As the saying goes, especially in this competitive market, ‘you need to make money and save money’ in order to survive! As a golf professional, you are the expert at ‘making money’ but there is another type of professional who can assist you with ‘saving money’.
Unlocking hidden savings
One underutilized savings tool is the cost segregation study. A cost segregation study performed by a Cost Segregation Professional literally puts money back in your pocket, through federal and state income tax savings. Any for-profit golf course, golf resort or golf community may take advantage of this tax savings strategy.
A quality cost segregation study looks at all of the real property improvements associated with your golf course, golf resort or golf community and reclassifies much of that property into shorter tax-lived 5 and 15-year property.
Without a quality cost segregation study, your in-house accounting group or CPA firm has no option but to depreciate, your real property improvements over much longer periods of time:
- Commercial Residential Rental Golf Communities: 5-Years
- Golf Resorts: 39-Years
- Golf Courses: 39-Years
Using IRS approved methods to produce a quality cost segregation study, a Cost Segregation Professional identifies and reclassifies improvements from 27.5 and 39-year real property to 5 and 15-year personal property. This reclassification can be accomplished through a number of survey and modeling methods with the engineering approach being the IRS preferred approach.
A Cost Segregation Professional using the engineering approach or, in the case of acquired property, the engineering and depreciation approach can save you thousands or millions of dollars $$$ in federal and state income taxes.
Introducing QIP
Be it a recently built, newly renovated, expanded, or acquired property; a quality study can save you money!
The Qualified Improvement Property (“QIP”) regulations now allow for the reclassification of newly constructed/non-structural components from 39-year to 15-year depreciation as long as the improvement went into service after December 31, 2017.
In addition, bonus depreciation allows up to 100% of 5 and 15-year property to be depreciated in the year the property was acquired or went into service. This bonus depreciation allows us to look back to year 2002.
The reclassification of property from 39 and 27.5-year property to 5 and 15-year property along with bonus depreciation and QIP regulations may allow for more than 50% of the total construction and acquired costs to qualify for accelerated tax depreciation and special tax savings.
Estimating benefits and utilizing tax tools
The tax savings, prior to engaging the cost segregation professional, can be estimated as ‘net present value tax savings’. The cost to build or acquire your property along with your current federal and state tax rate can be used to estimate the potential tax savings, also known as the estimated benefit.
For properties that went into service between 2002 through 2022 there are tax filing tools such as the ‘Amended Return’ or ‘Form 3115 – Application for Change in Accounting Method’, also known as the ‘recapture tool’, which can be used to recapture all past tax savings in the year your cost segregation study is performed.
Estimates of Benefit using a $10,000,000 Build/Acquired Cost:
(Based on a 35% Federal Tax Rate, 5% State Tax Rate and 8% Return on Investment)
Commercial Residential Rental Golf Communities: (No Study) = $0 Benefit
Commercial Residential Rental Golf Communities: (No Bonus Depreciation) = $245,407
Commercial Residential Rental Golf Communities: (with Bonus Depreciation) = $340,040
Commercial Residential Rental Golf Communities: (with Bonus Depreciation & QIP) = (Not Eligible)
Golf Resorts: (No Study) = $0 Benefit
Golf Resorts: (No Bonus Depreciation or QIP) = $279,475
Golf Resorts: (with Bonus Depreciation) = $365,505
Golf Resorts: (with Bonus Depreciation & QIP) = $2,293,564
Golf Courses: (No Study) = $0 Benefit
Golf Courses: (No Bonus Depreciation or QIP) = $335,370
Golf Courses: (with Bonus Depreciation) = $438,606
Golf Courses: (with Bonus Depreciation & QIP) = $2,298,615
