Unlocking Tax Savings: Essential Strategies You Can Implement Immediately, Ep #10

[0:00] Speaker 2: Welcome back to By the Numbers. So we’re early 2025 right now. Many of you are getting documentation and so forth to your CPA for 2024 tax prep.

You know, there’s still things you can do to affect your 2024 taxes. There’s some things you can’t. But today I’ve got two accountants from Clifton, Larson, Allen with us.

Clifton, Larson, Allen, otherwise known as CLA. They’re a leader in accounting in general, you know, a top 10 firm nationally, but they really have a great industry focus on manufacturing. And today I have Dylan Valentine and Nick Romanelli here to talk about some of those things that manufacturers should be looking at.

We start out talking about a little bit of things that you can cover now as it relates to your 2024 taxes. And then we really start to take a dive into 2025. So this first episode, taxes are a huge subject.

So as we’re going through this, we actually decided to make this a two-part episode. So come back next week for the second part, but you can capture a lot of information in this first one. I think you should go ahead and, you know, start discussing these things internally, maybe with your CPA, share this episode with them and tell them you’d like to talk about these things.

And then come back next week to kind of wrap up talking about things you can start looking at going forward to help you with your overall tax strategy. As with all tax stuff, it’s gonna be personal to your case, your company, your ownership structure, all those types of things. But if you really pay attention to your tax strategy, you can open up cashflow for your business that will allow you to reinvest and, you know, help grow and sustain your company.

So with that, let’s dive right into this and then we’ll see you back next week.

[1:40] Speaker 4: Welcome to Buy the Numbers. Each week, we’ll explore the numbers that drive your business, from accounting and finance to operations and the exciting realm of mergers and acquisitions. Whether you’re a seasoned veteran or just starting out, our discussions will equip you with the insights and strategies you need to rein in the power of data to elevate your manufacturing company.

Let’s crunch some numbers.

[2:08] Speaker 2: So Dylan, Nick, thank you for joining me today. Thanks, Mike, thanks for having us. Yeah, thanks, Mike, appreciate it.

We’re gonna talk about taxes today. That’s a scary word for a lot of small, medium-sized businesses, for everybody, I guess, for that matter. And we are thick in tax preparation time, right?

So first of all, I appreciate you guys even taking the time to join me today. I’m guessing you’re working 60 to 70 hours a week right now. It’s starting to ramp up, yep.

Yeah, so you got a March 15th deadline coming up and then an April 15 and you’re swamped.

[2:41] Speaker 5: Yep.

[2:41] Speaker 2: And we’re in early February and you guys took the time to do this. So on behalf of the Metalworking Nation, thank you for doing that. I know this is not the best time in the world.

Why don’t you guys, Dylan, let’s start with you. Why don’t you give the listeners just a quick overview of who you are and what you do?

[2:58] Speaker 3: Yeah, thanks, Mike. My name’s Dylan Valentine. I’m a tax manager with CLA out of our Minneapolis office.

And my primary focus is working with manufacturing businesses and their owners on the tax compliance and tax consulting side and really trying to help them make an impact throughout filing season here, system with their compliance, making sure they’re getting their returns done timely and then helping plan for cash flow too, because that is a pretty significant piece of the tax equation, making sure we’re being tax efficient, being upfront about what you can expect for cash needed for taxes too. So really that’s my main focus here at CLA. And Nick, how about yourself?

[3:38] Speaker 1: Yeah, Nick Romanelli, a principal in our manufacturing group. I sit just outside of Chicago in Oakbrook, Illinois. I kind of grew up in the manufacturing world.

My grandfather started a metal fab shop here in the suburbs of Chicago and I grew up working there. So I probably am one of the few tax accountants who serve manufacturers that can run a forklift who has operated a CNC before.

[4:02] Speaker 2: There you go.

[4:03] Speaker 1: And kind of like Dylan, the focus is on getting to know our clients’ businesses, understanding what their goals are, what their incentives are, what their risks are, and really helping them plan for success in their business, whatever that means to them.

[4:17] Speaker 2: Yeah, Nick, I love that you framed it that way because in all my years of involved with a lot of businesses for years, more on the transaction side of things. And one of the things I’ve always focused on, whether it’s you’re looking at tax implications of a deal or anything like that, is how do you net the biggest number, right? How do you really grow value in your business or your personal net worth?

And taxes can be a massive part of that, right? Absolutely. So I’m gonna test you guys on, not test you guys, I’m gonna ask you to test me on one of my theories of tax that I think people generally maybe misunderstand.

Again, personal opinion, tell me if I’m right or wrong. So much of tax savings is not as much as avoiding taxes as it is postponing taxes. Would you agree with that statement?

[5:07] Speaker 1: Yeah, I think the deferring taxes from a time value of money standpoint makes sense absent having some sort of huge tax rate increase in a future year. So yeah, at the end of a year, that’s a lot of what our planning is focused on. It’s finding ways to accelerate deductions, defer income into the future, look for incentives that might permanently reduce your tax rate.

But yeah, Mike, I think you’re right.

[5:33] Speaker 2: Yeah, and then the other thing I would tell listeners to think about taxes, because I think it’s such a misunderstood concept in business, right? I mean, just taxes in general. I think most people want to pay their fair share, but also not more than that, right?

So there’s a lot of strategies, but to me, it’s not just really a compliance thing, but it’s finding cash availability that you didn’t know you had that you can reinvest in your business to grow and sustain your company. Would you agree with that statement?

[6:03] Speaker 3: Yes. Yeah, I would agree. And one thing you said, Mike, too, with tax being a big expense.

And one thing when we’re looking at the life cycle of business or just business owner, anybody in general, tax is probably one of your largest expenses over your entire lifetime.

[6:19] Speaker 5: So- Oh, for sure.

[6:20] Speaker 3: Helping plan for it and being smart about the ways you can save and defer income over time is definitely a huge lever to pull.

[6:28] Speaker 2: Yeah, I know people are always looking for, I think they get referred to as loopholes, that it’s just so often, it’s not an avoidance of tax, it’s a deferral of tax. But you need to understand all of those things, right? So let’s start to try to unveil that mystery around taxes.

And the first thing I really want to kick off with, because we are in early February, this will probably go out in middle February, 2024 is done. They hopefully have got their stuff to their accountant by now or starting to. Let’s kick off with what are a few things I could look at today that could affect my tax liability in 2024?

[7:11] Speaker 1: I think one would be to review capital expenditures for the previous year, to review lives, methods, options for acceleration. Over the last 10, 15 years, we’ve had quite a few different options for accelerating that cost recovery when you buy a fixed asset, whether that’s bonus depreciation, which had been as high as 100% scaled down under current legislation, or Section 179, which also lets you write off the cost of that equipment on day one. There’s a lot of options available.

There’s an interplay with state taxes as well. Not every state follows the federal rules, so that’s a consideration. And then if you placed in service any sort of real property, so you bought a building, you did a build-out, you expanded your facility, reviewing the costs, reviewing what assets were placed in service, potentially looking at a cost segregation study, which would take a building that you would normally depreciate over 39 years, and it takes that building and it breaks it down into components.

Some of those components may be depreciated over five years, seven years, 15 years. And some of those assets might even be eligible to be expensed on day one under some of those other acceleration methods that I talked about, which is a huge savings, right? If you think accelerating depreciation over one year versus 39 years, we talked about that time value of money before, 39 years is a long time to run that cost recovery on.

So any acceleration you can do helps your tax.

[8:43] Speaker 2: Yeah, I do want to take a deeper dive into cost seg studies because those are, you know, I think they’re often overlooked and ignored and kind of the same way with even your accelerated depreciation in section 179. I mean, I know, and I have some personal opinions on this that I actually put out on LinkedIn back towards the end of the year, but you know, this industry gets bombarded from equipment manufacturers starting in October, definitely in November, about, hey, spend your money now, take your section 179 depreciation, which is great if you need the equipment, right? And it’s an amazing tax tool, but I also know there’s people that buy equipment just to get the tax savings and then that equipment since idle.

And I don’t know that that’s the best use of your- Agreed.

[9:27] Speaker 1: Yeah, you can’t let the tax tail wag the dog. Right. When we talk with clients, yeah, that’s one thing that I make sure of.

It’s take the tax picture off the table. Were you still going to buy that equipment because it was valuable to your business? Right, and if you were, it’s a great use.

Absolutely. A hundred percent. And you can look at timing, right?

If you were going to buy a piece of equipment in February of the following year. Sure. And it’s November of the previous year.

Yeah, I think looking at when you buy that equipment, when you place it in service this year versus next year, absolutely a consideration. But just to buy an asset solely for the tax deduction, I think you’re missing the point. You’re not quite focused on the operations of your business and growing the value of your business.

[10:12] Speaker 2: Yeah, the sales teams in this industry have obviously, rightfully so, made a good attempt to educate people on the availability of Section 179. Although I think they just rely on it sometimes maybe too much as a sales tactic. And anyway, that’s a totally different discussion that we don’t need to dig into the details of.

The other thing I always caution people of is if you’re looking to sell your business in the next two to three years, buying a piece of equipment and fully deducting it, you’re just going to pay taxes on it in a few years because you have a zero cost basis in it, right? Yep. So you have some ordinary income recapture there, yeah.

There’s a lot of considerations there. But again, that could be a whole nother episode that maybe we can dig into sometime. Yeah.

Okay. So you mentioned some credits, some cost segs, some things like that that people could do now. And we’ll dig into a little bit of those.

To start digging into, I think something that a lot of people struggle with is inventory, right? So I think for the most part, manufacturing thinks of inventory as just what I have on the shelf, right? So I’ve got raw goods.

I’ve got, you know, generally I look at it as three categories of inventory, right? You’ve got raw materials, whip and finished goods. And this industry can get incredibly leveraged on that, right?

So maybe we have a working line of credit where we’re leveraging 50% of that towards our line of credit. But the accounting of inventory is really what’s more important, correct?

[11:32] Speaker 1: Yeah. From a tax perspective, the accounting for inventory determines when you relieve that cost basis of inventory against the revenue, against your receipts. So when are you taking the deduction for that inventory?

And especially over the last few years where we’ve seen costs be fairly volatile, there can be some planning around that. So the normal, probably the biggest distinction that you hear from an inventory perspective is FIFO versus LIFO. So FIFO would be that you’re relieving costs on a first in, first out basis.

So the oldest inventory on your shelf, that’s the cost. The cost of that inventory is what you’re relieving on your tax return. And that may be okay.

But if you think about the last few years when you’ve had periods of rising costs, there’s another method that you might be able to use, and that would be LIFO. So that would be last in, first out. So you’re looking at the most recent purchases that you’ve made and relieving the costs related to those purchases against the receipts.

And when you’ve got rising costs, that can lead to increased cost of goods sold. So quicker cost recovery. And the same concept, like we talked about on the depreciation side, the sooner you can recover the costs, you’re paying less tax today and deferring that tax into the future.

So looking at FIFO versus LIFO is a huge consideration. I would tell you that LIFO does have some challenges. There are a few different options that you can choose.

There’s some tracking and some different methods available there. And if you were to sell your business, this is another one where you could end up with some recapture on the back end. So if you’re planning to go to market and sell your business, maybe doing a LIFO calculation isn’t the right time for that.

Because to the extent it’s all kind of timing, right? Your total cost of inventory, you’re going to relieve them over the course of the business. It’s just, what are you picking up now versus in the future?

And when you sell your business, any of that incentive planning around LIFO gets recaptured because it all kind of reverses in the year of sale. So just a consideration on timing of those costs.

[13:41] Speaker 2: This is something I’m relatively unsure of, but I can change my LIFO versus FIFO of counting of inventory throughout the life cycle of my business also, right?

[13:49] Speaker 1: You can. There are certain rules and restrictions and depending on which method you want to go to. Typically when you do that, you can’t change it for another five years.

So the IRS doesn’t want you looking at it every year and bouncing back and forth between the two. But typically once every five years, you can kind of review that accounting and look to see whether FIFO or LIFO makes sense. And if you want it to change, there’s an application form that you’d file with the IRS to switch.

So yeah, definitely a consideration. We saw a lot of that over the last eight years, just given the supply chain and the cost of inventory, there was a lot of change to LIFO.

[14:31] Speaker 2: I know in my business, kind of since COVID hit, right? We’ve seen incredible volatility in materials.

[14:37] Speaker 1: Yep.

[14:38] Speaker 2: I mean, three, 400% in some cases. So it could be a good time to talk with my accountant about how am I valuing inventory but then I wouldn’t be able to look at it again for five years. Correct.

[14:52] Speaker 1: Yeah, you’d kind of be in that holding period while you wait for that five years to run out. One other comment on LIFO, and this is somewhat unique in the tax code, is that if you use LIFO for tax, you also are required to use LIFO for book purposes. Okay.

You don’t have to use the same method of LIFO, but you have to use LIFO. So it does have an impact on your financial statement as well. Sure.

So just maybe a non-tax consideration to add in there as you’re reviewing, just the impact on what your gap basis financial statements will say and how that impacts with banking agreements, covenants, things like that.

[15:28] Speaker 2: Dylan, what would you say in the context of inventory and small to medium-sized manufacturers and so forth is the biggest consideration they should look at and consider today?

[15:42] Speaker 3: Yeah, I’d say on the smaller to medium-sized manufacturers, when we look at what options they might have, there’s what’s called a small business taxpayer exception, where if you look back the prior three years and your average annual gross receipts are under $30 million, that’s where the IRS draws that line of what’s considered a small business taxpayer. So there are quite a few taxpayers that are in that bucket that they’re below average annual gross receipts of $30 million. And one of the things that if you’re over that, a lot of our manufacturers, they have to also calculate a separate tax inventory, which is called UNICAP or uniform capitalization, where the IRS generally says, okay, you’re doing one method for book.

You’re already capitalizing costs. That’s great. We also want you to take a deeper dive and capitalize more direct and indirect costs that are associated with your overhead accounting department marketing that maybe if you’re already doing full absorption accounting for book purposes, maybe you’re already grabbing a lot of that.

And then that capitalization percentage isn’t quite as high, but the IRS still wants you to do that. Then bringing it back to this small business taxpayer, if you’re under that $30 million and you have a UNICAP balance that you’ve been calculating for tax purposes, you’re able to actually get off that method and create some tax savings that way and not have to actually capitalize additional inventory for tax purposes as a small business taxpayer. Right.

And maybe go a little bit further on that too. There’s other methods around non-incidental materials and supplies. So if you look at your overall inventory capitalization for book purposes, and maybe there’s just really small components that are going into your manufacturing process, but in the grand scheme of it, it’s not very material and the costs of it are pretty low.

But when you look at it in total at the end of the year, maybe there’s a lot of volume and that cost is somewhat meaningful. There are methods that are available to those small business taxpayers to just directly expense some of those non-incidental materials and supplies at the end of the year that you may already be capitalizing.

[17:58] Speaker 2: So define for the listeners what non-incidental materials and supplies means. Like what would be an example of that?

[18:04] Speaker 3: Maybe some of those like, okay, you’ve got miscellaneous nuts and bolts that are going into a piece of equipment that you’re assessing. Yeah, there’s other very small, what you’d maybe call immaterial, and maybe people are already expensing those anyway.

[18:19] Speaker 1: And that’s the lubrication that go through your machines as they’re running and that’s being consumed, typically lower dollar value items, but things that you are consuming in that manufacturing process.

[18:30] Speaker 2: Yeah, and there’s a lot of that in the manufacturing process, right? Yep. Golly, the list could be countless.

[18:37] Speaker 1: Yeah, and that’s when it’s helpful to get out to your client to walk the floor or walk their shop and just kind of see what’s going on. And that’s what I’ll typically do is, you know, what’s that? What has this been here and how are we accounting for it?

[18:50] Speaker 5: Sure.

[18:50] Speaker 1: That’s a lot of times how you start to unpack what the client has and how they’re accounting for it by walking the floor and seeing it with your own eyes.

[18:59] Speaker 2: Right. So for those smaller manufacturers, I know there’s a lot of unique opportunities to streamline taxes and improve cash flow. And maybe one of the most, maybe understood things that I see anyway would be that kind of cash versus accrual accounting.

Can you guys kind of touch on that and why I might choose one over the other? And then even the process of switching, right? Like, what does that look like?

And what effect could it have on my current tax liabilities or obligations?

[19:29] Speaker 3: Yeah, the switch to cash method can be a pretty meaningful change for a lot of small business taxpayers. Generally, people are keeping their books on the accrual method for the most part. Sure.

Going back to what Nick had mentioned about the life of inventory and maybe you need to be on the same method for book and for tax. Whereas if you were to switch to cash method, you can continue to keep your books and records internally on the accrual method. Maybe that’s one common misconception when I’m talking to clients.

Hey, switching to cash method would be a good opportunity for you for tax. Then the main question is, do I need to change what I’m doing internally? And for that, you actually don’t need to change, which is generally what people want.

They want to keep their books on their accrual method. And what that can mean in terms of tax savings, when you have, say, your accounts receivable well in excess of your payables for the year, generally, you’re paying tax on those receivables because you’ve already recorded the revenue on the accrual method. And if you were to switch to cash, you’re truly just getting back to what have I received in cash throughout the year?

And what is my AR balance? And I get to subtract that out of my income for the year. But then on the flip side, you also look at your payables and other liabilities that are creating deductions and things that you haven’t paid by the end of the year.

And that comes out of the expense side. So generally, when we’re looking at this opportunity for taxpayers, do you have receivables in excess of your payables? And some years it might switch back and forth depending on how the year goes.

But most of the time, you’re creating that income deferral on switching to cash method.

[21:16] Speaker 1: Yeah, you’re not paying tax on the income until you collect it in cash. You don’t get a deduction for your payables until you actually pay them. So it creates kind of in the year of transition.

So let’s say you’ve been running as an accrual basis taxpayer historically, and you want to switch to cash. In that first year, there’s kind of a supercharged benefit because you’ve paid tax historically, and all of that accounts receivable in excess of the payables. So the way that works is when you change, you get to basically reset as if you were doing cash basis all along.

So that spread, as of the beginning of the year, you get to take a deduction for it. Again, because you’ve already paid tax on income. Now under the new method, you shouldn’t have paid tax on that income.

So you’re one, you get that nice benefit of recovery. And then going forward, it’s a deferral, right? It’s that one year deferral every year.

And it just helps with cashflow planning. It helps people operate their business with one caveat being the same thing that we’ve talked about on kind of the inventory and some of the depreciation things. If you’re going to go sell your business, at some point, if you’re selling accounts receivable, well, you just collected all of your accounts receivable on the sale.

You have to recognize that ordinary income. So as long as you are understanding and quantifying kind of what that negative backend tax impact is, the benefits of the deferral are huge.

[22:41] Speaker 2: So if I’m thick and operating, right, and I’m not considering a possible transaction with my company in the next few years, and I have customers that are, so for example, my customers are mostly about on average, I’m about a net 90, which is a long time. And most of my vendors are net 30, right? So I have a pretty big spread there of when I’m paying for my labor and my materials versus when I’m getting paid for the delivery of the job, right?

Because it’s net 90 from the time I ship it, not by the time I start working on it, right? So if I’ve got to say a four week lead time, I’m really running 120 days from the time I’ve incurred the expenses of that job to the time I’m going to get paid. And just that general sense, should I be looking at cash or accrual?

[23:26] Speaker 3: Yeah, I’d say in that sense, looking at cash would be a good opportunity for you because you’re already incurring a lot of those expenses well ahead of when you’re actually getting the cash. So it truly gets back to you recognizing that revenue when you’re actually receiving that benefit.

[23:41] Speaker 2: Right. Now, if most of my customers were net 30 and I’ve got that same three or four week lead time, so I’m getting an order in January, I ship it in sometime in February and I get paid in March, then accruals probably, I mean, that’s not necessarily a big lever for me to pull probably at that point. Is that fair statement?

[23:59] Speaker 1: It depends. I mean, I think you’ve just got to look at your balance sheet at the end of any given year. Okay.

Right. Even if you’re net 30, you’re still looking at pushing income into a subsequent tax year.

[24:10] Speaker 5: Sure.

[24:11] Speaker 1: So while it may only be 30 days on the calendar, it’s another year of tax, right? So you’ve got different options on how you make estimates. It still may make sense to be cash basis in that scenario, even with the shorter sales cycle.

[24:25] Speaker 5: Okay.

[24:25] Speaker 1: Because you’re still getting that benefit of the deferral, whatever at the end of the year, accounts receivable in excess of payables and accruals times your tax rate. That’s the benefit of your deferral being on a cash basis.

[24:38] Speaker 2: That makes sense. You know, we talked about inventory. You can only make that switch every five years.

How often can you do that with the cash versus accrual accounting method?

[24:47] Speaker 3: That would be the same. You’re able to switch and then it’s a five-year waiting period. So if you’re really wanting to go back to accrual, you’ve got to wait five years and vice versa.

[24:57] Speaker 2: Okay.

[24:57] Speaker 3: On that too. And in order to do that, it’s a similar process like the inventory accounting method change. It’s a form you would file with the tax return for that year that you’re making the change.

And it’s generally an automatic accounting method change, meaning the IRS was going to automatically accept the method change, assuming after it gets reviewed, everything is in line with where it should be, but they automatically will accept the method change. Okay.

[25:24] Speaker 1: Yeah. Maybe one caveat to that. Normally you have five years, but let’s say the scenario is you qualify today because you’re a small business taxpayer in the eyes of the IRS.

You’re under that gross receipts threshold that Dylan mentioned.

[25:38] Speaker 5: Right.

[25:39] Speaker 1: And then in the next two years, your revenue crosses over that prior three-year average and you’re no longer considered a small taxpayer in the eyes of the IRS. Well, in that scenario, you can’t wait the full five years. In the year that you become a non-small taxpayer, you’ve got to make the change back to accrual.

Absent that, you’ve got that five-year window, but just wanted to clarify that one rule.

[26:01] Speaker 2: Okay. Now, I know one thing, there’s a lot of manufacturers that work off of some long-term contracts, right? Maybe they have a seven-year contract with an aerospace company to provide parts and so forth.

Is there any contract methods there that would matter to some of these things we’re talking about from an accounting method standpoint?

[26:25] Speaker 3: Yeah, I would say on the completed contract method, it may depend on if you’re already on that cash method because still in that case, on your example of a seven-year contract, you’re still gonna be recognizing income when you’re getting paid on it. Maybe they have some advanced payments during the year on the work that you’re doing. You’re gonna be recognized that income as you’re receiving it.

[26:45] Speaker 2: Okay.

[26:45] Speaker 3: On the maybe accrual method, when you’re having these longer-term contracts, generally on something, if you take, for example, you’re manufacturing a piece of equipment and that contract is gonna take into a second year. So you start the project in year one and you finish it in year two, that completed contract method would say you don’t have to recognize any of that income until you finish that project in year two, where it gets a little bit more complicated in some of those longer-term ones where you say the contract value is a seven-year contract and it’s X dollar amount. Generally, for tax purposes, you can’t defer that amount of income for that seven-year period and wait till the very end on that.

Generally, it’s a one-year deferral on that.

[27:31] Speaker 2: So, I mean, again, could have major impact on your current year tax liability, for sure.

[27:37] Speaker 3: Yeah, definitely. Coming back to that timing of when you’re recognizing income, if there’s a way to defer some of that income into a subsequent year, like Nick had mentioned, what’s your tax rate between federal and state? And what’s that value of that tax benefit that you’re recognizing on that deferral?

[27:53] Speaker 2: Okay, so I wanna talk about two things. One we’ve touched on, the other we have not. But let’s start with the one we have touched on, cost segregation study.

So I know a lot of small, medium-sized manufacturers do own their own real estate and their buildings and their entire infrastructure. What is a cost seg study and why do I care?

[28:13] Speaker 1: Yeah, so a cost segregation study is related to real property. And it’s looking at real property, so a building that you place in service facility that you have. And it’s breaking that facility down into smaller assets.

So it’s segregating out different classes of assets. And the reason that’s important is because in general, real property is depreciated over, non-residential real property is depreciated over 39 years. Which as we’ve talked about before is a pretty long recovery period.

Instead, the cost segregation can pull some of those costs out of 39-year class to 15-year, to seven, to five. Depending on the type of facility, if it’s a true manufacturing facility and you’ve got a lot of HVAC hookups, electrical running all over the place, plumbing specific to machines, there’s probably gonna be- Air. Yeah, air.

Yeah, it’s probably gonna lead a lot of benefit or more benefit for a true manufacturing facility. If it’s a warehouse and it’s kind of an empty shell with racking in there and maybe some docks, things like that, still beneficial. There may not be as many things as you could segregate out, but still beneficial to do it.

Because again, it’s all timing. The recovery, recovering something over five, seven, 15 years is better than 39 years. And the other critical point is a lot of the accelerated methods require assets to have a useful life of under 20 years.

So to the extent that you wanna use bonus or 179, you may need to segregate those assets out into those asset classes to be able to recover them on day one.

[29:51] Speaker 2: So for example, to put that in a real life example, and I’m just gonna use some fake big round numbers, but let’s say I have a $2 million piece of real estate that I’m using as a manufacturing facility. And when I moved in, let’s say I spent $100,000 on my electrical system, right? Because I had to have some transformers, I had to run power to every machine, maybe each machine has some transformers, et cetera.

But I built that into my build-out costs of that facility, right? So I didn’t pay 100,000, I just, it was $100,000 of my purchase price or whatever. I could pull that $100,000 out and take that accelerated, not in 39 years in the price of the building, but maybe in some cases use section 179, capture it this year.

I don’t think that’s true with the electrical system.

[30:45] Speaker 1: It depends, yeah. So if that electrical system was specific to a machine that you were putting in service- Then you could, okay. Then you could, because they would tie that electrical system back to the machine and the machine would be a five or seven year asset.

So you absolutely could do that. And it even goes beyond that. So cost segregation studies don’t have to be for new construction.

You could have purchased the building three or four years ago and set it up on your books as a 39 year asset. That doesn’t preclude you from doing a cost segregation study in a subsequent year. CLA has a team of engineers that would go out and block the property.

They would review the original purchase docs and any construction you’ve done since then. And using that information and other information we have available, kind of create that picture and break out some of the components of the original building that you bought three or four years ago. And then what you would do is you would file one of those accounting method change forms that we’ve talked about a few times here.

And what that accounting method change form would do, it would say, okay, how much depreciation had you taken as of the beginning of the year under your old method? You’d compare it to how much depreciation you should have taken after we segregate out all of these assets. And typically the post cost segregation depreciation number is higher.

And so in that year of change, you get to catch up to that higher number and take a deduction in the year that you file the accounting method check. So this is something that, yeah, not new construction. Everyone should be reviewing their balance sheets.

And if they see a building on there with a big round dollar amount, 39 years, that’s absolutely something that you should look at.

[32:26] Speaker 2: Okay, there’s so much to cover here, guys. And I think what I want to do right now is I want to take a break in this conversation and we’ll pause this episode here. And then we’re going to pick it up next week when we’re going to dive back into some of these details where people can really dig in and make a difference in their tax savings.