| Growing Company
Looks for Ways to Reduce Income Taxes
Scenario
This CB&H client manufactures and installs
display store fixtures throughout the United States. Major customers
include some of the leading “big box” retailers in the
country.
The client experienced rapid growth during 1999
and 2000 and found itself with an income tax liability of more than
$500,000 for the year 2000. The company’s borrowing capacity
was maximized. In filing tax returns in September 2001, the client
was forced to file with partial payment. The economy took a downturn
in 2001 and several customers slowed expansion and additions of
new stores. It was apparent by September that the company would
have to post a loss for 2001.
Also during 2001, the stockholder completed construction
of a new $2.25 million office, manufacturing and distribution facility,
with over 12,000 square feet of office space and 60,000 square feet
of warehouse and manufacturing space.
CB&H Action Steps
The CB&H Cost Segregation team talked to
the client about a cost segregation study when building construction
began and upon completion, prepared an estimate to show the client
the benefits of a study. A CB&H senior manager in the Cost Segregation
group and our engineering alliance firm visited the client at the
new building and to complete the free preliminary analysis.
CB&H conducted the estimate of the building
costs that qualified as 7 and 15-year depreciable property rather
than 39-year. CB&H estimated that more than $660,000 of the
total costs of the $2.25 million qualified, resulting in a net present
value (NPV) tax savings estimate of almost $100,000.
Since the client had no current taxable income,
the first year savings would result from carrying back the loss
to the 2000 tax year and recouping some of those paid taxes.
Results
The CB&H Cost Segregation team was engaged
to conduct a full study and resulting tax savings were greater than
initially anticipated. CB&H increased the net operating tax
loss of the company in 2001, saving the client $20,000 in taxes.
The company turned things around in 2002, generating taxable income,
and the tax savings for 2002 were $32,000. CB&H anticipates
that these savings will continue for several years.
The real benefit of a study is the NPV of tax
savings generated by speeding up the depreciation expense. A tax
dollar saved today is worth more than that tax dollar saved in the
future.
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