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1 Our Team is Your Resource solutions for tax professionals and businesses Tax Credits Incentives Cost Recovery Established in 1999 with offices across the US, KBKG provides turn-key tax solutions to CPAs and businesses. By focusing exclusively on value-added tax services that complement your traditional tax and accounting team, we always deliver quantifiable benefits to clients. Our firm provides access to our knowledge base and experienced industry leaders. We help determine which tax programs benefit clients and stay committed to handling each relationship with care and diligence. Our ability to work seamlessly with your team is the reason so many tax professionals and businesses across the nation trust KBKG. Value Added Services Research & Development Tax Credits Federal credit worth approximately 6.5% of wages related to designing, developing and improving products, processes, formulae and software. 45L Credits for Energy Efficient Residential Developments Newly constructed or renovated apartments, condos, and tract home developments that meet certain criteria are eligible for a $2,000 credit per unit. 179D Incentive for Energy Efficient Commercial Buildings Federal deduction worth $1.80 per square foot of energy efficient buildings. Available to architects, engineers, design/build contractors and building owners. Repair vs. Capitalization Review & Compliance Taxpayers often capitalize major building expenditures that should be expensed as repairs and maintenance such as HVAC units, roofs, plumbing, lighting and more. Retirement loss deductions for demolished building structural components are also identified. Fixed Asset Tax Review While a cost segregation focuses on buildings, a comprehensive Fixed Asset Tax Review encompasses all fixed assets a company owns including real property, machinery, furniture, fixtures, and equipment. IC-DISC The Interest Charge Domestic International Sales Corporation (IC-DISC) offers significant Federal income tax savings for making or distributing US products for export. Employment Tax Credits for Businesses Employers with 10 or more employees can benefit from a wide range of federal and state business tax incentives designed to spur economic growth. Property Tax Review (Real and Personal) Overstated property values and failure to fully leverage available exemptions and abatements often result in substantial overpayment of property taxes. Cost Segregation for Buildings and Improvements Any building improvement over $750,000 should be reviewed for proper classification of the individual components for tax depreciation, and retirement purposes. Sales and Use Tax Review Complex transaction tax laws vary from state to state and create opportunities to recover overpaid taxes, reduce future liabilities, and implement best practices. NATIONWIDE SERVICE KBKG.COM COPYRIGHT 2014 KBKG, INC. ALL RIGHTS RESERVED. ALLSRV

2 SOLUTIONS FOR TAX PROFESSIONALS AND BUSINESSES TAX CREDITS INCENTIVES COST RECOVERY Nationwide Service KBKG.com INDUSTRY MATRIX FOR TAX SAVING OPPORTUNITIES (updated ) Industry R&D Tax Credits Repair /Asset Retirement 45L Tax Credits 179D Tax Deductions Employment Tax Credits Cost Segregation IC-DISC 199 DPAD Deduction Affordable Housing X X X X X Agriculture, Forestry & Fishing X X X X Architecture & Engineering X X X X X X Auto Dealerships X X X X Communications & Utilities X X X X X Construction X X X X Film & Music X X X X X X X Financial Services X X X Government Contractors X X X X X X Healthcare X X X X Hotels X X X X Logistics & Distribution X X X X X X Manufacturing X X X X X X X Mining X X X X Multifamily Developers X X X X X Oil & Gas X X X X Pharmaceutical X X X X X X X Professional Services X X X Real Estate X X X Restaurants X X X Retail X X X X Technology/Software X X X X X X X Transportation X X Wholesale Trade X X X X X Call us today at to see how we can help you and your clients better understand these opportunities and secure these specialty tax incentives. NATIONWIDE SERVICE

3 SOLUTIONS FOR TAX PROFESSIONALS AND BUSINESSES TAX CREDITS INCENTIVES COST RECOVERY KBKG.com Identifying Value-Added Tax Opportunities (updated ) KBKG Service Description & Highlights Applicable Clients/Industries How much is it worth? Years Tax considerations Research & Development Tax Credits (Federal & State) Federal and State tax credit - designed to promote technological innovation in US companies. Research must be conducted in the US, not abroad. Most Qualified Expenses are wages paid to employees conducting certain activities. Payments to contractors doing R&D for Client may also qualify. Manufacturing Software Development Architects High Tech Food Processing Equipment or tools Clients developing prototypes, testing, applying for patents, upgrading systems/software Clients improving products or Improving their manufacturing processes Federal Benefit - Roughly 6.5% of their total Qualified R&D Expenses Ex. Client has $1M/year of wages related to R&D. Benefit = $65k/year. Many states also allow an R&D credit. For example, CA R&D Credit is worth an additional 6% of Qualified R&D expenses. Any open tax year. 3 year Federal Statute and 4 years for some states. General Business Tax Credit 1 year Carryback 20 year carryforward. Does not reduce AMT except for Eligible Small Businesses (ESB) can carry credits back 5 years & eliminate AMT. Repair v. Capitalization Review "Asset Retirement Study" (Federal) New rules allow you to assign value to "structural" components removed from a building and write off the remaining basis! Regs also clarify repair expense treatment of many types of building costs such as HVAC or roof replacements. KBKG also provides compliance consulting for repair and disposition regulations. Any building renovation costs > $400k Retirement Study- Building is renovated AFTER owning it at least 1 year. Building should have >$500K of remaining depreciable basis left. Repair Study- renovations that include roof, HVAC, windows, lighting, plumbing, ceilings, drywall, flooring, etc. Additional Year 1 deductions of 15%-40% of renovation costs (on top of benefits from 1245 reclassification) Any building renovated or improved in the last 15 Years. Ex. Client spends $3M on structural Use Form 3115 to claim renovations. Additional Year 1 deductions of missed deductions $450K-$1.2M. anytime. Depending on specific issue, may require a separate 3115 if doing concurrently with a depreciation change. Fixed Asset Tax Review (Federal) Comprehensive review of company s entire Fixed Asset listing & supporting documents to assign appropriate tax lives, identify retirements, and correct items that should be expensed. Includes Cost Segregation & Repair analysis. Operations with > $40M in real property or > 1,000 lines of fixed assets. Retail, Restaurant, Bank and Hotel Chains of 10 or more Manufacturing Utility Companies Net Present Value of 5-8% of total building related costs. Ex. Manufacturing client has $60M of 39 year fixed assets. NPV Cash value = $3M - $4.8M Use Form 3115 to claim missed deductions anytime. Reduces AMT Generally, 2 year NOL carryback and unused deductions carryforward. Must recapture personal property upon sale of building. Residential Energy Credits (Section 45L) (Federal / States can have similar programs) Federal credit for developers of Apartments, Condos, or Spec Homes that meet certain energy efficiency standards. Units must be certified by a qualified professional to be eligible. Anyone that built Apartments, Condos, or Track Home Developments in the last 4 years. Generally more than 20 units. Federal Credit = $2,000 per apartment/home unit. Many states have similar credits. Ex. 100 unit apartment/condo can get $200,000 of Federal Tax Credits. Any open tax year. 3 year Federal Statute General Business Tax Credit Credit is realized when unit is first leased or sold, not placed in service. 1 year Carryback 20 year carryforward. Does not reduce AMT except for : ESB allows carry back 5 years. Commercial Energy Deductions (Section 179D) (Federal/ States can have similar programs) Employment Related Tax Credits (Federal) CA Competes Credit CA Enterprise Zone Tax Credits (State) Federal deduction for Architects, Engineers, and Design/Build Contractors that work on Public or Government Buildings such as Schools, Libraries, Courthouses, Military Housing etc. Also available to any commercial building owner. Federal Work Opportunity Tax Credit (WOTC) Federal Empowerment Zone Credits - Location Based Federal Health Insurance Premium Credits (FHIPC) California income tax credits designed to stimulate growth throughout the state. Credits provided for employees hired and spending within the state. 179D for Designers: Architects, General Contractors, Engineers, Electrical & HVAC Subcontractors. Any Building Owner or Lessee: That has constructed a commercial improvement greater than 40,000 SF since 1/1/2006. WOTC or more employees. Location doesn't matter. Empowerment Zones - 10 or more employees located in the designated area. FHIPC (Section 45R) - clients w/ under 50 employees and paying health insurance. CA Competes Credit: Growing business clients who anticipate hiring additional employees, constructing new buildings, or investing in new equipment. EZ Credit (Phasing Out): Any client located in an enterprise zone with more than 20 employees. $.30 up to $1.80 per square foot in Federal Tax Deductions. Ex. 100,000SF building is eligible for $180,000 in deductions. WOTC - up to $9,000 per eligible employee. Empowerment Zone - $3,000 per eligible employee. FHIPC - 35% to 50% of health insurance premiums. Must apply for credits. Up to $37,000 per eligible employee, over a 5 year period. Generally 15-35% of employees qualify. Equipment- Credit is equal to Sales Tax paid. Designers: Open tax years. 3 year Federal Statute Owners: Can go back to 2006 with Form 3115 to claim missed deductions. Any open tax year. 3 year Federal Statute Any open tax year. 4 year CA State Statute Reduces AMT Generally, 2 year NOL carryback and 20 year carryforward. Deduction reduces basis in real property. General Business Tax Credit Various tax considerations can be discussed with KBKG. Credits will reduce taxes on owners W2 wages and personal return. Credits flow through to owners. Credits will offset tax at the S-Corp level.

4 SOLUTIONS FOR TAX PROFESSIONALS AND BUSINESSES TAX CREDITS INCENTIVES COST RECOVERY KBKG.com Identifying Value-Added Tax Opportunities (updated ) Cost Segregation (Federal & State) Allows taxpayers who have constructed, purchased, expanded, or remodeled any kind of real estate to accelerate depreciation deductions by reclassifying building components into shorter tax lives. Any building with over $750k of depreciable tax basis. Any leasehold improvement with over $500k of depreciable tax basis. Net Present Value = 3-6% of the total building cost. Ex. $2M office can yield an NPV of $60k-$120k. Assets acquired in the last 20 Years. Use Form 3115 to claim missed deductions anytime. Reduces AMT Generally, 2 year NOL carryback and unused deductions carryforward. Must recapture personal property upon sale of building. IC-DISC Federal Income Tax Incentive (Federal) The IC-DISC provides significant and permanent tax savings for producers and distributors of U.S.-made products and certain services used abroad. Any closely held, privately owned business with over $250,000 in profits from exports. Manufacturers Distributors Architects & Engineers Agriculture and Food Producers Software Developers Other Producers Minimum permanent 19.6% decrease in tax rate on half of export profits. Benefits can be dramatically higher by performing a transaction-by-transaction analysis. Benefits begin when Requires annual filing 1120 IC-DISC. entity is formed. No changes to business operations. Transaction-bytransaction analysis for existing IC-DISC calculations can be amended for any open tax year (3 year Federal Statute). Property Tax Consulting: Appeal and Compliance Services Personal Property Real Estate Ensure that companies pay the minimal real estate and personal property tax amount, meet all compliance requirements and leverage available exemptions and abatements. Real Property: All states. $100k+ tax bill Commercial real estate owners Multi-Family, Hospitality Manufacturing, Distribution, Oil & Gas Immediate reduction in current property tax liability. Client pays a % of savings. Per return fee arrangements are typical for compliance engagements. Year by Year Appraisal district must rely on mass appraisals techniques. Assessed Value is an opinion of value and may not equate to market value. Unique characteristics of building may not be accounted for. Sales & Use Tax Review (State) State tax codes are very specific regarding products & services which can be exempt from taxation. Ensure that clients did not overpay Sales and Use Taxes. Over/ Under payments are identified, quantified and submitted to the respective State for a refund. Non-taxable states: NM, NH, OR, MT, AZ, DE. $30 million+ in sales, greater than $100k in audit liabilities Multistate operations Multiple vendor relationships Poor accounting/tax software Manufacturing, Oil & Gas, Hotels, Telecom, etc Refund of overpaid sales and use tax on expenditures. Can be significant when refund covers multiple years. Voluntary disclosures of unpaid tax can minimize penalties. Any open periods allowed by statute of limitations. (SOL=4 years in most states) Sales & Use tax state law is complex and varies by State. Over and Under payments are reviewed for a net assessment. Sampling is used for large transaction data sets. For an electronic copy of our service matrix, contact us at or [email protected]

5 SOLUTIONS FOR TAX PROFESSIONALS AND BUSINESSES TAX CREDITS INCENTIVES COST RECOVERY KBKG.com Applicable PIS Dates (inclusive) Leasehold Improvements - Depreciation Quick Reference (last updated ) MACRS GDS Recovery Period Bonus Dep Eligible 3 Year Rule Unrelated Parties Rule Subject to Certain Exclusions 179 Expense Eligible Qualified Leasehold Improvements (QLI): Partial 9/11/01-10/22/04 39 Year / SL Y Y Y Y N/A Qualified Leasehold Improvements (QLI): 2004 Partial /23/04-12/31/14 15 Year / SL Y * Y Y Y Important Notes 39 year QLI qualifies for Bonus! See 168(k)(2)(A)(i)(IV) Landlord or lessee can make the interior improvement. Code Section 168 (k)(3) Up to $250k Landlord or lessee can make the interior improvement. 168 (k)(3) Qualified Restaurant Property: /23/04-12/31/07 15 Year / SL N** Y N N N/A Applicable to all improvements attached to building. 168 (e)(7) Qualified Restaurant Property: /1/08-12/31/08 15 Year / SL Y Y N N N/A Applicable to all improvements attached to building. 168 (e)(7) Encompasses the entire building structure as well as Qualified Restaurant Property: /1/09-12/31/14 15 Year / SL N *** N N N Up to $250k interior costs. Can be an acquired building.**** 168(e)(7) Qualified Retail Improvement Property 1/1/09-12/31/14 15 Year / SL N *** Y N Y Up to $250k Building can be owner occupied. 168(e)(8) * NOT eligible for bonus if placed in service 1/1/ /31/2007 ** Qualified Restaurant Property is eligible for bonus depreciation if placed in service 10/23/ /31/2004. *** Per R.P Improvements that also meet the criteria for Qualified Leasehold Improvements are eligible for bonus depreciation. **** Although the tax code definition of QRP in seems to encompass used buildings, it is unclear if this was the intent of Congress since previously these incentive were strictly for new construction. Bonus Depreciation Rates (inclusive dates) 9/11/2001-5/5/2003 ^ 30% 5/6/ /31/2004 ^ 50% 1/1/2008-9/8/2010 ^ 50% 9/9/ /31/2011 ^ 100% 1/1/ /31/2014 ^ 50% ^ Long Production Period (QLI improvements over $1M and construction period exceeds 1 Year) - can be placed in service one year after bonus normally expires. QLI (that is also LPP) started before 1/1/2012 can be entirely eligible for 100% bonus if completed during % bonus is applicable if LPP is started after 12/31/2011. Only pre-1/1/2015 basis is bonus eligible on any LPP. If Construction Started before Sept 8, Special Election Necessary to Claim 100% Bonus The new election introduced in Rec. Proc Section 3.02(2)(b) allows taxpayers to claim 100% bonus on certain assets where they would otherwise be limited to 50% bonus (if more than 10% of the construction cost was incurred before 9/8/2010 you would be limited to 50% bonus without this election). The election can be made for any Qualified Leasehold Improvement construction costs or building component acquired and placed in service after September 8, 2010, where construction started before this date. A more detailed analysis may be necessary by a cost segregation engineer to determine what construction components were actually completed after September 8, This election can also be made on any asset where construction started before September 8, Example - A $10 million newly constructed freestanding building was started in June 2010 and placed in service in November of A KBKG cost segregation specialist will identify which 1245 building components (with a tax life under 20 years), will qualify for 100% bonus vs. 50% bonus. See Next Page For More Detail On Depreciation Rules KBKG is a specialty tax firm that works directly with CPAs and businesses to provide value add solutions to our clients. Our engineers and tax experts have performed thousands of tax projects resulting in hundreds of millions of dollars in benefits. Our services include:» Research & Development Tax Credits» Cost Segregation» Property Tax Review» Employment Tax Credits» Green / Energy Tax Incentives» Sales & Use Tax» Federal» 179D for Designers» IC DISC» State Enterprise Zones» 45L for Multifamily» Repair v. Capitalization 263(a) Review» Fixed Asset Depreciation Review

6 Definitions: 3 Year Rule: The improvements must have been placed in service by any taxpayer more than three years after the date the building was first placed into service. Leased Between Unrelated Party Qualification: Improvements must be made subject to a lease between unrelated parties (see code section 1504). Can be made by lessees, sub-lessees or lessors to an interior portion of a nonresidential building. Certain Exclusions: The following items are excluded from the definition (i) the enlargement of the building, (ii) any elevator or escalator, (iii) any structural component benefiting a common area, and (iv) the internal structural framework of the building. Qualified leasehold improvement property: any improvement to an interior portion of a building which is nonresidential real property if (i) such improvement is made under or pursuant to a lease (I) by the lessee (or any sublessee) of such portion, or (II) by the lessor of such portion, (ii) such portion is to be occupied exclusively by the lessee (or any sublessee) of such portion, and (iii) such improvement is placed in service more than 3 years after the date the building was first placed in service. (B) Certain improvements not included. Such term shall not include any improvement for which the expenditure is attributable to (i) the enlargement of the building, (ii) any elevator or escalator, (iii) any structural component benefiting a common area, and (iv) the internal structural framework of the building. Qualified restaurant property : an improvement to a building if (A) such improvement is placed in service more than 3 years after the date such building was first placed in service, and (B) more than 50 percent of the building's square footage is devoted to preparation of, and seating for on-premises consumption of, prepared meals. Qualified restaurant property 2008: an improvement to a building, if more than 50 percent of the building's square footage is devoted to preparation of, and seating for on-premises consumption of, prepared meals. Qualified restaurant property : any section 1250 property which is (i) a building, if such building is placed in service after December 31, 2008, and before January 1, Qualified retail improvement property: any improvement to an interior portion of a building which is nonresidential real property if (i) such portion is open to the general public and is used in the retail trade or business of selling tangible personal property to the general public, and (ii) such improvement is placed in service more than 3 years after the date the building was first placed in service. QRIP shall not include any improvement for which the expenditure is attributable to (i) the enlargement of the building, (ii) any elevator or escalator, (iii) any structural component benefitting a common area, or (iv) the internal structural framework of the building. Long Production Period Property: 168(k)(2)(B) - Must have a recovery period of at least 10 years, is subject to section 263A, has an estimated production period exceeding 2 years, or an estimated production period exceeding 1 year and a cost exceeding $1,000,000. Copyright 2013 by KBKG, Inc. All rights reserved.

7 SOLUTIONS FOR TAX PROFESSIONALS AND BUSINESSES TAX CREDITS INCENTIVES COST RECOVERY KBKG Repair vs. Capitalization: Improvement Decision Tree Final Regulations Considering the appropriate Unit of Property (UOP), does the expenditure: (Last Updated ) Correct a material defect/ condition that existed before acquisition? Possibly Even if the defect was not known at the time of acquisition: Answer = YES Yes No Materially increase the capacity, productivity, efficiency, quality, strength, or output? No Possibly If using improved but comparable part only due to technology advancing (i.e. impractical to use old type) Answer = NO Particular Event compare condition of UOP just before event vs. after expenditure What do you compare against to see if it's a betterment? Normal Wear compare condition just after expenditure vs. last time it was updated or when placed in service Yes Betterment Is a material addition? No Possibly If there was physical enlargement, expansion, or extension: Answer = YES Yes YES Change the use of the property from its intended use when it was placed in service? No Possibly Example 1. Office is converted to showroom: Answer = YES Example 2. Three retail spaces converted to one retail space: Answer = NO Yes Adaptation Rebuild the UOP to "like new" condition after the end of its class life (ADS life)? No Replace a Major Component or Substantial Structural Part? No Possibly Possibly If brought to remanufactured or similar status under federal guidelines or manufacturer original specs. Answer = YES If replacing a large physical portion of UOP. Answer = YES (Generally, replacing < 33%: Answer = NO) Based on "facts and circumstances" If replacing part that performs discrete & critical function in operation of UOP (ex. such as a central furnace): Answer = YES Yes Replacing only incidental component, even if it affects function of UOP (i.e. such as roof shingles or HVAC switch): Answer = NO Yes Restoration Improvement = Capitalize Return UOP to ordinary operating condition after deteriorated (in a state of disrepair)? Possibly If minor part breaks during normal use & causes UOP to temporarily cease to function: Answer = NO Yes No Result in a basis adjustment or loss deduction for component removed? Possibly If basis adjustment due to casualty loss, sale, or exchange of component. Answer = YES. Yes No Was the expenditure "incurred by reason of an improvement" or did it directly benefit an improvement? Possibly Was it done in conjunction or at the same time as an improvement to a UOP? Yes Was the cost necessary or critical to complete the associated improvement. Yes No Possible Repair Expense KBKG, Inc. expressly disclaims any liability in connection with use of this document or its contents by any third party. Any US tax advice contained herein was not intended or written to be used, and cannot be used, for the purpose of avoiding penalties that may be imposed under the Internal Revenue Code (IRC) or applicable state or local tax law provisions. This document is for educational purposes only and is not intended, and should not be relied upon, as accounting or tax advice. Copyright 2014 by KBKG, Inc. Any reproduction, transmission, or distribution of this form or any of the material herein is prohibited and is in violation of US law.

8 SOLUTIONS FOR TAX PROFESSIONALS AND BUSINESSES TAX CREDITS INCENTIVES COST RECOVERY KBKG.com KBKG Building Unit of Property & Major Components Chart (updated ) This chart was created to help users identify building systems & typical "major components" in real estate assets. Replacing a major component is a capital expenditure, while replacing an incidental component can be expensed. Real Estate Major Component (examples) Building Structure Land Improvements HVAC System Electrical System Plumbing Systems Fire Protection System Security System Gas Distribution System Escalators Elevators Roof System (membrane, insulation & structural supports) Foundation Other structural Load Bearing Elements, incl: stairs Exterior Wall System Ceilings Floors Doors Windows Partitions Loading Docks Landscaping incl: shrubs, trees, ground cover, lawn, irrigation Storm drainage incl: inlets, catch basins, piping, lift stations Site lighting (pole lights, bollard lights, up lights, wiring) Hardscape (retaining walls, pools, water features) Site Structures (gazebo, carport, monument sign) Paving (roads, driveway, parking areas, sidewalks, curbing) Heating System (boilers, furnace, radiators) Cooling System (compressors, chillers, cooling towers) Rooftop Packaged Units Air Distribution (Ducts, fans, etc) Piping (heated, chilled, condensate water) Service & Distribution (panel boards, transformers, switch gear, metering) Lighting (interior & exterior building mounted) Site Electrical Utilities Branch Wiring (outlets, conduit, wire, devices etc.) Emergency Power Systems Plumbing Fixtures (sinks, toilets, tubs etc.) Wastewater System (drains, waste & vent piping) Domestic Water (supply piping and fittings) Water Heater Site Piping Utilities Sprinkler System (piping, heads, pumps) Fire Alarms (detection & warning devices, controls) Exit lighting & signage Fire Escapes Extinguishers & hoses Building security alarms (detectors, sirens, wiring) Building access & control System Gas piping incl: to/from property line & other bldgs. Stair and Handrail Drive System (motors, truss, tracks) Elevator Car Drive System (motors, lifts, controls) Suspension system (counterweights, framing, guide rails) * Building unit of property (UOP) rules apply to each building structure located on a single property. ** Building system components with a different tax life are separate units of property. For example, a cost segregation study separating HVAC into 5 year & 39 year categories for a restaurant creates two separate HVAC units of property. Lessee of Building Personal Property Plant Property Network Assets Must apply the same units of property above but only to the portion of the building being leased. UOP are parts that are "functionally interdependent" i.e. placing one part in service is dependent on placing the other part in service. UOP is each component that performs a discrete and critical function. Generally each piece of machinery or equipment purchased separately. UOP is determined by taxpayers particular facts Definitions Plant Property Network Assets Major Component Incidental Component Machinery & Equipment used to perform an industrial process such as manufacturing, generation, warehousing, distribution, automated materials handling, or other similar activities Railroad track, oil & gas pipelines, water & sewage pipelines, power transmission & distribution lines, telephone & cable lines; owned or leased by taxpayers in each of those respective industries. Part or combination of parts that performs a discrete and critical function in the operation of the unit of property Relatively small, inexpensive, or minor part that performs a discrete and critical function for the UOP. Generally, not capitalized because of it's size, cost, or significance. Examples: Asphalt sealer, HVAC thermostats, HVAC fan coils, HVAC registers, Plumbing valves and fittings, lighting or power control devices, hardware, escalator handrail, paint, roof shingles. KBKG is a specialty tax firm that works directly with CPAs and businesses to provide value add solutions to our clients. Our engineers and tax experts have performed thousands of tax projects resulting in hundreds of millions of dollars in benefits. Our services include:» Research & Development Tax Credits» Repair v. Capitalization 263(a) Review» Employment Tax Credits» Green / Energy Tax Incentives» Cost Segregation» Federal» 179D for Designers» Fixed Asset Depreciation Review» State Enterprise Zones» 45L for Multifamily» IC DISC KBKG, Inc. expressly disclaims any liability in connection with use of this document or its contents by any third party. Any US tax advice contained herein was not intended or written to be used, and cannot be used, for the purpose of avoiding penalties that may be imposed under the Internal Revenue Code (IRC) or applicable state or local tax law provisions. This document is for educational purposes only and is not intended, and should not be relied upon, as accounting or tax advice. Copyright 2015 by KBKG, Inc. Any reproduction, transmission, or distribution of this form or any of the material herein is prohibited and is in violation of US law.

9 SOLUTIONS FOR TAX PROFESSIONALS AND BUSINESSES TAX CREDITS INCENTIVES COST RECOVERY Nationwide Service KBKG.com Tangible Property Repair vs. Capitalization Regulations: Election Summary and Possible Accounting Method Changes (last updated ) ELECTIONS UNDER THE FINAL REGULATIONS Elections not requiring Form 3115 Statements required to make election Application Revocation Allowable? Code Section Capitalize certain materials and supplies (only rotable, temporary, or standby emergency spare parts); an optional method is available De minimis safe harbor ($5K with Applicable Financial Statements, $500 without) Capitalize employee compensation and overhead as amounts that facilitate an acquisition transaction No. Election made by treatment on timely filed return (including extensions). Safe harbor for small taxpayers with buildings (less than $10M in gross Yes. Attach statement to the taxpayer s timely filed original Federal tax receipts, unadjusted building basis is return (including extensions) each year. less than $1M) Capitalize repair and maintenance costs (must be consistent with financial statements) No. Election made by treatment on timely filed return (including extensions). Yes. Attach statement to the taxpayer s timely filed original Federal tax return (including extensions) each year. Yes. Attach statement to the taxpayer s timely filed original Federal tax return (including extensions) each year. Rotable, temporary, or standby emergency spare parts All eligible materials and supplies & improvements Each transaction, applies to either employee compensation or overhead, or both Only apply if total costs < $10,000 or 2% of the unadjusted building basis All repair and maintenance costs capitalized for financial accounting purposes Only by Private Letter Ruling Irrevocable for tax year elected Only by Private Letter Ruling Irrevocable for tax year elected Irrevocable for tax year elected (d) 1.263(a)-1(f) 1.263(a)-2(f)(iv)(B) 1.263(a)-3(h) 1.263(a)-3(n) Partial Disposition Election (see below for Late Partial Disposition Election) No. Election made by treatment on timely filed return (including extensions). Any type of MACRS property Only by Private Letter Ruling 1.168(i)-8(d) FINAL REGULATIONS Rev. Proc Change # General Topic Specific Purpose 481(a) Adjustment Stat Sampling Addressed? Regulation Notes Concurrent Change on One Form 3115? 184 Repair and maintenance costs, amounts for improvements to tangible property To deduct amounts for repair and maintenance or to capitalize amounts for improvements to tangible property and, if depreciable, to depreciating under 167 or 168. Includes a change, if any, in the method of identifying the unit of property, or in the case of a building, identifying the building structure or building systems for the purpose of making this change. YES YES Reg , 1.263(a)-3 No timing restrictions, Taxpayers are expected to comply for tax years beginning 1/1/2014 Can be combined with Changes #184 through #193 from section of Rev. Proc Regulatory accounting method Change to the regulatory accounting method. Cut-Off NO Reg (a)- 3(m) No timing restrictions since this is optional. Can be combined with Changes #184 through #193 from section of Rev. Proc Non-incidental materials and supplies Change to deducting non-incidental materials and supplies when used or consumed. Cut-Off NO Reg (a)(1), Reg (c)(1) No timing restrictions, expected to comply for tax years beginning 1/1/2014 Can be combined with Changes #184 through #193 from section of Rev. Proc Incidental materials and supplies Change to deducting incidental materials and supplies when paid or incurred. Cut-Off NO Reg (a)(2), Reg (c)(1) No timing restrictions Can be combined with Changes #184 through #193 from section of Rev. Proc Non-incidental rotable and temporary spare parts Change to deducting non-incidental rotable and temporary spare parts when disposed of. Cut-Off NO Reg (a)(3), Reg (c)(2) No timing restrictions, expected to comply for tax years beginning 1/1/2014 Can be combined with Changes #184 through #193 from section of Rev. Proc Optional method for rotable and temporary spare parts Change to the optional method for rotable and temporary spare parts. No timing restrictions since YES YES Reg (e) this is optional. Can be combined with Changes #184 through #193 from section of Rev. Proc Commissions and other transaction costs that facilitate the sale of property (DEALER). Change by a dealer in property to deduct commissions and other transaction costs that facilitate the sale of property. YES YES Reg (a)- 1(e)(2) No timing restrictions, expected to comply for tax years beginning 1/1/2014 Can be combined with Changes #184 through #193 from section of Rev. Proc Commissions and other Change by a non-dealer in property to capitalizing costs that facilitate the sale commissions and other costs that facilitate the sale of of property (NON-DEALER) property. YES YES Reg (a)- 1(e)(1) No timing restrictions, expected to comply for tax years beginning 1/1/2014 Can be combined with Changes #184 through #193 from section of Rev. Proc Capitalizing acquisition or production costs To capitalize acquisition or production costs and, if depreciable, to depreciating under section 167 or 168 / A change to capitalize inherently facilitative amounts allocable to real or personal property even if the property is not eventually acquired. YES / Cut- Off YES / NO Reg (a)- 2 / Reg (a)- 2(f)(3)(ii) No timing restrictions, expected to comply for tax years beginning 1/1/2014 Can be combined with Changes #184 through #193 from section of Rev. Proc Costs for investigating or pursuing the acquisition of real property Change to deducting certain costs for investigating or pursuing the acquisition of real property (whether and which). Cut-Off NO Reg (a)- 2(f) (2)(iii) No timing restrictions, expected to comply for tax years beginning 1/1/2014 Can be combined with Changes #184 through #193 from section of Rev. Proc Page 1 of 2

10 SOLUTIONS FOR TAX PROFESSIONALS AND BUSINESSES TAX CREDITS INCENTIVES COST RECOVERY Nationwide Service KBKG.com Tangible Property Repair vs. Capitalization Regulations: Election Summary and Possible Accounting Method Changes (last updated ) FINAL DISPOSITION REGULATIONS Rev. Proc Change # General Topic Specific Purpose 481(a) Adjustment Stat Sampling Addressed? Regulation Timing Concurrent Change on One Form 3115? 180 Late GAA election To make a late General Asset Account (GAA) election; Late election to recognize gain or loss upon disposition of all assets, the last asset, or the remaining portion of the last asset; Late election to recognize gain or loss upon disposition of assets in a qualifying disposition. Cut-Off NO Reg (i)-1; Reg (i)- 1(e)(3)(ii); Reg (i)- 1(e)(3)(iii) Tax year beginning on or after 1/1/2012 and beginning before 1/1/2014 May require single Form 3115 if filed with other changes. Should file one form 3115 for all assets that are subject to the GAA election 196 Late partial disposition election for MACRS Property (not in GAA) Change to make a late partial disposition election for a portion of an asset. Used for most dispositions of building structural components (not listed in 1.168(i)-8(d)(1)) YES NO Reg (i)-8 Tax year beginning on/after 1/1/2012 and before Can combine with Change #7 1/1/ (i)-8(d)(2)(i) - (Depreciation) for the same asset or- 1st or 2nd tax year in tax years before January 1, succeeding applicable tax 2015 year 1.168(i)-8(d)(2)(iv)(B) 197 Revocation of GAA election Change to revoke a General Asset Account (GAA) election. YES NO Reg (i) Partial dispositions of tangible depreciable assets Change to make partial dispositions of tangible depreciable to which the Service's assets to which the Service's adjustment pertains. adjustment pertains (not in GAA) Depreciation of leasehold improvements Permissible-to-permissible accounting method for depreciation of MACRS property Disposition of a building or structural component (not in a GAA) Change to comply with 1.167(a)-4 for leasehold improvements in which the taxpayer has a depreciable interest at the beginning of the year of change. Various changes involving permissible to permissible method of accounting for depreciable MACRS property. Applies to assets in GAA, Single Asset Accounts or Multiple Asset Accounts, and dispositions of property not in a GAA. (change in method of determining the unadjusted depreciable basis of the disposed portion of an asset from one reasonable method to another) Changes involving disposition of a building or structural component not in a General Asset Account. Typically used if a listed event occurs (see 1.168(i)-8(d)(1)); e.g. Casualty event, like kind exchange, Dispositions of tangible depreciable assets (other Changes involving dispositions of tangible depreciable than a building or its assets (other than a building or its structural components) structural components) (not not in a General Asset Account. in a GAA) YES NO Reg (i)- 8(d)(2)(iii) Tax years beginning on or See RP Sec 6.34 for list after 1/1/2012 and beginning of possible combinations. before 1/1/2015. Applicable when audited by IRS YES NO No timing restrictions, Taxpayers are expected to Reg (a)-4 comply for tax years beginning 1/1/2014 Regs (i)- 1(c); 1.168(i)- Cut-Off NO 1(j)(2); 1.168(i)- Tax years beginning on or 1(j)(3); 1.168(i)- after 1/1/2012 and beginning 7; 1.168(i)-7(c); before 1/1/ (i)-8(f)(2) or (3); 1.168(i)- 8(g) YES YES YES YES Reg (i)- No timing restrictions, 8(c)(4); Reg. expected to comply for tax 1.168(i)-8(f)(2) years beginning 1/1/2014. or (3); Reg. May require single Form 1.168(i)-8(g), 3115 if filed with other Reg (i)- changes. 8(h)(1) Reg (i)- 8(c)(4); Reg (i)-8(f)(2) No timing restrictions May or (3); Reg. require single Form 3115 if 1.168(i)-8(g), filed with other changes. Reg (i)- 8(h)(1) Should file one form 3115 for all assets that are being changed under this section Can combine with certain UNICAP changes. See RP Sec 6.36 See RP Sec 6.37 for list of possible combinations. Can combine with Change #7 (Depreciation) for the same asset in tax years before January 1, 2015 Can combine with Change #7 (Depreciation) for the same asset in tax years before January 1, Dispositions of assets (in a GAA) Various changes from impermissible to permissible methods involving disposition of tangible assets or portion of tangible assets in a General Asset Account. YES NO Reg (i)- No timing restrictions, 1(e)(2)(viii); Reg. Taxpayers are expected to 1.168(i)-1(j)(2); comply for tax years 1.168(i)-1(j)(3) beginning 1/1/2014 Can combine with Change #7 (Depreciation) for the same asset in tax years before January 1, 2015 Change # General Topic Specific Purpose 7 Depreciation or amortization (impermissible) Other Notable Accounting Method Changes for Consideration Rev. Proc Change from an impermissible method to a permissible method for changes allowed under Regulations section (e)(2)(ii)(d), and for depreciable property owned at the beginning of the year of change. 481(a) Adjustment YES Stat Sampling Addressed? NO Regulation Reg (e)(2)(ii)(d) Timing No timing restrictions. Concurrent Change on One Form 3115? 21 Removal Costs Treatment of removal costs in disposal (entire or partial) of a depreciable asset YES NO Reg (a)- 3(g)(2)(i) No timing restrictions, expected to comply for tax years beginning 1/1/2014 Use a separate Form 3115 in accordance with the automatic change procedure described in Appendix Section 10.03(1) of Rev. Proc "Cut-off method": use old accounting method for years prior to effective date and use new accounting method for items after the effective date. KBKG is a specialty tax firm that works directly with CPAs and businesses to provide value add solutions to our clients. Our engineers and tax experts have performed thousands of tax projects resulting in hundreds of millions of dollars in benefits. Our services include:» Research & Development Tax Credits» Cost Segregation» Property Tax Review» Employment Tax Credits» Green / Energy Tax Incentives» Sales & Use Tax» Federal» 179D for Designers» IC DISC» State Enterprise Zones» 45L for Multifamily» Repair v. Capitalization 263(a) Review» Fixed Asset Depreciation Review KBKG, Inc. expressly disclaims any liability in connection with use of this document or its contents by any third party. Any US tax advice contained herein was not intended or written to be used, and cannot be used, for the purpose of avoiding penalties that may be imposed under the Internal Revenue Code (IRC) or applicable state or local tax law provisions. This document is for educational purposes only and is not intended, and should not be relied upon, as accounting or tax advice. Copyright 2015 by KBKG, Inc. Any reproduction, transmission, or distribution of this form or any of the material herein is prohibited and is in violation of US law. Page 2 of 2

11 Research & Development Tax Credits solutions for tax professionals and businesses Tax Credits Incentives Cost Recovery Thinking Beyond the Tech World Legislation has substantially broadened the number of taxpayers eligible to benefit from the Research & Development (R&D) Tax Credit. Companies engaged in development, improvement or refinement of products, processes, formulas, and computer software may qualify. What is the R&D Tax Credit? The R&D Tax Credit is a federal tax incentive (also available in many states) designed to promote innovation. It allows companies to receive tax credits for expenses incurred for research and development, by lowering their tax obligation and increasing funds for future innovation. Primarily a labor based incentive, the R&D Tax Credit applies to activities undertaken to develop new, improved and more reliable products, processes and formulas such as: Developing or testing new products or materials Developing new or enhanced formulations Testing new concepts Improving existing products Trial and error experimentation Designing tools, jigs, molds and dies Design and analysis of prototypes or models Developing or improving production or manufacturing processes Developing, implementing or upgrading systems/software Paying outside consultants/contractors to perform any of these activities And more... Qualifying Industries: Aerospace Agriculture Automotive Chemicals Electronics Engineering Food Science Get More Information Forestry General Manufacturing Hardware Development Pharmaceuticals Semiconductors Software Development Telecommunications And more... A free preliminary analysis can give you an idea of how the R&D Tax Credit can benefit your company. Contact us today for an Estimated Benefit and fee quote. Why Now and Not Before? The R&D Tax Credit is an often overlooked and misunderstood tax benefit. Most tax preparers associate R&D only with technology, biotechnology and pharmaceutical activities. Regulations made final in December 2003, substantially broadened the range of taxpayers eligible for the credit. Based on these rules, qualified activities no longer need to create new technological knowledge; they only need to involve the use of technological principles to develop new or improved products and processes. As a result, more companies can take advantage of these benefits. About KBKG KBKG is a national firm specializing in R&D Tax Credits, Cost Segregation, Enterprise Zone Tax Credits, and Energy Efficient Commercial Building Deductions. Our engineers and tax experts have performed thousands of tax projects that saved our clients hundreds of millions of dollars in benefits since As leading educators in our field, we have been invited to speak to thousands of CPAs and tax professionals by the most prominent associations in the industry. Our goal is to bring value to our clients by providing quality service, building long-term relationships, and ensuring a high standard of professional ethics. NATIONWIDE SERVICE KBKG.COM COPYRIGHT 2011 KBKG, INC. ALL RIGHTS RESERVED. RDTXCR

12 Research & Development Tax Credit Case Study solutions for tax professionals and businesses Tax Credits Incentives Cost Recovery Who Can Benefit From The Research & Development Credit? The Research and Development Tax Credit is available to companies that invest in the development of new or improved products, manufacturing processes, and software. The credit was initiated by Congress in 1981 as an incentive to increase innovation in American businesses. Qualification for the credit depends on the nature of the activities performed by a company and the expenditures incurred during those activities. Case Study Following is a case study that presents a fictitious company in the food service industry, with some qualifying activities for the credit. In the current tax year, Green, Inc. undertook an effort to develop a new line of cookware using a new material that is biodegradable, and does not cause pollution when it is disposed of at the end of its useful life. Green, Inc. incurs the following costs in the development activities: Employee Wages Name Jim Smith Tom Johnson Phil Floyd Title Sr. Engineer Staff Engineer Scientist Wages 100,000 75,000 60,000 Qual % 100% 60% 100% Qual Wages 100,000 45,000 60,000 Contractors Name T ask George White Material Analyst Helen Jones Soils Engineer Sciences LLC Testing Amount Paid 20,000 20,000 40,000 Qual % 65% 65% 65% Qual Contractors 13,000 13,000 26,000 Supplies 43,000 Total Qualif ed Research Expenses $300,000 Qualifying Activities Activities must involve the development of new or improved products, processes, or software. There must be uncertainty of the capability, method, or appropriateness of the design for developing or improving the product, process or software. Testing alternative methods in an attempt to achieve a desired result. The activities must be technological in nature, using principles of the physical sciences. Qualifying Costs Associated With The Above Activities Include: Wages subject to income tax withholding paid to employees to perform qualified activities. 65% of amounts paid to non-employees to perform qualified activities (contract research). Supplies (non-depreciable property) used to build prototypes and other tangible items used in the development process. KBKG Results The calculation of the credit requires several other attributes not included in this case study. In this case study, the current year federal credit for Green, Inc. could be up to $30,000. NATIONWIDE SERVICE KBKG.COM COPYRIGHT 2011 KBKG, INC. ALL RIGHTS RESERVED. RDTCSD

13 Section 41 Research & Development Tax Credits // What? Federal credit designed to promote innovation. Dollar-for-dollar credit equals roughly 6.5% of client s wages related to Qualified R&D. Additional state credits may be available. Questions to Ask Do you develop or design new products or product alternatives? Do you enhance existing products? Have you developed or enhanced your manufacturing processes or process alternatives? Do you explore cost saving opportunities in either product designs or manufacturing processes? Do you explore new technologies? Do you explore new materials for use in products or manufacturing processes? Who in your company is responsible for development efforts for new or improved products or processes? o Do you have an internal product design department? o Do you have an internal engineering or tech support department for process developments? Do you hire outside contractors to provide services for new or enhanced product development? How about for new or enhanced manufacturing process development? Estimated number of employee's performing R&D - All departments? Estimated average salary of those employees performing R&D? Estimated % of time for those employee's performing R&D activities? Over the years, how has the amount of expense related to the above activities been? o Increased / Decreased / Remained Constant? Great Candidates Manufactures all industries Equipment or tools, jigs, molds, or prototype designers/builders Computer software developers Food / Sciences / Food manufacturers Poor Candidates Qualified R&D spending of less than $250,000 Timing Annual credit included on timely filed return (including extensions) G/R Federal - 3-year window to amend tax returns / some states can be 4-years If in a Net Operating Loss (NOL) position, can look back more than 3 years Study Time Total Project: Allow 6-8 Weeks Allow 2-3 Weeks for calculation work only / allow additional 4 5 weeks for documentation work Tax Planning Federal Credit is not refundable ; must currently pay tax to use credit General Business Tax Credit, 1 year carryback and 20 year carryforward Generally, tax credit limited to AMT Special Rule for Eligible Small Businesses ( ESB ) in 2010, potential to reduce AMT and have a 5 year carryback. (ESB is if gross receipts test of less than $50M is met) KBKG.COM KBKG

14 Section 41 Research & Development Tax Credits // Requirements The R&D credit is based upon a Four-part test: 1. Eliminating Uncertainty There must be technical uncertainty as to capability, method or design 2. Technological in Nature Physical or Biological Science, Computer Science, or Engineering 3. Process of Experimentation Develop, test & evaluate one or more hypothesis; success or failure is not a prerequisite 4. Permitted Purpose New or improved functionality, performance, reliability, quality, or achieve a significant cost reduction The Four-Part test is applied at the business component level. A business component can be a: 1. Product 2. Process 3. Formula, technique, or invention 4. Computer software. Pricing KBKG fees generally fall in the range of 15% to 25% of the credits generated but are not contingent or success based. The fee is based on the scope of the work involved. Items to Request Organization Chart Including employee names & titles Employee Listing Include name, department, title, date of hire &/or date of termination Current & prior 3 years financial statements Prior 4 years tax returns If R&D credit previously claimed Get copies of Form 6765 & supporting paperwork Job descriptions Accounts / Departments to Look For on Financial Statements Engineering or Tech Support Computer Automated Design (CAD) or Drafting Product or Systems Development Laboratory or Test Facility Quality Control Prototypes or Samples Outside Consultants / Services / Labs or Test Facilities KBKG.COM KBKG

15 Repair vs. Capitalization Review Understanding the Tangible Property Repair Regulations solutions for tax professionals and businesses Tax Credits Incentives Cost Recovery The IRS issued comprehensive Repair Regulations regarding the deduction and capitalization of expenditures related to tangible property also known as the Repair Regulations. The rules are applicable to businesses in all industries that acquire, produce, replace or improve tangible property. In most cases, these regulations present an opportunity for taxpayers to claim missed deductions, especially if buildings, owned or leased, have been renovated or improved. Even if a cost segregation study has already been performed, taxpayers should have those costs re-analyzed by an expert in this area. Application of the new Repair Regulations requires an in-depth understanding of various tax cases, regulations, and circumstances that must be met. IRS procedures allow you to apply these rules retroactively and claim any missed deductions using IRS Form Correcting these errors is considered an Automatic Change of Accounting Method and does not require amending any returns. Who Can Benefit? Taxpayers that acquire, renovate or improve real estate. Generally, anyone that has incurred significant costs for renovations to their existing real property in the last 20 years is an ideal candidate. These rules are particularly beneficial when the original improvements are placed in service for one year before renovations occur. KBKG recommends a detailed review if $350,000 or more is spent on renovations. Significant Changes Whether building expenditures are capital improvements or repair expenses. The IRS outlines numerous subjective factors that must be considered when deciding if the building expenditure is an improvement or a repair expense. KBKG engineers will help you determine when it s appropriate to expense things such as windows, roofs, HVAC, plumbing and electrical based on your unique situation. Write-off structural components of buildings when retired or demolished. Structural components of a building include items with a long tax life (generally 39, 27.5 or 15 years) such as lighting, roofs, HVAC systems, interior and exterior walls, etc. The new regulations allow you to assign a value to those items and write them off when replaced. Example: ABC Corp acquires an office building for $5M. Five years later they spend $1M to remodel the second floor. An Asset Retirement Study identifies $450,000 of 39 year life items that were removed during the remodel. This might include lighting, drywall, doors, floor coverings, acoustic ceilings, etc. Results: $400,477 of additional deductions on current year return. Plan of Rehabilitation Doctrine is now obsolete! Under the old rules, you had to capitalize any routine repair work that was performed at the same time as other major improvements. If you did not expense repair work done in the past under the old rules, you are now able to claim those missed deductions without amending tax returns. Example: Client capitalized $4M of renovation costs to their building four years ago. KBKG engineers find that $300,000 was incurred to replace certain windows, asphalt patchwork, painting, roof tiles, some plumbing fixtures and one HVAC unit. KBKG determines all these costs are repair expenses. Results: Filing Form 3115 and claiming an additional $266,985 of deductions on current year return. Getting More Information KBKG can quickly review your situation to determine if there is an opportunity. To see if you qualify, call us today or visit our website at for more information. NATIONWIDE SERVICE KBKG.COM 2014 KBKG. ALL RIGHTS RESERVED. TEMPRR

16 Repair vs. Capitalization & Asset Retirement Studies // What to look for? For clients that have owned property for more than a year, and then renovate or replace parts of the building. This can include things such as HVAC, roofing, ceilings, drywall, ceramic floor tile, building lighting, and more. KBKG performs a detailed review of building expenditures to appropriately classify them as a repair expense or as a capitalized asset. If expenditures do not qualify as a repair expense, the old building components being replaced or removed can be retired and written off for tax purposes. Questions to Ask Have you undertaken a major renovation or repairs on your property? How much did you spend on renovations or repairs? What year were they done? How much depreciable tax basis is in the original property being renovated? How long did you own or lease the property prior to undertaking the renovation or repair work? Do you have a schedule of costs including descriptions of the items repaired or replaced? What type of work did you perform? o Replace rooftop air conditioning units? How many? What kind of HVAC system is it? o Replace roof or part of roof? o Was the purpose of the construction to give the building a face lift o Was it a complete gut and renovate project? o Replace any plumbing fixtures or electrical? Please describe? o Replace any windows? How many replaced? o Were any repairs done to the property? o Was the building expanded? Great Candidates Any renovations > $400K in last 15 years Retail, hotels, banks, restaurants Manufacturing Commercial & Multifamily property owners Timing Poor Candidates Repair or renovation spend of less than $250,000 Buildings acquired with the intent to immediately renovate Renovations that occur shortly after building purchase (generally less than a year) Retirements: Closing window to change prior year missed retirements Repairs: Can correct any prior year by filing Form 3115 with tax return Study Time Studies take up to days from date of receipt of all pertinent project data Benefit to the Client Claim immediate deductions that would normally depreciate over 39 years Avoid recapture on all items that are now retired or expensed Benefits are in addition to any benefit received under a cost segregation study KBKG.COM KBKG

17 Repair vs. Capitalization & Asset Retirement Studies // Pricing Preliminary Review to estimate tax benefit No charge Formal Study Fee Range generally $5k - $15k and can be higher depending on the extent of renovations. Fixed fee based on estimated engineering time, which typically does not exceed 10% of the estimated benefits. Items to Request Schedule of repair or renovation expenditures Prior year s depreciation schedules Project Examples Example: KBKG Client acquired a 3 story office building in 2004 for $5M. In 2009 they spent $1M to remodel the 2nd floor (ceilings, walls, lighting, plumbing, ducting, electrical wiring, etc). In 2009, KBKG did a cost segregation study on the original building and the $1M remodel. For the 2011 tax return, KBKG performs a Repair vs. Capitalization review to identify everything that was removed from the original 2004 acquired building. KBKG s engineer identifies an additional $450k (from the original $5M building) of 39 year items that were removed during the 2009 renovation. Client claims $369,234k of additional deductions on the 2011 tax return (450,000 less previous depreciation of $80,766). Example: KBKG client spends $4M on renovation costs to their building in All costs were capitalized and depreciated. For the 2011 tax return, KBKG reviews costs and finds that $300,000 was related to asphalt patchwork, roof tile replacement, painting, replacing certain windows, replacing some plumbing fixtures, and replacing one HVAC unit. Based on the new rules, KBKG identifies all these costs as repair expenses. Client claims an additional $292,307 on their 2011 return ($300,000 less depreciation of $7,692). KBKG.COM KBKG

18 Fixed Asset Tax Review solutions for tax professionals and businesses Tax Credits Incentives Cost Recovery A Fixed Asset Capitalization Review evaluates a company s federal tax depreciation schedule over the last 15 years to identify assets that have been misclassified and are being written off over a longer period than necessary. The goal is to reclassify them into appropriate shorter tax lives or as a repair and maintenance expense. While a cost segregation study focuses on buildings and large improvements, a Fixed Asset Capitalization Review encompasses all fixed assets a company owns including real property, machinery, furniture, fixtures, and equipment. Misclassifications are generally caused due to: Companies using book lives for tax purposes Changes to case law and lack of in-depth knowledge needed by the taxpayer Lack of understanding on how assets may be interrelated Misapplication of the appropriate tests to determine correct treatment A proper Fixed Asset Capitalization Review requires not only tax expertise, but also an understanding of engineering and construction concepts. Our team of engineers will visit your locations to inspect assets, identify their use and function, interview your team, and review supporting documentation. Benefits Current laws allow for a taxpayer to correct these errors and realize any missed deductions in the current tax year. Other benefits include accurate reporting of book-tax differences and accurate tax filings. Who makes a good candidate? While anyone can take advantage of these rules, clients that stand to benefit most have significant annual expenditures in real property improvements. Retail, Hotel, Supermarket, Restaurants and Banks with more than 10 locations Franchise operations requiring corporate rebranding/re-imaging Manufacturing Operations Utility Companies The new rules for Repair vs. Capitalization had a significant impact on our tax liability Patrick T., CFO The Process Under current Revenue Procedures, the change in accounting method to reclassify previously capitalized assets or repair and maintenance expenses is considered automatic. Proper filing of the IRS Form 3115 with specific representations and documentation for each asset is needed. This change in accounting method can be filed any time before the extended tax return due date in the year of change. Get Started Today KBKG can quickly review your Federal tax deprecation schedule to determine if there is an opportunity. To get started, please contact us at NATIONWIDE SERVICE KBKG.COM 2011 KBKG. ALL RIGHTS RESERVED. FACRRC

19 45L Residential Dwelling Tax Credits solutions for tax professionals and businesses Tax Credits Incentives Cost Recovery About the 45L Tax Credit The Tax Relief, Unemployment Insurance Reauthorization, and Job Creation Act of 2010 extended the Energy Efficient Home Credit which offers a tax credit of $2,000 per dwelling unit to developers of energy efficient residential buildings completed after August 8, Eligible Apartment Buildings, Condos, & Single Family Home Developments A dwelling unit should provide a level of heating and cooling energy consumption that is significantly less than certain 2004 energy standards. Based on current construction trends and local building codes, many developments already exceed these standards. The Benefits QUALIFIED UNITS TAX CREDITS 30 Units 60 Units 100 Units 200 Units 500 Units 1000 Units $60,000 $120,000 $200,000 $400,000 $1,000,000 $2,000,000 Every residential developer should consider 45L tax credits as part of their tax reduction strategy Ideal Candidates All apartment buildings, residential condominiums, and single family home developments completed on or after August 8, 2005 with 10 or more units can be assessed for energy tax credits. Eligible construction also includes substantial reconstruction and rehabilitation. Additionally, IRC 45L allows for a $1,000 or $2,000 tax credit for manufactured homes that meet the criteria. HVAC ENVELOPE The Process The basis for developing and supporting this tax credit is a detailed energy analysis that must be certified by a qualified third-party. Our multi-disciplinary team of engineers and tax experts will ensure that you obtain the maximum tax credits and provide all the documentation necessary to sustain an IRS audit. Get Started Today KBKG offers a feasibility assessment that will illustrate how you can benefit from this tax credit. To find out more or to get started on a feasibility assessment, contact us today. SYSTEMS AFFECTING 45L TAX CREDITS NATIONWIDE SERVICE KBKG.COM COPYRIGHT 2011 KBKG, INC. ALL RIGHTS RESERVED. 45LTCR

20 Section 45L Energy Efficient Dwelling Unit Tax Credits // Who? Apartment/multifamily developers (includes investors with basis) Affordable housing developers Assisted living facility developers Condominium developers Production homebuilders & manufactured Timing What? $2,000 Federal Credit per dwelling unit Other State and Local incentives may be applied if engaged prior to construction Unit must be leased or sold within the 3 year Federal Statute of Limitations Requirements Building must be less than 3 stories above grade (potential for 3 stories above 1-level podium parking) Heating & cooling consumption need to be 50% better than 2004 or 2006 energy standards (2004 or 2006 IECC) In the real world, the energy consumption is mostly impacted by the building envelope (windows, doors, insulation, roof) Requires analysis that meet IRS requirements and certification by qualified third party Great Candidates 30+ Unit community California projects Participation in Energy Star, HUD programs, LEED, energy efficiency or utility rebate programs LIHTC projects (especially 1602 tax credit exchange & TCAP projects) Water source heat pumps or hydronic systems Windows: SHGC and U-factor under 0.40 Poor Candidates In colder climate zones (northern US), units with ducted electric heat systems are poor candidates. In warmer climate zones (southern US), AC units with a SEER rating lower than 13 are poor candidates. Custom homebuilders Tax Planning Tax credit is not refundable ; tax liability is necessary to offset Generally, 1 year carryback and 20 year carryforward Generally, tax credit doesn t reduce AMT In 2010, potential to reduce AMT and have a 5 year carryback if a gross receipts test of less than $50M is met. Credit reduces basis; for apartment property, 27.5 year property is reduced No recapture on credit Pricing For leased units, fees generally total 15-20% of the credits as more units qualify, fees decrease. No upfront fees; risk-free Phase I analysis protects client from unnecessary costs Audit support included Questions to ask... Where is property located? Number of Units? Number of stories? What is the SEER rating of the HVAC? What is the efficiency ratio of the heating system? What kind of heating system is there? (Hydronic? Heat pumps? Electric wall heaters? etc). What are the R-Values for the Insulation in the walls and ceiling? What kind of windows? What are the specs on the glass? (Glass U-Factor and Heat Gain Factor). KBKG.COM KBKG

21 Section 45L Energy Efficient Dwelling Unit Tax Credits // Affordable Housing/ Low Income Housing Tax Credit (LIHTC) Projects In most cases, the developer/general partner, will only have 1% basis in the property. This means the credits will NOT flow through to them. They can approach the investors and offer to sell the 45L credits at a higher price than our fee. Generally, credits are sold to investors for $.75-$.90 on the dollar. KBKG has found it difficult to sell a project to a developer in this scenario. Ask if they have used any 1602 or TCAP funds! You must ask which properties they have basis in due to these programs. If they have basis, the credits will flow through to them just like depreciation will. See below: 1602 Program. In 2008, when all the investors were not interested in LIHTC credits, US Government issued funds specifically to loan money (1602 program) to developers. This means that the Develop/General Partner has basis and will directly benefit from 45L Credits!! TCAP money (Tax Credit Assistance Program). These were grants for developers for LIHTC projects. KBKG is not entirely sure, but in some cases we believe the Developer will have basis in the property and benefit from 45L. But in other cases, since it is a grant, they may not have basis. KBKG.COM KBKG

22 Energy Efficient Building Deductions solutions for tax professionals and businesses Tax Credits Incentives Cost Recovery 179D Tax Deduction This legislation offers a tax deduction of up to $1.80/sf to those investing in energy efficient improvements placed in service after Jan 1, Eligible Improvements Eligible improvements must reduce energy use for any of the following categories: a building s envelope, HVAC, and/or interior lighting systems. Currently, there are eight different ways to pursue a deduction and all require comparison to ASHRAE Standard and certification by a qualified individual. The Benefits Sample Improvement Size Partial Tax Deductions Lighting HVAC Envelope Full Tax Deduction 50,000 sf 100,000 sf 300,000 sf $15k - $30K $60K $180K $30K $60K $180K $30K $60K $180K $90K $180K $540K PARTIAL TAX DEDUCTIONS AVAILABLE FOR: LIGHTING HVAC ENVELOPE Ideal Candidates Unlike most deductions, which are based on the amount spent, this deduction is primarily based on affected square footages. Ideal candidates will generally have improvements with a square footage of at least 50,000 square feet. A wide range of improvements, from simple lighting retrofits to full-scale construction projects, qualify for this timely tax break. Other great candidates include regional or national chains with multiple locations. Tax Breaks for Architects & Designers Architects and designers who implement energy efficient designs on government buildings are also eligible for the deduction if their design meets the criteria. $.30 TO.60 / SF $.60 / SF $.60 / SF The Process The basis for developing and supporting this deduction is a detailed engineering analysis, as prescribed by the IRS. Our multi-disciplinary team of engineers and tax experts will ensure that you obtain the maximum deductions available, following IRS guidance. In addition to performing energy simulation modeling or lighting power density calculations, our studies meet all 9 requirements of the tax code and include a written energy reduction plan, bi-level switching compliance, certification, and inspection documents. Get Started Today - for FREE KBKG offers a complimentary feasibility assessment that will illustrate how you can benefit from this deduction. To find out more or to get started on a feasibility assessment, contact us today. NATIONWIDE SERVICE KBKG.COM COPYRIGHT 2011 KBKG, INC. ALL RIGHTS RESERVED. 179DTC

23 Section 179D Energy Efficient Building // Who? Architects, Designers, Engineers, & Contractors who design government-owned buildings 50,000 sf and up Owners who invest in energy efficient building and improvements that are 50,000 sf and up What? $0.30 to $1.80/sf in Federal tax deductions When? Placed in service after 1/1/06 Starting in 2011, can file 3115 along with certification documentation to claim missed deductions in current year Requirements Must be commercial, government, or high rise residential (4 stories & up) In general, lighting & HVAC energy cost need to be 50% better than 2001 energy standards (ASHRAE ) to be eligible for full $1.80/sf deduction Lower thresholds for partial deduction on individual systems which include lighting, HVAC, and envelope for up to $0.60/sf deduction per system Requires analysis that meets IRS requirements and certification by qualified third party Great Candidates Buildings that are 50,000 sf and up, Government buildings such as schools, student housing, military facilities, etc. Multifamily & Hotels (4 stories & up) Industrial, Office, & Big box retail Parking garage Participation in Energy Star, LEED, energy efficiency or utility rebate programs California projects Poor Candidates Difficult to identify poor candidates without assessing. Older projects tend to be worse (i.e. PIS~2006) Smaller projects, especially those under 50,000 sf Envelope retrofits and partial HVAC retrofits Tax Planning Subject to 1245 recapture for building owners. Architects of government owned buildings not subject to recapture Generally, 2 year NOL carryback and 20 year carryforward Reduces AMTI Deduction reduces basis in real property Pricing Fees generally based on number of systems that are eligible, type of building, and size. In general, they don t exceed 15% of the deduction. KBKG.COM KBKG

24 Section 179D Energy Efficient Building // Advantage! No upfront fees; risk-free phase I analysis protects client from unnecessary costs For architects & designers, work with client to secure allocation letters Audit support included Expertise in tax code & energy codes necessary for maximizing deductions Can secure other financial incentives if engaged early enough (i.e. utility rebates, state credits) KBKG.COM KBKG

25 California Enterprise Zone Credits solutions for tax professionals and businesses Tax Credits Incentives Cost Recovery What Are Enterprise Zone Credits? Established by the California Trade & Commerce Agency in 1984, the Enterprise Zone Program is a tax saving incentive designed to stimulate growth and development in selected areas within California. This program promotes the creation of new jobs, attracts new businesses and retains businesses in particular areas. The program has created thousands of jobs annually in areas of underemployment, allowing private businesses to revive the local economy. Enterprise Zone Credits & Deductions The Enterprise Zone Program creates a significant tax saving opportunity for businesses in designated areas. KBKG s Enterprise Tax Credit service allows businesses to take full advantage of these opportunities and maximize benefits. Businesses that fall within Enterprise Zone boundaries may be eligible to take advantage of the following credits and deductions: Hiring Tax Credit The Hiring Tax Credit allows an employer to take credits of up to $37,440 per qualified employee, based on wages over a five year period. Sales and Use Tax Credit Taxpayers may be eligible to claim credits equal to the amount of sales tax paid on qualified purchases such as machinery & equipment, computers, fax machines, etc. Business Expense Deduction Accelerated depreciation is available for tangible personal property purchased by a business in the Enterprise Zone. The business may elect to treat 40% of the eligible cost of qualified property as a business expense rather than a capital expense. The business expense deduction must be claimed by making an election on the original return filed. Net Interest Deduction for Lenders Lenders making commercial loans to businesses located solely in an Enterprise Zone are exempt from state income tax on the net interest income they earn on the loan. This can translate to improved profitability for lenders and potentially reduced interest rates for borrowers. Qualifying Locations There are currently 42 Enterprise Zones within California - each zone can consist of multiple cities, unincorporated areas, and/or counties. While expiration dates vary from zone to zone, boundaries are constantly changing. Check with KBKG to see which locations fall within a zone. Free Preliminary Analysis KBKG s free preliminary analysis estimates the benefits for a business located in an Enterprise Zone. The first step in obtaining an analysis is to provide us with addresses of all of your California locations. We will screen these locations for tax incentives. California Enterprise Zone Areas: (Partial List) Anaheim Antelope Valley Barstow Calexico Canoga Park Chatsworth Chula Vista Coachella Valley Compton Delano Eagle Rock Eureka Fresno Hesperia Highland Park Hollywood Imperial Valley LAX Long Beach Los Angeles Madera National City Newhall Oakland Pasadena Pittsburg Pacoima Rancho Dominguez Richmond Sacramento San Bernardino San Diego San Fernando San Francisco San Jose San Pedro Santa Ana Santa Clarita Stanislaus Sun Valley Sylmar Taft Valencia Van Nuys Watsonville West Sacramento Woodland Hills NATIONWIDE SERVICE KBKG.COM COPYRIGHT 2011 KBKG, INC. ALL RIGHTS RESERVED. EPZONE

26 California Competes Tax Credit solutions for tax professionals and businesses Tax Credits Incentives Cost Recovery The California Competes Tax Credit is an income tax credit for businesses that are expanding or relocating to California. California Competes is a tax credit program that Gov. Jerry Brown approved in It is a successor program to the Enterprise Zone Tax Credit which is phased out in The amount of credits available will increase over several years: $30 million in ; $150 million in ; and $200 million in each year through The credit available to any individual business will be based on a set of criteria including: the number of jobs created, opportunity for future growth, and many more. Who can claim the California Competes Tax Credit? In order to qualify for a portion of the allocation, the business must have expansion plans to create jobs in California over the next five years or be at risk to leave California. In 2014, the current allocation of tax credits available to businesses is $30 million. The tax credit award process is a three part program with a quantitative analysis phase, a qualitative analysis phase and a negotiation phase. KBKG is prepared to represent and assist businesses who want to apply for California Competes Tax Credit. Contact us to start your application! Credit Details Tax Credit Attributes Negotiated incentive 4 Phase application process and contract award Administered by the governor s office Nonrefundable 6 year carryforward Can be awarded over multiple years Targeted Applicants Business expanding in California Businesses new to California Businesses at risk of leaving California Businesses relocating within California Credit Limits No more than 20% to any one business 25% must be allocated to small businesses KBKG Tax Credit Process Phase 1: Quantitative Analysis Compares your investment in California to the tax credit Prepare an application based on your expansion plans Isolate projects and develop application strategy and timing Perform quantitative analysis and ask ratio modeling for a competitive bid Phase 2: Qualitative Analysis Analyzes your expansion plan for key economic criteria Identify key components to be included in the application Highlight economic and targeted job creation data Qualify the expansion investments as high priority *Step 1 of KBKG fees: Application fee based on amount of data to be processed and analyzed Phase 3: Negotiation Prepare a contract identifying the terms of the tax credit Ensure the terms and conditions are conservative and attainable Reduce risk of recapture or liability in contract terms Capture anticipated costs and reduces any vague or undefined benchmarks *Step 2 of KBKG fees: Negotiation Fee Phase 4: Committee Review and Award Award or deny decision rendered at this time Coach and plan taxpayer to receive full award Assist in preparation of necessary forms for tax return Model financial impact of credit and consult with tax preparer *Step 3 of KBKG fees: Success Fee NATIONWIDE SERVICE KBKG.COM COPYRIGHT 2014 KBKG, ALL RIGHTS RESERVED. CCTV

27 Hiring Tax Credits Federal and CA // General Info Many states have Enterprise Zones - most are $500 - $5,000 / employee and have barriers to participation Federal programs are "hourly not to exceed" clients or to be proposed on a case-by-case basis Shareholders/partners of pass through entities get benefits on their personal taxes For 2010 less than $50M in gross receipts means AMT is offset by federal credits with 5 year carry back per the Small Business Jobs Act which was signed December 2010 Federal Work Opportunity Credit Who? Large # of employers What? Federal Credit usually up to $2,400 in first year of employment, but can be up to $9,000 Where? USA When? No refunds have to file protective claim within 28 days of hire for each employee Sales Business located near FEZ/FRC are more likely to benefit because of a 2007 loophole. High turnover is good 400 hours means you get the full credit Only have 28 days to file protective claim per employee. Contracts: $500 per qualified employee Federal Empowerment Zone (FEZ) Who? Anyone in a zone When? 3 year amendment window for refunds What? $3,000 / employee if they live and work in the zone Sales? Requalify employees every year We basically analyze the payroll records for addresses Can offset some AMT Where? Anywhere Contracts $500 per employee each year they qualify KBKG.COM KBKG

28 Federal Employer Health Insurance Premium Credit Who? Less than 25 Full Time Equivalent EE's and under $50,000 average wage (computed numbers) employers What? 35% of health insurance premiums , 50% Starting 2010, employer must pay at least 50% of employee's coverage for all covered employees. Where? Anywhere When? 2010 onward with 1 year carryback Sales We analyze payroll and plan benefits to determine the tax credit and provide an IRS/CPA friendly study Premiums capped by state (CA limit is $4,628/$9,677 individual/family per employee) Can offset AMT, qualifying numbers do not include owners/related parties. Contracts $1,000 per study California New Jobs Who? Any California employer who had less than 20 W2's at the end of the prior year What? $3,000 per employee Where? California When? Sales Must be filed on an original return or an amendment before the extension cut off (9/15 or 10/15 usually) If no previous location in CA all new hires are considered qualified! Related parties no limitations if no 50% constructive ownership Contracts 25% can go to 20% (note contingent fee requires an 8886 disclosure for this credit) KBKG.COM KBKG

29 California Enterprise Zone Who? Employer's in California Where? What? $37,000 per employee over 5 years (more in earlier years than in later years) Sales tax paid on manufacturing or technology equipment (including food manufacturing) One of 42 Enterprise Zones (including every major downtown) When? Four year window (2007 is closing this year) Sales Qualify employees based on 1 of roughly 15 criteria Examples: residence at hire, military history, employment history, government assistance history, criminal record, disability, eligibility for government programs The catch is you have to appropriately document each of these criteria - we work with federal, state and local agencies to gather all the necessary paperwork and prepare a deliverable with the documentation and computations for the accountant and FTB If they already have done the work, likely they only looked at residence at hire, we can find more credits If they are located in a zone that expired and was re-designated they likely can take more credits than they have historically. Especially relevant for multiple locations or multiple businesses. KBKG Fees Our fees are generally between 15-25% of the credits. Utilized our contracts can be structured such that client pays for the credits when they are utilized KBKG.COM KBKG

30 Tax Saving Strategies Using Cost Segregation solutions for tax professionals and businesses Tax Credits Incentives Cost Recovery What is Cost Segregation? Accelerate depreciation, increase cash flow & reduce taxes Cost Segregation is a strategic tax savings tool that allows companies and individuals, who have constructed, purchased, expanded or remodeled any kind of realestate, to increase cash flow by accelerating depreciation deductions and deferring federal and state income taxes. In general, it is easy to identify furniture, fixtures, and equipment (FF&E) that are depreciated over 5 or 7 years for tax purposes. However, a Cost Segregation Study goes far beyond that by dissecting construction costs that are usually depreciated over 27 ½ or 39 years. The primary goal of a Cost Segregation Study is to identify all construction-related costs that can be depreciated over 5, 7 or 15 years. Reducing tax lives result in accelerated depreciation deductions, reduced tax liability, and increased cash flow. Conducting a quality study involves: review of cost detail & blueprints, site inspection, photo documentation, cost estimation, and preparation of the report. Benefits of Accelerated Depreciation The depreciation for a property with a Cost Segregation Study allows for a significant increase in deductions within the first 5 years. ($) DEDUCTIONS with a study without a study YEAR 40 The graph illustrates how a building s depreciation schedule would look with a study vs. without a study. Assuming a combined tax rate of 41% and a return on Investment factor of 8%, every $100,000 of costs shifted from 39-year property to a 5-year property, creates a present value tax benefit of approximately $22,000. Every $100,000 of costs shifted from 39-year property to 15-year property, creates a present value tax benefit of approximately $12,000. Who Can Benefit? Any structure used for business or as rental property, is eligible for the benefits of Cost Segregation. Any leasehold improvements or renovation costs can also qualify. The graph represents the percentages of costs that could be reclassified from either 27½ or 39-year real property to 5, 7, or 15-year property. PROPERTY TYPE O s Apartments Retail Stores Auto Dealerships Restaurants Veterinary Facilities Manufacturing Facilities PERCENTAGE REALLOCATED 12-25% 20-30% 15-32% 20-35% 23-40% 25-40% 30-60% These are just a few examples of the types of results from a study. Please contact us for more information on your specific property type. Timing is Everything The ideal time for a Cost Segregation Study can vary depending on an owner s tax situation. Although the optimum time for a study is during the year a building is constructed, purchased, or remodeled, a study can be completed anytime afterwards. In fact, current Internal Revenue Service procedures make it easy to go back and claim missed depreciation on assets acquired as far back as 1987 without amending prior tax returns. Our experts will help analyze your tax situation to identify the right timing for you. Year Purchased, or Remodeled $ $ $ $ $ $ $ $ $ $ $ 1987 Current Year Getting More Information A free preliminary analysis can be easily conducted to estimate how much a Cost Segregation Study can benefit you. Contact us today to apply for an Estimate of Savings and a fee quote or inquire about available seminars on Cost Segregation. NATIONWIDE SERVICE KBKG.COM COPYRIGHT 2012 KBKG, INC. ALL RIGHTS RESERVED. CSTSEG

31 Cost Segregation Services // What is Cost Segregation? Identifying, segregating, and reclassifying components of commercial property or residential rental into shorter depreciable tax lives. o Example Reclassify parking lot and landscaping from 39-year (or 27.5 year for Residential) to 15-year. o Example Reclassify certain electrical and plumbing systems from 39-year (or 27.5 year for Residential) to 5-year. IRS prefers specialists with construction/engineering expertise with in-depth knowledge of the tax laws. Good Candidates/ Prospects Buildings acquired, improved, or built by the client in the last 15 years. Cost Basis of $750K or more for a freestanding building. ($500k or more for improvements to a building). Client is paying tax requires taxable income to enjoy a current tax benefit. Properties that will be held for 5 or more years. Depreciation recapture is a consideration for short-term holders. Poor Candidates Non-profits, Hospitals, University REITS Cooperatives Short term RE holders Benefit to the Client. Time Value of Money - Benefit is measured in terms of the Net Present Value (NPV) of the deferred income tax liability. Net Present Value benefit is generally 20 to 50 times the cost of the study. Overall NPV Benefit is typically 5% of the depreciable tax basis of Building and Tenant Improvements: o Example - $5M Building basis = ±$250k NPV Benefit Bonus Deprecation on new construction. Applicable and Process/ In-depth study Detail review of available cost records and invoices. Review of building and architectural plans to re-engineer the building from a cost and asset classification perspective such that assets are then depreciated on the most favorable tax method. Preliminary review - No charge With very little information about the property, we can provide an estimate of the tax benefits and fees. Fee Structure Fixed fee Generally between $5k-$15k depending on size and type of property. Questions to ask Have you added or acquired significant Building additions in the last 15 years? How much did you spend? You can go through our Information Request Form with them on the phone to get enough info to propose. KBKG.COM KBKG

32 Cost Segregation Services // Information needed: Type of building Square Footage of Building Size of Land Parcel Location Purchase Date Purchase Price Success Stories KBKG reviewed two restaurants that cost $1.5M each. Saved client $250,000. KBKG reviewed acquired office building purchased for $10.5 million. Saved client $600,000. KBKG reviewed manufacturer with $55 million of asset additions. Our study reclassified $25M (45%) into 5 & 7 year tax lives. Yielded approximately $5 million NPV benefit over the life of the assets. This study was also reviewed by 3 IRS Engineers and resulted in NO ADJUSTMENTS. KBKG did a statistical sampling study for 125 locations for a public retailer. Saved the locations $13M in additional first year deductions or $5.3M in tax savings the first year. This was audited by the IRS and there were NO ADJUSTMENTS. KBKG.COM KBKG

33 IC-DISC Federal Export Tax Incentive solutions for tax professionals and businesses Tax Credits Incentives Cost Recovery The Interest Charge Domestic International Sales Corporation (IC-DISC) offers significant Federal income tax savings for making or distributing US products for export. The IC-DISC was originally created by Congress to promote export sales by allowing companies to defer income, with interest charged on the deferred tax. Now, the IC-DISC provides significant and permanent tax savings for producers and distributors of U.S. made products used abroad. Who Can Benefit? IC-DISC benefits are available to qualified producers or distributors that are either directly involved in exporting, or selling products to distributors or wholesalers who resell for use outside of the U.S. This includes traditional manufacturers as well as those who grow agriculture products, extract minerals, distribute U.S. made goods, and develop software. Engineering and architectural services related to foreign construction projects are also included. How does it work? The owner of the operating company forms a tax-exempt IC-DISC. The IC-DISC must maintain its own bank account, accounting records and file U.S. tax returns, but otherwise there are no changes to business operations. The operating company pays a tax deductible commission to the IC-DISC equal to at least the greater of 4% of operating company s gross receipts from qualified exports or 50% of the operating company s net income from qualified exports. The operating company expenses the commission and reduces ordinary income taxed at a maximum 39.6% rate. The IC-DISC is tax exempt and is not taxed on the commission income it receives from the operating company. The IC-DISC pays dividends to its shareholders, which are taxed at a 20% rate. The result yields a 19.6% permanent tax rate arbitrage (3.8% net investment income tax may yield different results). Case Study ABC Co. has $2M in gross export sales and $500,000 in net income from those exports. It will pay a commission of of at least $250,000 to the IC-DISC (50% of export net income). Results: ABC Co. pays $250,000 in deductible IC-DISC commissions, saving its shareholders $99,000 in tax (at a 39.6% tax rate). The IC-DISC pays dividends to its shareholders who pay only $50,000 in tax (using a 20% dividend rate). The net result is an annual $49,000 permanent tax reduction! Summary: An IC-DISC offers a permanent annual decrease in tax rate on at least half of export profits. The benefits of an IC-DISC can be dramatically higher by performing a transaction-by-transaction analysis. OPERATING COMPANY SHAREHOLDERS Dividend Income 20% Capital Gain Commission Deduction 39.6% Ordinary Income IC-DISC Getting More Information KBKG can quickly conduct a complimentary analysis to determine if an IC-DISC can benefit your company, or if a transaction-by-transaction analysis will yield increased savings for an existing IC-DISC. Call us today or visit our website at for more information. Net Effect: 19.6% Rate Reduction NATIONWIDE SERVICE KBKG.COM 2015 KBKG. ALL RIGHTS RESERVED. ICDISC

34 IC-DISC Federal Income Tax Incentive // What? IC-DISC Federal Income Tax Incentive for Exporters and Producers/Distributors of Products and Services used outside the U.S. Benefits can be dramatically higher by performing a transaction-by-transaction analysis. Questions to Ask Do they produce, grow, extract, or distribute U.S. goods? Do they perform architectural or engineering services located outside the U.S.? Do they sell to businesses who then export their products outside of the U.S.? Is the company a closely held, privately owned business? Do they earn over $250,000 in exports per year? Great Candidates Manufacturers Distributors Architects & Engineers Agriculture and Food Producers Software Developers Other Producers Timing Eligible companies can begin taking IC-DISC benefits usually in less than 24 hours Completed setup usually takes less than two weeks Study Time Completed setup usually takes less than two weeks Tax Planning There are no changes to business operations Exclusions Companies whose products are used strictly within the U.S. Publicly traded companies and widely-held businesses Exports of Oil or Gas as well as Unprocessed Softwood Timber KBKG.COM KBKG