Podcast: Cost Segregation - Is it Right for You? An Interview with CSSI
An insider look at how cost segregation can free up working capital for you today.
About the Host
Ryan is an entrepreneur, podcast host of the show Life After Business and the co-owner of Solidity Financial. Having personally experienced the hazards of selling a business, he joined up with his friend Brandon Wood to educate others on the process. Through their business (Solidity Financial), they provide a platform for entrepreneurs called Growth and Exit Planning that helps in exit planning, value building and financial management.
About the Guest
CSSI stands for Cost Segregated Services Incorporated. Our guests today will discuss how cost segregation (a form of accelerated depreciation) can help you free up some cash so you can reinvest it in your business or handle an unexpected expense. The company provides defendable numbers so you can rest assured that any money CSSI frees up is legitimate and aligns with the IRS' mandates.
Our guests today, Jodi Nielsen (national senior accounts manager) and David Deshotels (lead presenter and face of their program), share the industry insights that allows their company to service its clients so well.
If you listen, you will learn:
- What is Cost Segregation Services Incorporated (CSSI)?
- Why “friends don’t let friends over pay their taxes.”
- How will the new tax codes affect business owners?
- Why cost segregation is the best method of depreciation.
- Straight depreciation vs. cost segregation
- Why the government allows cost segregation.
- The strategies to reduce recapture.
- Why not to do cost segregation.
- Why a cost segregation study is a great negotiation tool.
- How cost segregation helps with the IRS.
- Jodi and David’s final thoughts.
Announcer: Welcome to Life After Business, the podcast where your host, Ryan Tansom, brings you all the information you need to exit your company and explore what life can be like on the other side.
Ryan Tansom: Welcome back to the Life After Business podcast. This is episode 107. If you're a business owner and you own a building today, you have to listen to this podcast because we're going to talk through different ways to keep more of your money in your pocket and I think that is so unbelievably important when you're talking about how to increase the value of your business in light of different exit options and how to juggle and how to arrange this jigsaw puzzle to have the best outcome possible. We have on the show today, Jodi and David from CSSI, which stands for Cost Segregation Services Inc., and they're here to explain to us how cost segregation, which essentially is accelerating the depreciation in different parts of your building, will help you get more money in your pocket today to offset the profits. And then I help architect the different outcomes that you want to build the value of your business with the investments that you're using that money from. And then also how to architect the best ideal internal or external transition. It's amazing. I can't believe more people don't know about this cost segregation and this is something with the new tax law, there's some additional changes that allow this to be even more advantageous for anybody that's an owner of a building and a business. So I really hope you enjoy this episode with David and Jodi. So without further ado, it's time to learn how to keep more of your money.
Announcer: This episode of Life After Business is sponsored by GEXP Collaborative. Their proven process gives you clarity on all of your exit options and how those options impact your financial success, timing and future happiness. Sell your company on your timeframe to the buyer of your choice at the price you want.
David Deshotels: Hey Ryan, this is David. May I ask you a couple of questions? If you were paying more taxes than you had to, would you want someone to tell you that you're paying more taxes than you had to?
Ryan Tansom: Uh, yes.
David Deshotels: And so if you paid more taxes in the past, would you want them to tell you how to get your money back?
Ryan Tansom: Yes. And then how to go get it.
David Deshotels: And how to go and get it! And, you know, so, so, you know, I don't know what kind of titles you put on this thing, but we should probably label this discussion between you and me and Jodi: friends don't let friends overpay their taxes.
Ryan Tansom: Yeah, I'd say that would be a good friend that would not let me do that. And I think with this new job acts and all the stuff that, all the confusion that's going on right now, I think you two are going to have to provide a lot of insights on what's going on and specifically from your guys' roles within that act. But maybe for the listeners, let's give. Let's just give a little bit of background, Jodi and David, on where you guys came from and how you ended up doing what you're doing.
David Deshotels: Wow. Well, again, Ryan, be careful asking two salespeople that question. We're going to spend the whole hour talking about ourselves. Alright, Jodi, make it quick.
Jodi Nielsen: Well, national engineered-based company, Cost Segregation Services Incorporated. It's been around since 2001. Um, I've been with the company for going on eight years and my degree's in nuclear medicine and I love helping people save money.
David Deshotels: That's excellent. So Ryan, the other part of that is you've got a mechanical engineer talking about taxes, so we're going to lose this audience pretty quick if we don't give them benefits. So it's not about me, it's about the, it's about the people that are listening in. So, so Ryan, it's uh, I, I talked to CPAs all over the country all week long. The questions that they're getting from their clients: how do these new tax codes, the new tax cuts and jobs act, how's that gonna affect me and what do we need to start doing now to take advantage of the new rules because there's a brand new game, new rules to the game. So got to play the game differently. So...
Ryan Tansom: And the game... what's interesting too is because I had... and I think some of the listeners would know that I interviewed an EY, Ernst & Young, tax guys - lead tax guys - and we did a big broad brush stroke, but you guys approached this from a very specific angle, which is why even a lot of the CPAs don't understand necessarily what you're doing, but I think you know, all the different areas that the game has changed and a lot of different fronts from the businesses, from personal taxes, from real estate, and you guys fit a very specific role. So maybe Jodi or David one of you guys take up a... What is it that's specific that you're doing that impacts the taxes that the listeners might be paying?
David Deshotels: Ryan, we're not going to be as nearly boring as that guy was. I have my heart in, but we're talking about real dollars. So we want to convey to people, here's how you reduce the amount of taxes that you're paying. Here's what you need to do to take advantage of these new tax cuts and jobs act. Yeah, you're commercial building owner. So let's limit the conversation to do you have a commercial building or you're thinking about buying a commercial building or you're looking to exit your sell your business in four or five years? What do we do now to prepare for that in relationship to the commercial building and what we do with that? So it's pretty simple where people can take advantage of this if they make the one right decision between, do I do straight line depreciation or do I do cost segregation depreciation? It depends on which method you choose. And if you choose the wrong one, straight line depreciation the wrong one, if you choose a cost segregation method, there's all these new tax deductions that are available to you if you knew how to take advantage of them. So that's what we're going to talk about. Let's see how to take advantage of these new regulations by employing a cost segregation model for depreciation of the commercial buildings.
Jodi Nielsen: And probably, Ryan, um, they're just listening. They're probably wondering what is the cost segregation study? What, what does it consist of? So what it basically is is we are going to be accelerating the depreciation of different building components and systems within the building. When you straight line commercial building 39 year or residential 27-and-a-half year, everything's on the same playing field as far as getting a little bit of depreciation over that time period. What we do is we're able to come into that building and break up pieces so to speak, and to be able to put them into five, seven or 15 year category. So you're able to use your money now instead of having to wait. So the point is cash flow, cash flow, cash flow in what can we do with this? And the reason this is such a big point right now and CPAs know all about this. This is not something new, it's been around since 1997. They are just typically not able to document and get calculus, calculated, defendable numbers for a particular building component or system. But they will apply the numbers we provide on the taxes and then they will use them with the tax cuts and jobs act to get more money for their clients. But they don't have anything defendable and that's what the IRS wants is documentation, documentation, documentation. They don't care what the number is. How did you get it and show us.
Ryan Tansom: Right. So what I think is so funny, Jodi, when you and I first met it's almost so "d'uh". So you're going to take all of this stuff that's in the building... so the building, you might want to depreciate it for 39 years, but like who says the carpet last that long or the light bulbs or all this other stuff. So it actually makes a lot of logical sense that you would have different schedules for those things. So you know, for, just to put some really a wrap, some serious comments sensor on. When you say more money faster and now, can you kind of just explain, I mean, I know we're kind of getting to probably one of the one of depreciation, but like how was that actually happening? David, do you want to tee it up for that?
David Deshotels: I'm going to go back again and go back to the "d'uh" factor. Let's make it even easier on uh... I use the Big Mac analogy. So in describing a big Mac, you know, how do you describe it? Do you say it's a hamburger? Or do you say it's... Ryan, do you know it?
Ryan Tansom: No I don't actually...
Jodi Nielsen: Two whole beef patties, special sauce, lettuce, cheese, pickles and a sesame seed bun.
Ryan Tansom: I don't know if you're familiar with Mitch Hedberg. He's got a joke about sesame seeds. That's the only other...
David Deshotels: All right, so all the baby boomers are grinning in their cars and all the millennials are going, what the hell was that? That's the power of 40 years of uh, advertising. Uh, so, so I give that analogy to say you can describe that as a whole, as a hamburger, or you can describe a big Mac as its parts and pieces. And so that's the difference between straight line depreciation which describes the building as a whole and therefore you depreciate that building as a whole over 39 years or 27-and-a-half years. That's a long time. Or you can describe that built into the IRS and it's parts and pieces to break that up and do a study to give value to all those parts and pieces. And then the IRS lets you appreciate some of those parts faster. Jodi said five slash seven slash 15 year basis. So you get your deductions upfront versus waiting a long time. So it's equivalent to doing your taxes with the 10:40 easy forum where you get no deductions, straight line depreciation or if you do some work let a cost segregation professional do that work and break that building up and value it in its parts and pieces. Then you're eligible for these deductions. For instance, with the new tax cuts and jobs act, when someone buys a new building or build a new building in 2018 and beyond the next five years, they'll be able to depreciate maybe 15 to 30 percent of that building in the first year. So there's - it's called 100 percent bonus depreciation for the parts and pieces that we identified that qualifies for that. So that's huge. A million dollar building you could ever get, you know, quite a bit of cash flow, $50-80,000, in that first year depreciation. Or, you know, you could default to looking at the building as a whole and you might get $6,000. Which do you want?
Ryan Tansom: Fantastic analogy of the big Mac and all the parts and pieces because all the parts and pieces are different in a building. Even throwing some numbers out there, so for practicality purposes, so if we get $100,000 worth of windows because you've, you've put a value to all that and that's where I think your engineering background comes in, right? And you put a value to all of those different parts and pieces so that hundred thousand dollars over 39 years versus $100,000 over five or whatever the windows are. I'm just making it up right now.
David Deshotels: Bad analogy because they're 39, but that's okay. You're not in the business.
Ryan Tansom: Right, that's what you guy are here for! So whatever that $100,000, that's over 39 when you smush it up front, there's more deductions you can... So you're taking instead of that payment over long period of time or that depreciation, you're smushing and offsetting that against profits. Correct?
Jodi Nielsen: Right, so... I was just going to give him some numbers...
David Deshotels: To use your car, to use the carpet analogy, when you buy a new building, you can depreciate all the carpet in the first year under a hundred percent bonus depreciation. When you do a renovation, you'll be able to depreciate all that carpet. So those are some of the examples. So. So Jodi, give us some examples of buildings on, on what the cash flow might be in certain situations. Some examples.
Jodi Nielsen: So people listening here,, so for every 500,000, as David mentioned, your tax benefits going to be somewhere between 20 and $70,000 depending on what the building's used for and what type of components are in it. And we will uh, no charge or obligation analysis, which I'll get into a little bit later. So when, like for an example, I just did an ACE Hardware store. Most people know about ACE Hardware. This guy, well he has two ACE Hardwares, let's say one of them he's owned for like seven years and it was like a $540,000 building. His tax benefit on that $39,548. He just built like a $2,000,000 ACE Hardware last year. His tax benefits on that was like $120,000. I just did a hotel, like a $38 million dollar hotel. I don't know if you know about that one, David. And we came in, I don't know if he knew about that one day, but we came in at $700,000 more than anticipated. So his tax benefit was over two point $7,000,000. So we're talking a lot of money and how for your listeners to what do they do with that money? So basically if easy numbers, let's just say 100,000, if you owe 100,000 in taxes this year, you don't write a check to the IRS. It's cash flow. What can you do with that $100,000? If you only have 50,000 this year for tax year, you don't lose it, you don't pay anything this year, then next year it's as I call it in the holding queue and they don't pay any taxes the next year until it runs out. They used to be in for 20 years, but it's the new tax jobs law, it's now to infinity.
Ryan Tansom: I think that's the perfect analogy, Jodi, and I think maybe even to clarify when you're talking about those different numbers of the ACE and the hotel and stuff is it's not additional money that they are. So they're not getting $2.4 million in extra money for... They're getting their money now. Right? So you're able to do with clarifying questions that make sense?
Jodi Nielsen: You're using your money now to do something. Do you buy more equipment to buy another restaurant? Do you build another hotel or do you pay it off or do you buy more equipment? Do something with their money. A lot of people seem to like, that's easy to remember. If I asked you... you win a million dollars, Ryan in a lottery, and I asked you, do you want a little bit of it every year for 39 years or do you want a bulk of it right now? Well, you want a bulk of it right now because it's time value. Money. A dollar is worth more today than it will be tomorrow. So definitely want to use your money. Instead of giving the IRS an interest-free loan, you're giving yourself one and...
Ryan Tansom: And maybe that leads right into the perfect question of why do they do? Why does the IRS let you do this? Why does it, why are they, why are they letting this happen? Or why did they want it to happen?
David Deshotels: What Congress did was they're trying to stimulate the economy so they're trying to reduce people's taxes. So what this is doing is for the commercial building owner, they're creating more deductions. So what this accelerated depreciation is is giving the a commercial building owner more deductions. Therefore, as you're asking Ryan, therefore he has more cash flow because he has less profit because he's, Yep, greater textbook. So therefore, you know, that's what they're doing to try and stimulate the economy is to make it to where you know you're getting your depreciation deductions faster, you're getting the cash, you're putting that back into the economy and overtime that money's going to grow into the economy. Hey, they're not giving you these deductions, it's, this is basically an interest-free loan from the government in that there's recapture. You got to give this back at, at some period of time, you know, when you sell the building. And, and we'll talk about the exit strategies for people in their buildings or how to mitigate some of that recapture. Again, an interest-free loan from the government. So it's not free money. Oh, we'll talk about some situations where it is, uh, it's getting more deductions now versus in the future. So in the next five years or so, we have 100 percent bonus depreciation, section one 79, which if you do a put on a new roof or HVAC, you can write that off. So they're trying to get you to spend money, buy things, stimulate the economy and you know in time you'll pay that money back.
Jodi Nielsen: Another point on that that too. So when you do a class segregation steady $100,000, or maybe now I'm going to do improvements to my building or I'm going to add onto my building. So you do a cost segregation study, you get the benefit. Then you also can use what's called, we won't get into too much, repair regulations in your favor, but now you put under $200,000 into your building. You come back out and will cost a, the improvements that you did to your building. And it's not a one-time thing either for just your, uh, listeners either if you do a cost segregation study on a building and I sell it and slash or I die and someone inherits it or whatever, it starts over at the new appraised value. And we start doing, we do the same building new person, new owner, a new study.
Ryan Tansom: Interesting. Because now you've got a benchmark for all the stuff. So if you do it once, now you've got a schedule of how much everything is actually worth in your building. Like d'uh again. So you know, maybe going back to the recapture David, because you know, I know we're going to get into how this correlates towards options or the buildings or the businesses and the different transition scenarios. But I think a lot of people are scared of recapture because what happens is a lot of business owners are like, oh, I'm going to sell my company. And then they go into kind of run these numbers and the CPA, you know, after the fact is running some of their net proceeds calculation like, holy crap, by the way, depreciation recapture is going to be ordinary income on your plant and equipment. And all of a sudden the numbers break and they can't sell because they're not going to make enough money. So is there. There's... I think there's probably some fear behind, well this is just gonna accelerate the problem that I'm going to have anyways, so can you explain how that that should be viewed in your situation?
David Deshotels: Sure, and so if they employed straight line depreciation for the building as a whole, typically the recapture rate is 25 percent. On these new deductions that were getting under the new tax code and jobs act and on items that we accelerate depreciation on, the recapture rate is ordinary income. So for some people, net wealth guys, you know that's got to be somewhere around 37 percent. So you're right, we do have to be careful that there is a higher rate of recapture when the building is sold. One of the things that we also need to be aware of is I use an example of carpet when you sell your building 10 years from now, you know what his 10 year old carpet worth? Well it's, it's little or nothing, you know, it's a salvage value. So we apply a higher rate to something that's at a salvage value now. So there's a lot of strategies when you're selling your building, how you categorize that, how you value that building to minimize some of that recapture. So there's some strategies to do that, so they're really not going to pay a higher rate, more than likely, the majority of these items that we're accelerating. So, but it's something to be aware of. Is there going to be a 10-31 exchange? Is it going to go into a trust? You know, we'll, we'll talk about some of those things, but it can be a higher rate, more than likely the effective rate. It's got to be somewhere around what they're already paying. So. So the question though is, is what can you do with the money? Where are you going to put this? My story is I worked with two types of clients. Those that are running towards gold medals that know that every nickel I can get my hand on and reinvest it, I'm going to make you know, a large percentage and those that are running away from German shepherds, they can't find any money. I need to pay my taxes. How in the hell am I going to do this? Wait a minute, you're going to get all this money that I've overpaid? Sure. They don't care what the recapture rate is, if I can keep them afloat and they can pay their taxes this year, I'm in ! Whether you're running towards gold medals or running away from German shepherds, I work with people that are running their businesses and running them hard. Who's interested in it?
Ryan Tansom: I'm stealing that analogy by the way, so what would be the triggering event, so if I'm, if I'm an owner and I either have owned it for a long and do I do this or I've got remodeled, what are the triggering events? When and how does this scenario fit into the picture?
Jodi Nielsen: I think the process is what we should say first so they understand. Anyone that owns a building is a candidate, definitely anyone that leases current pasture we can help as well. So it's a very simple process for building owners and for CPAs or financial advisors because ever listening to, we make your life easy. We do all the heavy lifting. So we need a depreciation schedule and slash or if they just bought or built what they bought or built for the cost and what's the building used for? We'll run a no charge, no obligation analysis, have a number- I'll have numbers back to within 48 hours. That will show you what your predicted tax benefits going to be and what the cost of the study is going to be. If the numbers look good and it makes sense, then we do what's called a site survey. We come and look at the building inside out, take pictures. We ask if they have appraisals and blueprints. That's it. Then we take it and we have it for six to eight weeks. They go through and they get everything calculated and we come back with the finished study for them to apply to their taxes.
Ryan Tansom: I think what's interesting is that there's... everybody should technically do it. There's so many services out there. But these are the times that you wouldn't do it. That's I think the biggest takeaway is that it doesn't really matter because whether you've owned them for a long time, you can still have this, whether you're preplanning for something else or you're remodeling, all the different scenarios. As long as your business is making money essentially, then there's a way to figure this out.
Jodi Nielsen: Well I say, and maybe David has a different, I say the two things... there's no negative to doing a cost segregation study. The only reason you wouldn't want to do one, number one, if you don't pay any taxes, then there'd be no point to it. And number two, if you're going to take the $100,000 or whatever amount we get you in additional cost saved tax benefits and put it in your desk drawer, don't do it because there's no point. You're supposed to take the money and do something with it to benefit yourself or your business or your family, whatever it might be.
David Deshotels: And the third scenario, Ryan, you're trying to allude to is how long have you owned the building? So you've owned your building for 20, 30 years. You've depreciated most of that building already. So the remaining, uh, is, is not there. So, so when's the best time to cost segregate a building? When you first buy it, because do you want to get your money back from the IRS or do you never want to send it to them in the first place? Um, so, so when you first buy a building, that's the best time at the five year mark, if you've owned your building for about five, six, that's the maximum return in that we go back and simply adjust your method of accounting and therefore that's going to be the maximum cash flow at the five year mark. And then once you get past that, at 10 years, oh, let's look and see, look, let us run the numbers at 15 years we've, we've made the buildings, that's a owned them for 20 years. The cash flow was there. So it just depends what we'll take a look at it and Jodi will run the numbers for you, um, and, and we'll know which, what the actual predictions are. And then you and your tax professional can make us secure financial decision on that. But once you start getting out maybe 10, 12 years or so, we need to start looking at that hard, what are you going to do with that money? How bad do you need it? Because we say it's an interest-free loan from the government. You're having to pay me a closing cost to do all the paperwork essentially to get that money and then you have to pay it back at some period of time.
Ryan Tansom: What's interesting and we can kind of roll into, okay, so now we've got a pretty good overview of how this fits and why you would do it and the different benefits. And then you start to think about, okay, so in that scenario, let's say you've owned it for a long time, this kind of gets into what's the ultimate goal with the building or the business because this is how you're planning and juggling the annual cash flow with your ultimate end goal is going to be important because, and maybe we can kind of talk about the and we can bounce around and if we want, but the maybe internal family transition of a building or something of that nature where, you know, you said, you know, we had talked, I've got clients where they've owned the buildings for a long time. It's a significant value of the real estate, but they've owned them forever. So there's this whole estate planning that you can do with the kids and the trusts where because a trust is a new entity, right? So maybe it kind of makes you know, give it two cents on how, you know, how that happens with the stepup and basically that kind of that whole transition of the buildings, how that works?
Jodi Nielsen: I would say typically in a lot of senses if they've owned the building too for a long time, they've done something to the building. How much have they put into it? Are we able to cost, like if I have an apartment building I'm doing stuff all the time. So, you know, if I have put in over 100,000 over the last 20 years? Pobably. So even though the cost basis of the original building might not have value to do a cost seg study, but what you've done to the building, we may be able to find more money and that's why we always... We look at everything doesn't cost anyone anything. Look at it to see what we can find when you, if the internal switching to a trust or to another family member that becomes a whole new entity for the trust or the new family member. So then it starts at the appraised value at that time, because many times I'll have somebody tell me, you know, I bought this building for 300,000, but it's worth a million now, Jodi. And it's like, well that's great, but we have to use it for 300,000 for you. Yeah. Now when David sells his building to Ryan or gives it to the trust, we start over from that million dollar basis.
David Deshotels: So that's something that we need to discuss, Ryan. So when you're exiting your building, how's this gonna affect things? One of the things, if you plan on selling your building in the next three years, cost segregation is probably not good for you because this is a time value of money strategy. I'm getting you an interest free loan from the government. You're only going to have them use the money for the next three years. What are you doing with that? So it may not make sense if you're going to make those transitions. So you...
Ryan Tansom: Can I interject? You know, the collaboration of the strategies is, is potentially extremely valuable because a lot of the business owners own the buildings and so in technically in terms of just a building and the rent potentially. But if, if I've got money as in, and this is where I think the collaboration also with the CPAs is the tax planning as an individual, if we have money coming in and how the entity structure is all lined up, we might be able to do money. You take that $100, $200,000 and be able to do things within the business or certain other things to get a rate of return on that. When David, you and I were chatting off the flying and if I were to able to put 100 grand into my company right now there's value building strategies of recruiting and hiring executives and or certain things that I could potentially get 500 to a million dollars more for my business because I'm doing certain things. So I think there's just looking at the building and the business, all these different things is so important with the planning, having a foot in the what am I doing this for? And you know, with the annual cash flow at the same time is... It's an interesting juggling act for sure.
David Deshotels: You're right, Ryan. So everyone listening to us, when I say opportunity capital, everyone listening to us, if I just had another 50-100,000, I could buy a new x ray machine, I could hire a new sales rep, we could get a new truck and we could make X. You know, I could double or triple my money. So a lot of times what we do is we pulled the money out of the walls of the property. We accelerate depreciation. Simply change the method of accounting that they've been using. It's a simple process. Get all that done so they can take advantage of you. This accelerated. Yeah, deductions and have more cash flow and go do that. And so you know the recapture rate, it really doesn't matter what you're gonna do because I need that money now. I've got an opportunity now. So. So you're absolutely right. This is a, the cheapest money that they'll ever borrow.
Ryan Tansom: Interesting clients that we could work on together and they're paying a million dollars of a million dollars. They hit a million dollars of phantom income that they're paying taxes on. So if they. So right now literally the cash flow is strapped to be able to help this family transition, so if we can accelerate a $10,000,000 building and get it and I mean hundreds of thousands of dollars of actual in the next few years, we might build a help fund the parents to help them pay their bills so we can help actually juggle the transition. So there's all these different things again. Yeah. The depreciation recapture might be with certain things, but you, you now make something that wasn't possible possible because of looking at the bigger picture like that.
David Deshotels: Exactly, exactly. You were talking about the exit strategies in those scenarios. So, I keep saying it's an interest free loan from the government. When do you not have to pay the loan back where this truly would be free money? And that scenario, if the patriarch of the family, um, dad may own the buildings, he's going to keep these buildings until he passes. Well, when dad passes, there's no recapture against that. The buildings go to his heirs and as Jodi said, the, uh, the value of the buildings or restated, um, they'll have to do a, uh, an appraisal to give a fair market value, but there's no recapture against the depreciation that's been taken about the building gets a step up in basis and we go do a cost segregation study on it again and accelerate depreciation again. So the cycle continues. So that's one strategy, passing that along to them, to the kids, you know, it can be gifted to the kids, uh, when, when a building is gifted to the kids, there's no recapture, but it keeps its original basis. So there's no step up in basis. So now there's not many depreciation deductions for the kids. There was no recapture against what's already been taken. So, you know.
Ryan Tansom: I think it's so interesting, David, when you think about it, like having your estate attorney and your CPA and all these people talking is so important because making that specific decision of whether we should gifted or whether we should put into a trust. And then so all of these things, because if you know that you're going to be making 500 grand or a million dollars in profit this year, that even though gifting sounds better, you don't get the step up in basis, you don't get more write offs. So I mean there's all this stuff they take into consideration instead of just making a quick off the hip decision on it.
David Deshotels: I'm sure you have a lot of talented experts that can answer all those questions. [lots of cross talk]
Ryan Tansom: So let's, let's, let's take it outside of the internal stuff I know we had been talking about is okay crap, I want to be. I'm going to be selling my building and my business and I don't have time to do this or whatever. Let's, but I'm going to be selling it. How is one of the big challenges that most of the lower market, so underneath 5 million in revenue, generally the building becomes a huge portion of the sale and then the equity and the net worth of the individual. So if I haven't, I've already kind of gone through and I might not have this opportunity. I think we had talked about previously showing because there's a big bridge or there's a big gap between how much the buyer wants to pay and how much the person needs, so explain how your situation, you might build a bridge, some of the net proceeds of the payments because of what you're showing them.
Jodi Nielsen: This can work for either the buyer or the seller. So if you're someone that's going to be buying a new property, have us run the numbers or the analysis now because if to how you're going to negotiate this deal because if you're buying a $2,000,000 building and you know the first year you're going to say 200,000 of taxes, you might be able to give them that extra 10,000 and not blink an eye because you know you're going to be getting a lot of money to be able to be successful the first year. If you're selling the building, this is a great moment motivator to show the buyer because you want this much money and they're saying, oh, you're asking too much, but however if you can show me $200,000, Jodi, have you. Did you know about this? And the buyer's like, no, I didn't have a clue, that couldn't very much get you here the price you want as the seller and the buyer's happy. It's a good negotiating tool. Brokers, a real estate people like it. Bankers love cost segregation as well because their deal is they want to make the loan right, but they want to get paid back or cure the loan, they say. So they had nobody doing a cost segregation. Say at least I know you have $200,000. I'm going to get my at least paid back the first couple of years. I know you're going to be good on the end for me, so everyone that's kind of involved with a situation sees the advantages of doing a cost segregation and for what you do for your clients and all your different specialists that you work with. You kind of do the whole picture and that's where we just want to come in and be able to. Or not us or somebody. They should really look at them using a cost segregation benefits.
Ryan Tansom: I think it's interesting from the 3rd party transaction. Speaking from a couple of stories where you say, I'm going to sell and I haven't done this, and so most of these sellers don't realize that the market's going to tell them what it's worth and they usually are upset with the results. So again, you know, if you're thinking, if you're, if you're about to sell your business and your building combined and you haven't done this, if you do this, then you can use this as leverage and say, okay, you know, or by a potential buyer, I don't know what your balance sheet looks like and how much profit you're going to make or how you're getting your loan, but if you do this and you have this ability to take another 150 grand this year in extra cash, you might be able to land your bank loan. You might be able to pay a little bit more money. So it helps smooth out the negotiation. But you know, to flip it, Jodi, like you were saying, um, we've got a client who was actually looking at having cost seg as part of their due diligence because if they go in and they - because again, 99 percent of the people haven't done this and they're going to, regardless if they had, actually to your point, it's a new, it's a new buyer anyways, or new owner, so they still could do it - they would be able to allow to do that and then that person can look at their balance sheet and say, okay, I can actually afford this and I can afford to do these certain things that I wouldn't have. So might, like you said, I might overpay a little bit or it might be able to outbid someone else that's also bid on it. So I think it's just, it's such an interesting buffer for cash flow in this that whole transaction period.
David Deshotels: Tell you a story related to me by a real estate broker. I love cost segregation. He says, I had a big deal, uh, they wanted 20% down and the client couldn't put down, just didn't have the cash flow. I said, do you have any other buildings? He said, yeah, I got seven years. He says he did a study on a 7 billion or some buildings. Got Him $350,000 of cash flow. He was able to buy the building. He says the best thing is I got my commission because I got the deal done, so it's so able to bring more cash into the transaction by leveraging this in not only in this building but others that they may have. So.
Ryan Tansom: I think it may be an interesting point in your experience or some of the numbers, because if I'm the listener than any of the listeners are going to go, okay, well this sounds way too good to be true. So now I think 20,000 studies because you guys have been around for decades, you know, what are the risks of this magic stuff happening of me getting flagged and all of a sudden having to now be like underneath the microscope from the IRS? So what are some of the risks associated with that or perceived ones?
Jodi Nielsen: Perceived is a very good word. We've been around since 2001, we've done over 20,000 - I think it's closer to 22,000 now - we have never triggered an audit. We defend our numbers. The IRS is very aware that we're an engineered-based company. We're a national company. As long as people file in the United States, we can help them. We, our numbers are. They stand up, as David has said, you know, if somebody called the payroll audited for payroll, okay, now they're going to look at their depreciation. They see who they see we've done it, we defend it, we're in and out. It's a calculated numbers like they say, I always like to give the analogy, you know when you're in third grade and you brought the answer to your teacher, and she said, that's really good Ryan, but show me your work. That's what the IRS wants to be able to see who did it, how did they do it? Where did they do it? You know all the, all the Ws and that's where we're able to show them this is the steps we took and it's documentation and they don't care what the number is. How did you get it? So it. It is something to look at when you're looking at doing a cost segregation study. You do want to get somebody that's had I guess quite a bit of experience CPAs typically doing that do cost segregation studies, but they will apply our numbers.
Ryan Tansom: Why don't the CPAs tell people about this? How is it that I've never heard of this before, especially if it's been around for 20 years? So is it the CPA's fault, does it, some of the real estate, like what, where's the, where's the, who's dropping the ball here?
Jodi Nielsen: The answer to that, what I found, because I as well as David, um we do a lot of speaking to CPA groups. They are aware of it, they do know about it. They just, number one, most of the time aren't able to do the study. I like to say they're river wide and inch deep. There's so many different things they need to know and there's so many different clients and there's so many different laws and regulations that are changing all the time. They're just doing all they can to stay afloat. Tons of respect for tax professionals out there. When they meet someone like us, our particular company, you know, we're independent. We don't file taxes, so we're not in competition with them, with the new laws coming out, though, they are wanting to do this for their clients because there's definitely competition amongst firms that they are using the strategy for their clients. Um, once, especially once they start using a company like us, they see the benefit, what you wouldn't want to do, if you're a CPA, as you wouldn't want another firm come in and talk to your top clients and saying, Hey, as your company, then them not knowing anything about it, you don't want to be that CPA getting questioned by your clients why you didn't bring up advantageous tax benefits to them.
Ryan Tansom: I agree. And I think, you know, one of the biggest challenges that all these professionals have and why we're doing what we're doing is that you don't know the general context of the whole plan, it's all stuck in the owner's head, right? So how would you know to bring it up? Because you don't know what they're doing, you know, you're usually just having them file your taxes. So I do see both sides too, because you just wouldn't know how to do that otherwise or why you should do that because there's no, there's too much risk and putting your foot out there if it doesn't fit.
Jodi Nielsen: If it doesn't fit, right. That's why a lot of times when we're dealing with these different firms or individual CPAs or whatnot. Right? Why not, you know, we'll run the analysis. Maybe it's not gonna work right for all of our clients, they're not for whatever reason, don't want to do it, but at least they're brought it to their attention and I think now the compliancy issue is going to be... It's going to be a lot more with this new tax laws. They're all new, like David had mentioned earlier, that nobody really knows what's going to happen because the first year of filing, so at least for this portion of it, they know that they're going to have defendable numbers by US doing this study for application.
Ryan Tansom: They're deferring the risk to you. [Jodi interjects: right.] So, as we're kinda... I mean, we've covered a lot and I think it's been... this has been a lot of fun because it's very story-driven and you know if we were to circle back and say, okay, here's the one thing that I want to highlight and kind of leave you with, or if there's one thing that we might have missed before we wrap up... to you first, David, then to you, Jodi.
David Deshotels: When... I think people should know, if they're hiring a cost segregation specialist that gives them executive sleep. So, CPAs that say, hey, we'll do this for you. Ask them, how many have you done? How many have you defended? You know, what's your methodology? It's not in doing it, it's in documenting how you did it and having the methodology so you get executive sleep where if there's ever a question on this and there probably never will be, but, you know, it's an independent third party expert that's done your taxes and is able to defend those. That's versus your CPA that does not do this very often. Not going to be able to work off of plans, not going to have an engineering-based attitude, not going to go there and take a couple of hundred pictures of your property, you to document it. So it's a great investment with a specialist. This is an area that requires tax specialty knowledge and experience. And as Jodi was saying, typically CPAs or general practitioners. They know a lot about everything. This is where we have to get very specific and so we can do it very cost effectively because we've perfected the method of doing that. So again, yeah, friends don't let friends overpaid their taxes. So, uh, we, we hope to be able to help.
Ryan Tansom: Jodi, Jodi, anything that you want to leave our listeners with?
Jodi Nielsen: Well, I think one thing we didn't touch on, which I think we might... it's about cash flow and people are probably wondering what is the cost of doing this study. The ROI is always fantastic. Probably you give me a dollar, I'll gave you back ten, probably 20, 30, 50, 1,000. But that's what you'll do with the free analysis. It's a very easy process and we're an expensive, too, I should say that doing a cost segregation study, you get to expense part of what, what the cost is to have us do it. So that's even more benefit.
Ryan Tansom: Is there any chance... if you feel comfortable giving a range of what the variables are, because if I'm one of the owners that you referred to David, that is someone that is running from wolves I'm going to say because that's what it feels like instead of dogs, but is there a range or I mean I'm assuming buildings an amount of all that stuff could be variables, but I don't know if you feel comfortable kind of throwing how you, how you get to that determination.
Jodi Nielsen: Sure. So, so typically we see anywhere from 15 to 25 ah, dollars of cash flow for every dollar spent. Certainly we have lots of examples where we got 15 to 100. Yeah. If it's 15 to 25 bucks, that's, that's a no brainer as far as uh, an investment to get an interest free loan from the government. If it's down around 10, you have to have a really good reason to do this, you know, what are you going, where are you going to invest that money and how's it going to grow before you have to pay it back? So that's kind of my role right on those things. So, uh, as Jodi said, we'll take a look at that, we'll run the numbers for you and we'll let you know what that number is so you can make a secure financial decision.
Jodi Nielsen: And I would leave it, too, that just, you know, even I walk out of a room and a tax professional say I've got a fourplex, would it work? It's like really if you have a building, have us or some engineered-based company run a study or an analysis to see what your benefit's going to be. They say a lot of times somebody may have an older building, but they've done a ton of work over the last seven years. And so that's a whole different ballgame. Um, again, if, if, uh, you leased the building, it has to be current tax year. Okay. And there's money dollars in the dumpster, we call it, um, there's partial asset disposition which we didn't get into, but so even if you're carrying a bunch of stuff out, there's value to that if we've done a cost segregation study for you. So I would just encourage anybody to look at the strategy to work with, you know, Ryan and your tax professional and to see if it's something that would make sense for you.
Ryan Tansom: So what's the best way to get in touch with both you guys.
Jodi Nielsen: Probably for the service of your clients, they should probably contact me. My name is Jodi j, o d I, it's my last name n I e l s e n and my phone number is six. Five one. two one zero I'll say it again, two one zero, one nine slash one. And I am with Cost Segregation Services Incorporated. I could spell out my email. It's long.
Ryan Tansom: We'll put it in the show notes so you don't have to do that cuz most people are driving or running or cleaning the house.
Jodi Nielsen: That's what I figured.
Ryan Tansom: Well thank you so much for coming on. I appreciate how you easily you broke this all down.
David Deshotels: Thanks.
Jodi Nielsen: Thanks for having us.
Ryan Tansom: Well, I hope you enjoyed that episode with David and Jodi and if you're not on the phone right now or sitting in front of your computer typing an email to your CPA, to me or to Jodi, I think you're crazy because I was so floored when I first came across this with one of our clients that it was just like, why is no one talking about this? And I think the big huge takeaway that you as the listener needs to have is that getting a team of people that are looking at the whole picture where everybody can be working to help you benefit the most because it's your balance sheet and your cash flow that everybody should be helping drive to the outcome that you want. And if you think about how intertwined estate planning, tax planning, cash flow management, real estate, the sale of the business, the internal transition or third party, all of this is so intertwined that you have to know what your outcome is that you're trying to drive for before you can optimize everything. But even if you don't know that this is obviously something that is super, super easy. Because if you have more money right now, you can at least use that money to continue building your business and your buildings to make more money and have a more valuable asset. So I really hope you enjoyed the episode. If there's any big takeaways, start figuring out what your big growth and exit plan is. Talk to the advisors that can help you, talk to us. Go into Itunes, give me a rating. Otherwise I will see you next week.
Written by Ryan Tansom
Ryan runs industry-specific podcasts on his website which pertain to mergers and acquisitions, and all the life lessons he wish he had known then. He strives to bring this knowledge to his listeners in a way that is effective and engaging by providing new material each week from industry experts.