Advice on Cost Segregation and Non-Qualified Plans

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When it comes to dealing with salespeople in our profession, you need to understand how to not only deal with them in general, but specifically understand the issue of cost segregation and non-qualified plans.

Whether we like it or not, we have to deal with salespeople.  I have a love hate relationship with them myself, however, I seriously just mind my own business and trouble finds me.  For example, I have two stories from two different salespeople that you might like.

Salespeople and Cost Segregation

When a client buys an asset like a building, we will pick up that asset at the asset’s basis and depreciate it.  For whatever reason, some clients may not think that you as their accountant are doing your job and they will get a call from a salesperson representing a cost segregation company.  

The salesperson will then promise large tax deductions to the client and charge them between $5000 - $10,000 to do this “study.”   What the study boils down to is that a non-licensed person will segregate items in the asset purchase. They will say they can either use Section 179 (forget that under IRC §179, the profit can only go to zero) or the new accelerated cost recovery depreciation, such as 100 percent or 50 percent bonus depreciation.  

They will then give this report to the client, who will in turn give this report to their tax professional, asking them to get these deductions for them. Sound good?  Maybe too good to be true.

Recently I received an email from a salesperson talking about some cost segregation article that I wrote so long ago that I don’t even remember it.  He first condescends me by saying that maybe I thought that the IRS had shut these scams (sic) down, or that I had hoped they were shut down.  He was trying to "learn" (AKA sell this to me in a different way) the business and ask what was my issue with these studies.

I explained that with these studies, our clients will get sucked in with the promise of this large tax deduction.  To get this deduction we need to file Form 3115, or as I like to refer to this form, “please, oh please, audit me now,” because we are changing depreciation methods, or accounting methods if you will.  

After that nonsense is done, we have to amend these tax returns.  An amended return for an honest mistake is one thing however, amending a return with a large deduction, getting a huge refund is quite another thing.  

If you don’t know, most amended returns cannot be electronically filed.  The reason they take so long to process is that the IRS goes over them with a fine-toothed comb.  Especially, if there is a large tax deduction, coupled with a large refund.  All pointing to, you guessed it, an audit.  

Who would be held responsible by the client?  Not these sham companies, but us!  Not to mention that the IRS has a special cost segregation task force, and a whole audit technique guide for this industry.  

Salespeople and Non-Qualified Plans

I then get another, similar email from a second salesperson, who again read an article that I wrote and wants to tell me about a tax deduction that I can get to my clients.  I am always skeptical when I hear that, but I entertain this idea, thinking perhaps there is something here and if not it will make a good story.  

So, he starts off telling me about how Fortune 1000 Companies are using this strategy (i.e. none of our client base, unless you work for the Big Four).  He presents the idea of a non-qualified plan, which I’ve never heard of.  However, I do know enough about ERISA to know that non-qualified means it can’t be deducted, so there is no tax deduction here.  

What is boils down to is you can put $200,000 or so into a non-qualified plan, for executives.  Again, not my client base.  You can do this year after year, until retirement and the payments go to the executive.  

What this guy didn’t tell me is they are taxable upon receipt to said executive. I ask like I always do with a salesperson, to give me the information in writing. Why?  Because, salespeople are salespeople and I want to independently verify this information.  

Before the email comes, and it takes all day, I perform a simple Google search on "non-qualified plans" and the word "scam."  BINGO!  Hit after hit.  I already dismiss this before the email finally comes in, but right around 5 pm this email comes in with attachments that are simply just sales flyers.  

I then skim the email, give my response that this is a scam and say that certainly there is no tax deduction. This is met with an immediate response, which I know is just going to be nasty, so I don’t even read it. What is the point?

Again, I try to respond to most emails I get about what I write, but don’t ask my opinion if you simply don’t want it.

About Craig W. Smalley, EA

Craig Smalley

Craig W. Smalley, MST, EA, has been in practice since 1994. He has been admitted to practice before the IRS as an enrolled agent and has a master's in taxation. He is well-versed in US tax law and US Tax Court cases. He specializes in taxation, entity structuring and restructuring, corporations, partnerships, and individual taxation, as well as representation before the IRS regarding negotiations, audits, and appeals. In his many years of practice, he has been exposed to a variety of businesses and has an excellent knowledge of most industries. He is the CEO and co-founder of CWSEAPA PLLC and Tax Crisis Center LLC; both business have locations in Florida, Delaware, and Nevada. Craig is the current Google small business accounting advisor for the Google Small Business Community. He is a contributor to AccountingWEB and Accounting Today, and has had 12 books published on various topics in taxation. His articles have also been featured in the Chicago Tribune, New York Times, Yahoo Finance, Nasdaq, and several other newspapers, periodicals, and magazines. He has been interviewed and been a featured guest on many radio shows and podcasts. Finally, he is the co-host of Tax Avoidance is Legal, which is a nationally broadcast weekly Internet radio show.

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May 24th 2018 16:01

I think your opinion on cost segregation is way off and a little irresponsible. I have worked for Big 4 firms, a boutique and a Fortune 500 real estate company for a combined 20 years saving our clients billions of dollars. The 3115 or amended return (3115 is generally much easier) are only required if you don't do the study in the year the asset is placed in service and never have I had an audit triggered because of it. If you intend to hold the asset for more than 2 years and you pay tax, cost segregation is a great tool.

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