's been off and on since two and one, it was never really eligible for assets that were purchased. Rather it was only for assets that were brand new. Meaning if you bought a property that was already placed in service by another person that wouldn't have been eligible for bonus in the past with the tax cut in Jobs Act, our clients are now able to take advantage of bonus depreciation, which generally is a federal tax benefit because many of the states decouple from bonus depreciation.

But what that allows them to do is all the assets that go into the five and the 15 year bucket are now able to now be depreciated even faster than just simply looking at it from, okay, this is five years, this is 15 years. Now with the bonus depreciation, you're able to take any asset that's being classified as under 20 years. Any maker's class asset, you're able to now take what's called bonus depreciation and say, I'm going to take the full deduction or the percentage of the deduction in that first year outside of the normal five year or 15 year makers depreciation. So this is a very big benefit that a lot of our clients have, especially with new purchases. So starting in 2017 towards the tail end of 2017, it moved to a hundred percent bonus and that stayed in play until 2022. Moving forward in 2023, we had 80%, and now for 2024 we have 60%, and that's going to keep dwindling down.

Now with the change in the administration that might change, bonus is always a hot topic that gets discussed in Congress. They're always looking at possibilities of extending the bonus depreciation window. So we'll see what happens with it. But for right now, what's important to know is that bonus depreciation still is in play even at a lower reduced rate, but it still has significant advantages and significant benefits that can happen for clients when they're doing the cost segregation study. Now, another item just to note, even if you bought a building in a prior year and you've never done a cost segregation study on it, let's say you bought a building in 2018 or built a construction in 2018 or even a renovation, you would still be eligible to the bonus depreciation that's applicable for the year that it was placed in service. So even if you're implementing the cost segregation study in your 2024 tax return, if your building was purchased in an earlier year, you would actually be eligible for the bonus rate at the time that the asset was placed in service. So they've started to decline, but they still bring significant benefits and those benefits are still up to debate whether or not there's going to be extended even further. So it's an important thing Just to note, bonus depreciation is a huge advantage from a federal standpoint.

So here's some examples of the equipment infrastructure that would go in as a seven year property that you could kind of see a little bit more for yourself. What is the seven year property? It's easy for me to say it, but now we could see looking at a picture, a diagram of a manufacturing facility. These are different assets that our engineer, when they look at the property, they're measuring the specialty duct work, they're measuring the gas and compressed air piping, and they're measuring the dedicated conduits. They're measuring all these different assets and identifying which bucket of those three main component buckets that I pointed out in the earlier slide where they would fit in. And then we're able to quantify it based on the IRS approved methodology. We're able to quantify it so that we can now have a call segregation study and show those benefits for our clients.

So now 15 year land improvements. Again, another diagram just to kind of show you what we're looking at. You have your building that's separate, that's going to be your 39 year and your five or seven year buckets. But now looking at the outside of the property, things that most of us kind of ignore, we are now able to see that even the flag poles, site lighting, all of these different assets are now getting calculated, quantified, brought into some kind of value related to the basis, and we're able to push those into that 15 year land improvement. And now we're able to see those benefits out of, we're able to see those benefits and how the cost segregation study can then apply to the tax return and give you significant deductions where otherwise you would never have had them. So with that, we're up to the next polling question and I'm going to hand it over to Astrid so that she can kind of set that up.

Astrid Garcia: Polling Question #2.

Travis Epp: So Terry, the one question was can things like wiring associated with a five to seven year property be considered part of the five to seven year?

Terri S. Johnson: Yes, absolutely, Travis. So this is a great question because as Avi was talking about, especially electrical, especially, especially equipment, any associated wiring that goes with that equipment is also a five or seven year life depending on the life of that asset. So this is a big, I think, advantage of doing a cost segregation study that you can differentiate, but things between say the lighting or electrical, that's part of the base asset versus specialty. So it's a big help that you can get that delineated when you do a cost side study.

Travis Epp: Thanks Terry. And then there was a second question I think we can get to before we get to the next slide is would building a solar field be land improvement?

Terri S. Johnson: It's interesting because we're seeing more and more questions on solar and we get involved in consulting on that. That solar actually has its own depreciation method and it's eligible, it's a short-lived asset five year, it is eligible for bonus. And there's also tax credits now available under the ITC. And there's some, the calculation depends on some different things, but if you are doing a solar project, you definitely need to talk to us about, because you start with the cost eg study and identify all the solar equipment and then you do the calculation whether it's the deduction and the tax credit.

Travis Epp: Astrid, can you go to the next polling result please?

Astrid Garcia: Absolutely. I will be closing the polling question now. Anyone that needs to submit their answer, please do so now. All right, back to you guys.

Terri S. Johnson: Okay, we're going to roll right into the EPAC 179D deduction. So we're going from the cost segregation now on the energy side and the 179D deduction has been around for a very long time, since January 1st, 2006, and it applies to all commercial buildings. So obviously manufacturing distribution facilities is the sweet spot for doing these 179D studies and it's available for new construction or when you're renovating buildings and doing possibly an energy retrofit that's also in play. What's nice is that you can use the form 31 15 change in accounting method to go back retroactively, which you could do by the way with a coex study as well to pick up that deduction as if you got it in year one and catch that up to the current year. So picture when you're looking at the 1 70 90 deduction to understand how big is the building, the square footage because it's all based on square footage and a dollar per square foot.

So right now, high hypothetically, your energy cost savings is compared to a benchmark and we'll get into a little bit more detail on that. And then with the inflation reduction act, we saw a lot of changes with the one every 90 deduction and they came out, traditionally we had gotten up to a dollar 80 per square foot and now it's up to $5 a square foot, but it's also adjusted for inflation every year. But they added a requirement for paying prevailing wages to get those high deductions. So if you don't pay prevailing wages, your baseline is about a dollar a square foot and it also goes up with inflation, inflation with adjustments every year. So as I mentioned, the square footage really affects this. So the bigger the better. We see manufacturing distribution facilities to be these perfect targets because they typically are very large, often open type buildings.

So you've got energy efficient equipment that you've installed to keep from an operation standpoint for efficiency, and it just blends in really well to be doing these studies because you can take advantage of having the high square footage and also very energy efficient buildings. So as I mentioned under the inflation reduction act, there's lots of changes. So let's say that you're doing a renovation of your facility and you're not going to necessarily get to the 50% reduction in energy against a benchmark, but if say you get 25%, that's kind of the floor is 25% and you can still get a portion of the deduction. So that was really good news. It's also, I think, easier right now to qualify because the standard is against an ASHRAY 90.1 2007. So what you're doing is comparing your as far as energy cost savings against this benchmark that is from 2007.

So here we are in 2024. Obviously that's a fairly old standard. So even if you're just doing everything kind of according to what is required in where the facility is, you are more than, I mean, it would be rare that you would not meet that ashtray standard and exceed the 50% and get the full deduction at least at this point in time. That will change by the way in the next few years. But that is what we have right now. So here's a good graph that shows you that baseline 25%, which is the minimum that you need to qualify with your efficiency increase over that 2007. So here's a big thing that we've got to pay attention to. Remember I mentioned the prevailing wage. They added this requirement to pay prevailing wages to get these higher rates. So if you look on the far right side of this table, you'll see the induction amount with prevailing wages.

So if you meet say 25%, which is at that minimum needed to qualify of efficiency increases, you would get two 50 a square foot. Remember before the inflation reduction we were at a dollar 88, so that's really good. And then it goes and maxes out at 50%, which is $5 a square foot. So right now in 2024 with the adjustments we're at $5 and 65 cents a square foot. And if you didn't pay prevailing wages, it's as I mentioned, up to a dollar a square foot and it also can be adjusted. I think right now it's a dollar 13 a square foot. So here's a really important takeaway. So if you have done any new construction or renovation on projects that you started before January 30th, 2023 and you finished after that time, you are grandfathered in to be able to get that higher $5 a square foot and not pay prevailing wages.

The other thing I want to add about prevailing wages is it doesn't necessarily mean union wages. I mean as long as you're paying prevailing wages, you go to the labor.gov site, they list out by area regions what the going prevailing wage is by job category. So you can actually go in and see. And if all of the labor and apprenticeship requirements and labor rates meet the prevailing wages don't necessarily, they could be an open shop, they just are paying prevailing wages. It's something to not just assume you don't meet that you might meet. And I think that we have to really delve into that to make sure we're certifying that and that it's true and the contractor says, yeah, we paid prevailing wages, but we need to kind of see the proof of that. And sometimes contractors don't want to give that information, and there's ways that at EisnerAmper that we can audit that information and make sure that they did pay prevailing wages without disclosing of what those wages were. So we have a way of doing that that keeps that confidentiality if the contractor is really worried about that.

So there were a couple other things that happened under the Inflation reduction Act as far as the 179D deduction that we felt were really important under the legacy program. So before the Inflation Reduction Act, it was a one-time deduction. So let's say you're working on your facility, you're doing upgrades constantly. You went for this deduction once. Let's say you have a 200,000 square foot facility and it's once and done, but what they did under the IRA is they had this reset provision. So you can take, if it's a commercial building, which our audience here is today, you can take this once every three years and keep in mind that you have to calculate on the entire square footage of the building and not just a small portion of a project because you have to kind of look at the whole building. So if you had continued to improve and upgrade over once you pass three years, you can kind of go back and have another bite at the apple, which is very nice. That was a very positive change. So this really encourages companies to continue to improve energy efficiency and also keep your operating costs down as well. So this provision is just really beneficial for anyone doing multi-phase long-term projects. We are at another polling question.

Astrid Garcia: Polling Question #3.

Avi Jacob: And then just to step in a lot of our clients, because like I mentioned before with the cost segregation being on new construction, on renovation and on purchases, a lot of our clients are able to take advantage of both sides of the equation. So when we have clients that are doing new construction or renovations, they're able to deal with both the 179D deduction along with that cost segregation study. So what you would be doing is by doing the cost study, you'll be identifying your five year and your 15 year assets, but at the same time and isolating them from the 39 year assets. And then at the same time, we would also be looking at the 179D deduction and see where we could carve out from that 39 year as well. Something that can be reducing the basis overall of the total property, but being able to reduce it from that 39 year asset class and being able to take that deduction right away as well. So it has a lot of benefits as an interplay, especially like what Terry was saying, a lot of the newly constructed or renovations are happening today are far exceeding that ASHRA standard rate from 2007. They're really exceeding it. So we are seeing a lot of clients kind of taking advantage of both at the same time and not just relying. It's not a one or the other. You're able to really take advantage of both deductions at the same time.

Astrid Garcia: All with, thank you. I will be closing the polls now. One second.

Avi Jacob: All right. And just to answer the question that I see here, yes, the 179D deduction does decrease the basis of the assets. It's essentially taking that deduction from the basis of the building assets that we calculate. Then you just reduce that basis by that amount. Okay, so the benefit is directly dependent on the property square footage. That is definitely true. That is partially true. Hold on, sorry, prevailing wages. Okay, so which of the following is true regarding the 179D deduction? Prevailing wages and apprentice requirements have no bearing. That's not true. They do have a bearing on it. They can change it, as Terry said, from that $1 maximum to the $5 maximum, the maximum deduction amount is $4 adjusted for inflation. Again, like Terry said, it's $5 and then the benefit is directly dependent on the property square footage. So congratulations, we have almost 69% that answered that question correctly.

So thank you guys for listening and we'll continue forward. So we've now given you the background on two of the deductions that we're talking about today. And now the real question is where are the triggers of when we should really be talking about these specific deductions and whether they apply or whether these studies are, whether you're a good candidate or one of these studies. So when it comes to new construction, always definitely worth evaluating whether or not this is a good fit and whether or not you can benefit from a cost segregation study and the 1 70 90. When it comes to an acquisition, you're really looking only at the cost segregation study, the renovations we're looking at both. We want to evaluate whether or not there are benefits that can be hitting the 179D and that cost eg. If you had already done the renovation or the new construction or the acquisition in the past, you still have that option of a lookback study and you can basically go back like what Terry was saying and recalculate how much the deduction would've been then through today, how much of that benefit did you miss out on so far?

And you can recapture it now and take that full advantage in the year that you implemented into your tax return. And that would be done not by amending a prior year return, rather, you would be looking at a form 31 15 to implement that other deduction and that 4 81 a calculation and that would calculate how much additional depreciation would you have gotten had you done a cost segregation study from day one, or how much is that 179D deduction that you didn't take in the initial year that you had done that construction or renovation? Now you're able to catch it up in the current tax year. So don't be worried if you haven't done it before, that doesn't mean that you can't still do it. The time is still available and generally we look at around seven to eight years as the furthest back we go, but it's always worth looking because depending on the amount of basis, there still could be significant benefits that our clients can get from doing that.

Manufacturing facilities can get from doing a cost segregation study or a 179D study. In terms of the study goals, like I said, if you have income and if you're a corporation and you're trying to mask some of that income accelerated depreciation deductions are definitely a great way to go. They don't cost that much money to generate, you're accelerating them and we're able to take a non-cash deduction to offset a real cash liability. So it's always a great tool to have to be able to do a cost segregation study or a 179D study in order to offset any taxable liabilities that you may have, especially with a corporation, especially honestly with almost any type of entity type, but especially with a corporation, especially with these manufacturing facilities. Now the goal is obviously to maximize that depreciation, whether it be through bonus depreciation or the accelerated buckets, that's the goal, maximize the depreciation and then see how we can offset as much of those gains as we can, as much of that income as we can.

Addition to cost segregation studies, we also, we have this other aspect to it where we're looking at what can be expense versus capitalized and what can be Beach's expense fully now and not put onto a capitalized depreciation schedule. That's a separate item. It's called tangible property regulations. And we can do a whole nother seminar on that alone. But essentially you want to make sure that we have an accurate record of the fixed assets and then what we can do is in the future we can then start looking at some of the smaller additions that we make and seeing if we need to capitalize those small additions or if we're able to look at our accurate records from the call set study, we could see if we're able to now take what's called tangible property regulation compliance and expense, those future minor smaller expenses, some of them can be pretty big, but rather than just your simple $2,500 safe harbor, you're able to now expense by looking at what's called the unit of property that we include in the cost segregation study.

You're able to now make decisions and see if we're able to expense rather than capitalize. The other thing that's important about having a cost segregation study is it gives you the quantification of each of those assets so that at a later date if you start disposing of certain items and renewing them, you might be able to do what's called a disposition study and basically write off the assets at the proper basis level from what was put into the cost segregation study. So why that's important is some of the assets still do remain in that 39 year wipe. So for example, say you have a rooftop and now you have your roof needs some repairs or some replacements, we can now look at it and say, okay, is it a repair and therefore we can expense it or is it a replacement? In which case we have to capitalize it, but maybe we can do a disposition on the old roof and say all the remaining basis that is sitting on the books related to that old roof, now we might be able to write it off to catch up to back to square zero and then move forward with the new roofing and say, okay, now let's take depreciation on the new roof.

So there's a lot of benefits that come from the cost segregation study that work in with the planning for future renovations and future changes on the property itself. So these are all very important goals. These are different triggers that we need to look at and what dictates how we make our decisions moving forward for the best tax situation possible. So now me and Terry are going to run through some examples of different properties that we've evaluated, different properties we've gone through and just kind of show you what some of the benefits could look like. So looking at the first one we had a trigger was a new construction. This client did a wooden pallet manufacturer. They had four pre-engineered steel structures, three were warehouses and one had office space and production facility. So there was also a railroad siding connecting to a local spur line.

Overall depreciable basis was determined to be $27,758,359. Placed in service date was April, 2023 and it was 200,000 square feet. So what are the important things here? So firstly, we look at the fact that it's 200,000 square feet and it's new construction, which means that that triggers a 179D study potentially in terms of the cost seg, we look at the fact that it was placed in service in April of 2023 means that it's eligible for 80% bonus. And it gives us an idea of, okay, is this going to be, in this case it was done during the 2023 tax year. So we implemented the study right away at the initial construction when it was placed in service, and when we look at the results of the cost side, we were able to see that our client was able to put 0.4% into five year. That's just the small minor items in a manufacturing facility.

Usually the seven year is where the machinery goes. And then we had 12.6% into that seven year bucket from that original $27 million. And then 32% moved into the 15 year. And that's because as we mentioned, it had a railroad siding connecting to a local spur line and three out of the four buildings warehouses usually that indicates that there's going to be a lot of land improvements around, and that's because there's usually a lot of concrete paving to facilitate the different trucks and being able to move in and out of the property. So by looking at these amounts, we were able to, in total, we moved over 45% into accelerated buckets of that $27 million. And our first year tax savings ended out being $3.2 million. That's after taking into account that approximate 37% tax rate. So our tax savings with $3.2 million and our deductions were probably closer to about $14 million, $12 million.

And that's really what we're looking at here. So that's just on the cost side. Now, separately from that, this client was able to be eligible for 200,000 square feet times. At the time with the inflation it was $5 and 36 cents per square foot. We were able to get to a total 179D deduction of 1,072,000. So you're looking at very significant benefits here, almost 10% of your total depreciable basis as a tax savings. And then in addition, you have this large deduction of the 179D and how they interplay together. It really can be very significant benefits that our client's able to and that can make the difference between having a tax viability and being tax free for a year, freeing up that cash, especially in a year when you just finished your construction and being able to spend that money on other resources that you need to in order to increase your operations.

So now again, another example, just kind of looking at it, I'm not going to go through the details in as much, I'm not going to go through it in as much detail as the last version, but here we're looking at a lookback study and what that means is we see the place in service date was in December of 2022. Our client wasn't aware of these incentives until 2024. And in this case, again, being a large facility and being a cold storage, they were able to take advantage of the 179D. They did not have prevailing wages since, or maybe they did, but because it was placed in service before 2023, they weren't IND debt to this prevailing wages here they had $325,000 of 179D deduction. But by just reclassing of the 31 million, they were able to reclass here they reclassed 30, 31 and a half percent.

They were able to get a first year tax savings of 4.2 million. And the reason why this number seems a little higher than on the last slide where it was in the initial year because this is a lookback study and because of the fact that it's when there was a hundred percent bonus depreciation rather than 80% bonus depreciation we're getting the catch up of multiple years in comparison to what we originally depreciated. So that's why even though the basis doesn't seem to be as significant of a difference, the first year savings can be bigger because in the second year you're now getting the benefits from 2022 along with the benefits of 2023. And in this case you have the a hundred percent bonus versus the 80% bonus. So you could see how they interplay and how the deductions really make a difference when you're looking at the manufacturing facilities. Now I'm going to let Terry go on with this one.

Terri S. Johnson: Okay, so on this one the trigger is that we're doing an addition to an existing facility with process modifications and it is a refrigerated warehouse. So some of the things that keep in mind that would pop out at me if I was looking at this was we did an addition of 54,000 square foot addition to the existing production facility and they expanded, they did the expansion using existing cooling system, but featured new palletizing systems. Again, the basis is very good. It's 35 million, so it should have a really nice deduction, but pay attention. This was placed in service in January, 2024. So one of my first questions would be, when did you start construction on this edition? Because if it was after January 30th, you have to worry about prevailing wages on the 179D. If it's before you don't, so you'd be grandfathered in. So in this particular case, we were able to do both the cost EG study and the 179D.

But those results as I mentioned, vary depending on the timing of when the project started and if it started after January 30th, then we'd have to be concerned about prevailing wages. So let's take a look at how you see the table at the bottom. If you had to be concerned about prevailing wages because the project started after January 30th of 23, it's 1 0 7 square foot, which is a 57,000 square foot deduction. If you either met the prevailing wage requirement or you were grandfathered in, which in this case they were, you would get the $5 and 36 cents a square foot, which would've been a little over $300,000. And then on the cost side of things, the engineer moved 50% into five year, which is actually pretty typical when you're looking at refrigerator warehouse and making process modifications. That's not unusual at all. And then there was also a little bit of work done to land improvements, which is 6.1%. So the total first year tax savings on this was 6.6 million, and those are after you've applied the effective tax rate.

And then the next one is the trigger is an acquisition and it's a snack food manufacturing facility. So on this one, the building was kind of plain Jane. It was one story pre-engineered still building, and it included areas for production, storage, packaging and processing. But note that there's a lot that went into land improvements. So you not only have the paid parking, but in concrete basis for outdoor lighting, but extensive landscape, a lot of site drainage. And I always say a lot of times it's not what you see, it's what you don't see. So if you have underground stormwater retention type drainage, those numbers really add up and you don't necessarily see them, but they're there and those things are very expensive. And we had chain link fences and precast concrete wheel stops, traffic, signage, et cetera. So on this one we moved almost 40% into 15 year, which is high. And then you see on the five and seven year was about 7.6% on the personal property side, so not as high on that one, but this was placed in service in June of 22, so we were still getting a hundred percent bonus. So the first year tax savings after you apply the effective tax rate was about $375,000 on that project. So the basis wasn't that high, but it's still a really nice tax savings.

So the story continues. So let's take this property that we just took a look at. And then in the current year, 1 million improvements went into the facility including advanced packaging machines that use flexible materials and upgraded conveyor belt technology for safe material handling. So that opened the door for what we call qualified improvement property and qualified improvement property is any improvement to the interior portion of a building that is non-residential, which this would be if the improvement is placed in service after the building was first placed in service by any taxpayer. So it can't be an enlargement to a building, it can't be exterior or structural. So things like windows, outside windows, things like that would not apply if you had a rooftop unit for HVAC that would not apply. But everything you're doing inside that, unless it's structural, would absolutely qualify as qualified improvement property.

So this is section 1250 property, which means it's really your 39 year assets. So if you think about it, you're moving five and seven year for personal property, 15 year for land improvements, and all of a sudden you've got a chunk of your 39 year assets in a renovation that can become 15 year. And because it's 20 years or less, you're eligible for bonus on this. So in 24, the bonus is 60%. So here on that little million dollars you've got 60% of that went into QIP, the qualified improvement property and met that definition and another 10% went into five year. So we ended up with that first year tax savings of 1 47 and some change.

Avi Jacob: Look at that

A little bit closer to qualified improvement properties, especially for manufacturing companies is also a very big factor. And what we're seeing is it's the way for the IRS to say, we want you investing in your company internally in your facilities, just like the 179D. They're saying, we want you to keep investing in your company, become more efficient. If you keep investing in your company, we'll make sure the benefits are there so that you're not getting disadvantages by spending more money to increase your facility. So another example, just to kind of move things along, another example would be in the lookback study for a fiber class manufacturing facility here, we had an a hundred million dollars depreciable basis, three stories, 200,000 square foot. Again, that's the key for 179D. You see something with a large square foot and you start wondering, is this something that could be beneficial with 179D?

The electrical system was critical here, multiple supplies and substations, and then it was placed in service in 2020 when bonus was still at a hundred percent, but the epac, the maximum for the energy efficiency, it was still a dollar 80. So we're interplaying both benefits together and we're seeing that engineers were able to move 30% into the seven year, 10% into the land improvements. And again, now we have a first year tax saving after the applicable tax rate of almost $13.5 million. So the numbers can be quite large, quite significant, especially when you're talking about larger basis. But again, you don't always have to have such a large basis. Usually we're looking at projects anywhere from a million dollars all the way up to, in this case, a hundred million dollars. All of them are worthwhile to take a look and see is this something that would be an applicable project and feasible to do a cost egg study or a 179D study.

So another trigger, a renovation study, multiple strategies at play simultaneously. This is where we're kind of looking at a new 30,000 square foot building with a conveyor connector building, 18,000 square foot of warehouse expansion, seven dock locations and a new shipping receiving office. So they upgraded machinery, cabinet shops, paint booth, QA lab, depreciable basis for all of the improvements was $25 million based on the timing of when it was there was a hundred percent bonus was in play. So few things that we're looking at in this case. So firstly because they upgraded a lot of the machines, they would have to capitalize it. They wouldn't be able to necessarily qualify under expensing from TPR tangible property regulations. But what they are able to do is they are able to now look at the assets that were originally in play and now that they've removed those items from the overall basis, we're able to look at it and say we're going to have a partial asset disposition.

And what that means is that we're now taking that remaining depreciable basis that's still sitting on the books and we're going to retire the asset and now take that full deduction that remains on the books for those, we're now going to take them in the year where it was removed. So that's a very big benefit that you can get. On the flip side, in addition to all the other items that we've already spoke about, we have the depreciation, we have the 179D deduction, all these different pieces, but then we layer on top of it, we look at this partial asset disposition and we're writing off the remaining basis of the items that we removed. So whenever you're doing a renovation or whenever you're doing a renovation, there are so many components that come into play and that's why doing a cost segregation study with an applicable firm, with somebody with a good reputation, somebody who's going to be looking at all these different details is so important because you don't want to leave money on the table from all these different components that are moving around.

And then in addition, because it's a renovation, we have qualified improvement property opportunities here, not for the new building and not for the expansion, but for anything that was done inside the original walls. So just because you did an expansion for part of the building, the remaining shell that's still there, as long as you didn't tear it down, anything that was done as an improvement internally to that original shell would be still eligible potentially for qualified improvement property. So unlike certain other benefits that you see in the tax world where it's either a yes or a no when it comes to qualified improvement property, you could be yes and no at the same time. And our engineers are trained to basically decipher what is eligible for qualified improvement property and what wouldn't be. So that's something just important to note, something to be on the lookout for and make sure that whenever you're doing a cost segregation study on a renovation, all these different components are being looked at.

And then the last example that we have, just to run through it quickly, I know we're short on time, the engineer moved 25% to the seven year, 10% to the 15 year and 30% to the QIP in this case. Again, we also have multiple strategies all at the same time. And here we're seeing that the total first year tax savings is $5.4 million from the cost se, but then with the addition of the PAT elections, which is the partial asset disposition, and with the addition of the 179D, now we're looking at a $6.2 million benefit rather than just that $5.4 million benefit. So there's a lot of benefits that can be still pulled in by doing that, by looking at those partial asset dispositions. And with that, I'm going to hand it over to Astrid, let her get the last polling question going.

Astrid Garcia: Polling Question #4.

Travis Epp: While the polling question is being answered, there was one question that came up and Terry and Avi might be a little bit vague, but the question was how is a project priced?

Terri S. Johnson: Sure, I'd be happy to jump in on that. Travis, we've talked a lot today about these triggers. So it's important that Avi and I, when we're looking at a project, we're really strategically thinking what's going on here? What is the full scope of the project? We want to maximize this benefit, so we're going to ask for a lot of information and then we will be able to come up with a strategy and then we price that project is a fixed price, and so you'll know exactly what it's going to cost. And then we also run a conservative estimate of benefit and everything that we've talked about basically today where we would include in our S benefit. So you'd have a really good feel of what you could expect and what modules would be in that report. I mean, is it going to have a disposition analysis or expensing analysis or is it just straight up construction? And then there would be a separate proposal for the one every 90. So it's not really that complicated of a process. We ask some good questions and then we get information and really just figure out what is the best strategy for this to maximize the benefit. And we put the pricing structure together, but it is fixed price so you'll know exactly what that is before you ever spend any money because there's no cost for that whole process of evaluating the project. Avi, did you have anything to add to that?

Avi Jacob: The project pricing really depends on the scope and the size of the project. Our engineer goes down to the site, they have to evaluate all the different components. So when we do our pricing, it has to do with really the size and the magnitude of the project type. So a facility that's just an empty warehouse versus the facility that's filled with machinery, obviously the machinery is going to be slightly more expensive, but we run that fee analysis before any commitment. We do it free of charge just to get a proposal estimate of benefit, and you'll see that the benefits significantly outweigh the pricing of the study. And we've had very few people come back to us where the pricing is really the issue in the situation because the benefits that we're looking at are so significant. As you saw in the examples that we ran, the benefits really outweigh any of the pricing that you'll see.

Astrid Garcia: Okay, wonderful. All right, so I will be closing the polling question now. Make sure that you've submitted your answer and back to you guys.

Travis Epp: So as we close, I'd like to thank you everyone for taking the time to participate in IRA's webinar on real estate incentives for manufacturing and distribution. A special thank you to Avi and Terry for all their comments and expertise. If you have any questions or feedback for eyes or amper, please feel free to reach out to any of your EisnerAmper contacts. Again, thanks again and I will turn it back to Astrid.

^{Transcribed by Rev.com AI}