Combining Cost Segregation and Sales & Use Tax Refund Strategies

So we always look at our clients, we look at what their issues might be, what their situations are, what they're currently undergoing, and we try to understand what they have and how we can get a plan together to really tackle any potential issues and make sure that we're getting them in the best situation possible. With a lot of hotel clients, they have to do renovations every couple years as part of their standard. So this is where we find a lot of benefits for our clients. And this is just a practical example. It's not limited to hotels, but this is a common example we run into. So we figured this is a good example to walk through. So hotel, A, B, C, let's give some background information. They were renovated and placed in service in December of 2021. It was a 298 room building. It had a lobby, a restaurant meeting spaces located in upstate New York.

What were the renovations? They were the roof, the facade, lobby, guest rooms, hallways. And the reason why that's important is because sometimes when we think about cost segregation, we're only looking at the assets that would be segregated, but we have to look at the whole project. So that includes the roof and the facade that might not necessarily be segregated into accelerated wives, but there still are options and still items to be considering related to those different items. And then ultimately our depreciable basis for this project with 17,715,000 and the hotel size with about 120,000 square feet. So just to lay out the table, the example we're going to be going through, common example that we run into on an annual basis probably multiple times and just kind of walking through this example, we think we could paint the picture of what we do to help our clients.

So when somebody comes to you or when you're working in your business and you have a renovation, certain triggers should really come to mind. And those items are, should I be doing a cost segregation study on this renovation? Should I be looking at what are the ramifications of qualified improvement property? Is it eligible for here, pad elections? Did I remove items as part of that renovation? So if I went into a building and I had to take out all the internals in order to redo them, meaning if I go into a hotel space and I take out all of the furniture to replace it, when I replace those assets, I need to be thinking, should I do a partial asset disposition on the items that I've removed, 1 79 D deduction? Am I eligible for extra deductions related to energy efficiencies? All of these different things come into play. And then ultimately, on the other side of things, that gets you the deductions for your tax return. Did I spend too much money on my renovations? Did we accidentally pay sales tax where we really shouldn't have? So we need to look at all the different pieces related to the renovation and figure out what are the items that we can do to maximize our deductions for tax purposes and recover any costs that we should not have spent and they go hand in hand.

Next slide seems to have frozen on me. There we go. So now we're up to polling question number two. And basically a renovation should trigger thoughts of cost segregation pad elections, both A and B plus qualified improvement property 1 79 D, deductions, forensics and sales tax use and recovery reviews. So feel free to spend the time now entering that in. I see results are coming in. We'll give you about a minute, give it a number, 20 seconds.

Okay, five more seconds. See, we still are getting a few people clicking. Okay, I'm going to close the poll now. Alright, so majority of you guys got the right answer. A and B plus qualified improvement property 1 79 D deductions and the forensic sales and use tax recovery reviews. And I see 11% selected cost segregation. And that normally is the case for a lot of our clients when they do a renovation, that's what they think of. The goal of today's webinar is to educate the crowd, let you guys know all of these things should be really considered and cost segregation is great, but it's not the end all be all. And there are sometimes additional items to consider when you guys are doing renovation or when a renovation's in play. So cost segregation, that's the big line we've been talking about. That's one of the items we discussed.

Probably the most common one that we see. What is a cost segregation study? So a cost segregation study is an IRS approved methodology used to identify and reclassify personal property and land improvements that are originally grouped under the default method as real property assets. And we do this through an engineering based study. And what it does is it results in higher depreciation deductions in the earlier years of property ownership. So what this all really boils down to is an engineer will go into the site, they will identify and reclassify the assets into their appropriate useful lives. So common examples would be if you go into a building, carpeting, cabinetry, countertops, appliances, when you buy a building, you have to either classify it under the default as either 27 and a half year real property or 39 year real property if it's non-residential. So what the cost segregation study does is it says as part of your purchase, you also bought all these other items including the building and included inside the building or outside the building, the land improvements.

And now we need to come up with an allocation that's appropriate to basically segregate the assets and accelerate them while it doesn't create new basis. And we're not going to gross up to the fair market value, we're going to take your historical cost and allocated into the correct buckets to bring up those deductions earlier in the lifecycle of the asset. And it's applicable to owners of investment property as well as properties used to operate a business. So if you have a common example, we run into our doctor's offices. A lot of times it's an owner user where they operate their business out of that property because that property is owned by the dentist or owned by the doctor, they can depreciate that property. And the way how we do it, it's through a cost segregation study, we're allocating the lives to accelerated buckets and then they're able to take those deductions earlier on in the lifecycle.

Now, why is this important? Depreciation is a non-cash expense. So while you already laid out the cash to buy the property, the IRS says you cannot just take a deduction on that property immediately. They have their useful lives that you have to now take the depreciation over time and deduct that expense that you've now spent or that cash that you've now spent. So it's a non-cash expense, so it doesn't cost you anything extra to take. However, you need to understand how much you can take through the cost segregation study. So you're increasing your overall cash flows that now you can utilize by not paying taxes on it, on that income that you've now reduced through those deductions, you're now able to utilize that cashflow for other investments, other business needs or even personal needs in some cases, you're able to now bring that cash to a different use.

And that's our goal here, reducing your tax liability and maintaining economic gains. So that's an important thing to know. So like I just said, our goal is to take the assets from either the 39 year or the 27 and a half year assets, the real property, which includes the roof, the walls, the Windows Foundation, and we want to move as much as we can through the cost segregation study into the tangible personal property or the land improvements. Now, the general rule is land improvements would be your outdoor improvements to the overall land, not to be confused with the land, which is not depreciable landscaping still, we might think of it as raw land. There is depreciable basis for that. So you would take landscaping, the paid parking lots, retaining walls, fencing, all these items would get classified into that 15 year land improvement bucket. And then the tangible property would be the carpeting, the cabinet, the cabinetry, special electric, that additional electricity above the standard that is needed for the building, sound systems, special lighting alarm systems, all these different items.

We would go into the property with an engineer and they're trained to identify and reallocate those assets into that accelerated bucket. So it's a very powerful tool, especially for tax planning and that's why that's usually the first thing that comes to mind when a renovation happens. How can I take the renovation and say as much as possible was really tangible personal property or land improvements rather than keeping it locked in at the default of real property. So here's the lifecycle of real estate, the lifecycle of an asset. So the way how it starts is you have, if it's a new construction, you have a conceptual design and project planning. If it's an acquisition, you have that second step where you buy it or if a new construction actually happens or a renovation. And then looking forward, you have your look back, studies of existing assets, renovations that happen after the acquisition, all these different life cycles.

You need to start planning ahead towards the ultimate final step, which is if you're going to sail, dispose or exit strategy out of that asset or a redevelopment reposition. So what we like to do is we like to look from the beginning. What are you doing on this property? Did you purchase the property? Did you do a renovation on the property? And the third step here, lookback studies, what it's really trying to portray is just because you did an acquisition or a new construction in year one, you don't miss out on the opportunity just because you didn't do it in that first year. So you could go backwards and say, okay, I have a practical example. You have a real estate building that you bought a rental property, but in the first two years you don't actually have revenue. So if you're not in a tax positive position, maybe you don't need those additional losses in that first year.

So it might be better to wait two years until you have cashflow positive or you have tax liabilities that come up because now you're in a taxable situation, you're an income. You could go backwards and look at cost segregation or other strategies and say, how do I implement them now to get myself from taxable income to a loss position? So just because you didn't do it on the initial purchase or the initial steps here on this lifecycle, you can still go back and look at it. Now after an acquisition, usually down the road there would be a renovation and that's where you need to start triggering. Okay, what do we need to consider in order to make sure we maximize these different items within the lifecycle? And the ultimate goal is this is a planning tool towards that exit strategy. And that's where the PAT election comes into play, which we're going to go into more detail, but we want to make sure that we're keeping things as current as possible throughout the lifecycle so that way we can make sure that we don't end up with a big tax liability at the end of the day when you sell or you exit out of that property.

So one item that's a very hot topic, why do we want to get into these five and 15 year buckets? What is the benefit of them? Well, yes, they have a shorter life. How does that really translate? One item that comes up a lot is bonus depreciation. And what bonus depreciation is, it's an additional incentive where incentive where you're able to write off immediately a significant portion of assets. Now how are you eligible for bonus? Bonus eligibility is for assets that have a maker's class of 20 years or less. There are certain property that is considered accepted property and it's not eligible. We're not going to really go into that today, but just be aware items that are 20 year or less is generally the rule of what is eligible for bonus depreciation. So when we were speaking before about those different buckets, the important thing about the five and the 15 year bucket and why those cutoffs are important is because those assets are eligible for this bonus depreciation.

Now over the last few years, bonus depreciation has been phasing down. However, with the one big beautiful bill, we've now restored a hundred percent bonus depreciation permanently. And there are some nuances to that about timing of when items start, if it's a renovation or construction, and there are some nuances of when it's placed in service. But just be aware that a hundred percent bonus is back in play even though it has been phasing down over the last few years. And bonus depreciation, the big difference from what was before, even the tax cut in Jobs Act versus what we have now is an asset only needs to be new to you. So before the tax cut in Jobs act in 2017, it used to be that bonus depreciation was only eligible on new construction or renovations, new assets that were never used before. Now even if you buy a property and it's new to you, you are eligible for this potential bonus depreciation.

So it's a very important play. There are some caveats, there are some limitations, but just be aware that with the one big beautiful bill act, there's now a hundred percent bonus depreciation reenacted and that can have large interplays with giving us significant benefits on our projects. Let's go back to our practical example, hotel, A, B, C. We're starting off with just the call seg here. So our call, our engineer went into the site and they did their evaluation and as you could see from our percentages here, we were able to reallocate from that renovation almost 77% of the assets. And the reason for that, a lot of the assets are eligible for this type, for this asset type called QIP, which we're going to go into shortly right after this slide. And other assets are eligible for that five-year personal property. So that's most likely going to be the furniture and equipment that got replaced in the hotel also carpeting.

All those different items were identified and quantified on the cost segregation report. And this specific example, not much was done to the exterior, so that's why you see a very low land improvement. And then ultimately, again, the depreciable basis we're working with here is 17,715,000. So just so that you could see when it comes to renovations, there are times where there are significant reclass. Now the reason why it's important to differentiate between that five year and that 15 year. So firstly, there are two different reasons. One, companies that have a real property trader business election involved would have to do the qualified improvement property that QIP has 20 year assets and then they wouldn't be eligible for bonus. And then separately from a state perspective, there is an advantage of having five year versus the 15 year. So even though the five year mostly would qualify under the parameters of qualified improvement property, which we're going to go over in a minute, it is important to note that there is a difference between the two and you have to look at them separately.

Okay, sorry. Ultimately the tax savings here, we had 4.6 million, 4.7 million of tax savings from that depreciable basis once we take those deductions. So significant amounts. So now we're going to go into the qualified improvement property and walk through what that is and how that interplays. So qualified improvement property is an improvement to an interior portion of a building, non-residential real property. So sorry, did I freeze? Can everybody hear me? Send emojis? If you can hear me. Okay, I'm going to continue on. So qualified improvement property is any property to an interior portion of a building which is non-residential. An important thing to note real property. And so if the improvement is placed in service after the date the building was first placed in service, then you would be in the realm of qualified improvement property. Now, there are certain assets that are not eligible for qualified improvement property and that would be an expansion.

So if you expand the outer walls of your building or if you expand higher than your building, so if you add a floor or if you expand outwards, so you have to stay within your original four walls or let's say better terms, six walls because your roof and your bottom floor. Anything that's done internally that's not related to the internal structural framework of the property or related to an elevator or escalator, that's a distinction that's made. And then lastly, I'm freezing up. So those are the main items that are not eligible for qualified improvement property. So it can't be an expansion, it can't be elevator escalator, and it can't be internal structural framework. So what happens here is what are common examples of real property that normally would get classified as 39 year but through qualified improvement property can now be identified as regular that would normally get classified as building and real property.

Common examples would be drywall, electrical, plumbing. A lot of these items have portions that are generally classified as real property, but with the qualified improvement property and being bonus eligible, you can have significant advantages and acceleration on those assets. So it's an important thing to note. So here's our practical example with the hotel A, B, C, where we're going to show that we moved items into these different buckets and therefore accelerated the assets. So we took from the a hundred percent of assets that were placed in service and we were able to reclassify 63.8% of the assets into these accelerated buckets. So now we have our third polling question. We're going to give everybody a minute to answer OBBA did the following to bonus depreciation. So choice A restored it to 80% for five years, choice two restored it to a hundred percent permanently or choice three eliminated it and we're very grateful. Choice C is not the answer that was a concern at one point that it was phasing out, but ultimately we'll let you guys answer, but we'll go into the answer shortly. So we'll give it another 45 seconds.

Avi Jacob: Give it another 15 seconds. Okay, I'm going to close the poll now. Okay, so restorative a hundred percent permanently, that is the right answer and that's very important for our world because now you're still able to get that maximum benefit and maximum deduction on those assets that qualified. There was a lot of concern about elimination of the bonus as it was phasing out. Some people thought maybe it would get restored to just 80%. We're happy to announce that it is a hundred percent. It does help our clients in getting all those benefits upfront. While bonus is not always the best option, it's definitely because of state interplay. It is a very valid option for many of our clients, especially on the federal web. So now I'm going to hand it over to Terry who's going to go into the partial asset dispositions and go through what that is and how we can implement that for our clients. Thank you.

Terri S. Johnson: Thanks Avi. Great to be here today. And I get to talk about one of my very favorite topics, partial asset disposition elections. So for those of you that have not seen the EisnerAmper tangible property flow chart, I wanted just a quick overview or reminder that these regulations came out in 2014. So they've been around a long time. And the tangible property regs really focused on when you spend money to improve your property, can you expense that or do you have to capitalize it? So they came out with this very intricate approach where you look at expensing on the top, is it routine maintenance? Is it di minimis? Which I'd say people are really good at using that. And then, or to take a look at is the expenditure and improvement to the building systems or the building structural components. So in a nutshell, you take a look as is it a betterment adaptation or restoration?

And if the answer is no, then you go a little bit further and you say, well, is it basically material to a unit of property? You think, where do I get that information? Well, it's in the cost segregation study. We actually present the unit of property data so that you have this data on an ongoing basis to make expense versus capitalization decisions. So in this scenario, and with a hotel, you're refurbishing them all the time or office buildings, retail, when you've got tenants coming in and out, we see the tangible property regs used a lot. So when you can expense, that's fantastic, whenever you can expense versus capitalizing, we all love that. But what if you get to the bottom of this flow chart and there's no path that leads to expensing, you have to capitalize that asset. So the good news is that they still give you an option.

So if you have to capitalize, what am I removing from that renovation? What assets am I removing? And I can take what we call a partial asset disposition election in the year that the asset was removed. And this is really important and I will tell you if there's something that folks miss, it's this. Lemme give you an example. Let's say we've got a hotel and it goes into service. Let's say we bought in 22 decide to do a big renovation and it's going to go into service in 26, but we're actually removing assets, 39 year property, five 15 year property during 2025. The time that you want to do this disposition election is actually in 2025 in the year that you remove those assets. So if you've got to capitalize, you want to remove as much as you can as far as the elections and remember to do that in the year that you remove those assets.

And I can tell you it's a common mistake. If you wait till 26 and you didn't take care of this, it's gone. You can't go back. So what does that look like in a cost EG report? So I'm going to go to the next slide and you'll see a typical our cost segregation study is these assets are taken right out of the EG study. So the important point here is that the tool to accomplish this is having the cost EC study done before you start the renovation and then we can go back the engineers and look line by line and say, is this still there? Was it removed? Create this disposition table. And as you can see in this example for the hotel that you've got about almost $2 million in dispositions and they're identified right in the report. So here's what you do next is you identify the assets and these were placed in service maybe between 2018 and 21.

So you've had on average three years or more of depre, whatever, how many years you've been depreciating it, you divide that by 39. So let's use this example and say 8% of this asset's been depreciated. You take the depreciable, the amount of the PAT election times 92% that is left is the remaining depreciable basis. So you come up with this $1.8 million writeoff, that's a pretty big number. So this would be your remaining depreciable basis of the disposed assets and this is your write off value. Now, one of the questions that came in a few minutes ago was on the subject of recapture. So I think this is a great time to answer that question, which was what do clients have to be aware of regarding depreciation or recapture after a cost say. So keep in mind if you sell an asset quickly and you've done accelerated depreciation, you're going to have a recapture issue.

And I can let Avi discuss that a little more in a minute. But the important point here as it relates to PAT elections, I remove those assets off the books. I don't have to worry about recapture. So the other thing is you don't want to have duplicate assets on your books. So you want to make sure you're removing the assets that have been taken out of service are no longer there, so it's clean and also that you're not carrying those assets that, but ultimately if you sell that asset, you'd have a recapture issue. I mean I'm going to leave that hang in the rest of that if you want to talk if we have time at the end just to talk more in general about recapture. But I thought that question was really good and it relates exactly to what we're talking about.

So changing gears a little bit, going from the tangible property regs, I wanted to speak just for a few minutes about on the top of energy and one of the things that has been around for many, many years is the 1 79 D deduction for energy efficient property by a long time. It came out in January 1st of 26 and under the new tax bill it expires June 30th of 26. You have to have at least started the project by June 30th of 26. So you made me thinking, well, I know under the new tax bill they're getting rid of a lot of the energy credits and deductions, so I'm not that interested in it, but that's a pretty long runway of having this available to you to utilize. So with a 1 70 90 study emphasis on deduction, it's not a tax credit, it's all based on the size of the building and the square footage.

So you take that square footage and you multiply it by the benefit that's available this year to give you the deduction. And keep in mind this reduces, it's a one-time reduction of basis. It applies to all commercial billings or residential that are four stories or more. And you can use this on any new construction projects or any major renovation projects. What's cool about this is that you can do this retroactively. So if you're sitting here, dang, I did a major renovation three or four years ago and I didn't know about this, you can utilize the change in accounting form the 31 15 to go back in time and retroactively take that deduction if you didn't take it before. So under the inflation reduction act starting in 2023, things were changed up. Before that you got about up to a dollar 80 a square foot. So they changed things a bit and they gave us more of a range between 25% to 50% increase over the baseline for energy efficiency.

So it was a little more flexible. And then they introduced this concept of prevailing wages that your benefit would be based on whether or not you paid prevailing wages. So on the right side of the table here you can see that, which by the way, in most cases since you're looking at a baseline of the 2007 Ashray standard, yes, that's right, 2007 in the year 2025, it's kind of hard not to meet that 50% increase over the baseline because the baseline is so old, but the deduction can be up to $5 a square foot if you pay prevailing wages and it's adjusted annually for inflation. Now if you don't pay prevailing wages, it's a dollar a square foot. So for example, in 2025, it's $5 81 a square foot or it's a dollar 16 a square foot if you didn't pay prevailing wages. What I want to mention here is there is a little bit of a loophole that if you are grandfathered in, meaning you started the project before January 30th, 2023 and finished it afterwards, you are eligible for that higher $5 a square foot and you don't have to worry about prevailing wages. So I encourage you to go back and look at major construction or renovations that you did during that timeframe and maybe you didn't pay prevailing wages. And I mean these benefits can be very large as we'll see here in just a second.

Oops, we will get to the example in just a minute. But I want to emphasize what are the drivers for this 1 79 D deduction? It's interior lighting, HVAC and building envelope and I would emphasis on interior lighting and HVAC. And again, because you're going up against comparing to a baseline standard in 2007, most projects we see will actually qualify for the full deduction. So for hotel A, B, C that Avi's been going through, they qualified for the maximum benefit, which was only a dollar 80 because remember this project was done in 2021, so they were at the dollar 80. Now let's take a look at if that 1 79 D deduction at a dollar 80, it's $216,000 of a tax deduction. But under the inflation reduction act, if it was today in 2025 and you either paid prevailing wages or you were grandfathered in because you started the project before January 30th of 23, it's $5 81 cents a square foot times the 120,000 square feet, it's almost $700,000 deductions. That's a huge difference. So back to the dollar 80, 216,000 or the 5 81, almost $700,000. So this is definitely something you would want to look at. It requires a pretty detailed study. You have to, if you pay prevailing wages, you have to document certify that. So that's all something that we do here at Eisner Emperor.

Avi Jacob: And with that we have our fourth polling question. The 1 79 D deduction value depends on a percentage of energy efficiency attained over baseline B, dissatisfaction of prevailing wages and apprenticeship requirements or C, both A and B. And as Terry mentioned, while you have all three options here, both options here, the satisfaction of the prevailing wages and apprenticeship requirements you might be able to grandfather in. So be aware of the projects that you guys have done or if you're aware of projects your clients have done that relate to a time period where there is grandfathering in there could be significant benefits that we're missing or that aren't being accounted for. And those deductions can really help your client or your company in the current tax year. So it's important to look at it and it can be corrected through a 31 15. I'm going to give the poll another 25 seconds and I'm going to pass it over number 10 seconds and we're going to close the poll.

So both A and B, that's generally the answer. The answer generally is A and B, both the energy efficiency over the baseline and the satisfaction of the prevailing wages. Now there is that slight caveat if it is grandfathered in and it doesn't have to satisfy the prevailing wage requirement, that can happen. But again, generally what we see and in the more current times it is both A and B. And with that renovation, projects like this one are also great candidates for sales and use tax. Terry and I have been really focusing on the cost segregation, the PAT elections, the energy efficiency, the qualified improvement property, all the stuff that gets you for income. Now I'm going to hand it over to Bill who's going to go through the sales and use tax recovery for the tax that you've already paid on your invoices that really you should be looking back and seeing did I pay tax on something that I am not required to? And this is also an important thing. Now the reason why it interplays with the cost segregation is because the engineer usually starts by looking at those invoices. So as part of our cost segregation, we're already getting some of the documentation that would be needed to determine the sales and use tax recovery studies, but we could also notice these items on those invoices to make sure that we're looking at holistically the approach for the client or for the company. So now I'm going to hand it over to Bill. Thank you guys very much.

Bill Flick: Thanks Avi. I hope everyone can hear me. I think Avi did a nice introduction as well. One of the things I wanted to focus on was that we help companies find refunds. So when we first became part of EisnerAmper, I had several partners that were confused and they kept asking me, where are you going to find a refund on tax that we already collected? So I want to reiterate that it's tax that has been paid on purchases and then we're looking for refunds. We're going backwards and getting cash taxes that were already paid and recovering them for our clients. And I want to also talk about another area that can get confusing for individuals that don't focus in on this niche area of ours, but the difference between sales tax and use tax, it's almost either paying one or the other. It's like a complimentary, you're symbiotic tax structure and it's based on how and where the purchase is made and who was responsible for collecting and remitting the tax.

So the definition of sales tax would be a tax imposed by a state or local government on the sale of goods and certain services, it's collected by the seller at the point of sale. It applies when the purchase is made within the same state where the seller has a physical presence or nexus. And an example of it would be you buy a laptop from a store in Pennsylvania, the store adds sales tax to your bill and remits it to the state. But it could be similarly, you have a contractor coming in to do a project and just charging you tax on an invoice. So that would be considered sales tax on the invoice. Use tax is a little different. It's a tax imposed on the use storage or consumption of goods in estate. When sales tax was not collected at the time of service, it's incumbent upon the purchaser to accrue the tax because it didn't show up on an invoice.

So it's paid by the buyer, not the seller. It applies when you buy something out of state and the seller doesn't charge sales tax. An example would be you order a camera from an outstate retailer who doesn't charge Pennsylvania sales tax or you're getting a service from somebody from out of state providing it to you and you would be responsible for reporting and paying that use tax to the state in which the activities occurring. We estimate when we do these refund reviews and what we do, I'll get into a little more detail, but when we go in to do these reviews, we find about 80% of the time we find overpayments for our clients. So it happens routinely. It's a regular occurrence. It's not something where a lot of times people can get concerned that they made a mistake, but it just gets very confusing and what we're able to do is look backwards for them and identify where there were some payments made that shouldn't have been and it happens about 80% of the time for us.

And how can this happen? And there's a whole variety of different examples and ways this does happen for us. I think the first thing to consider is vendors are liable to collect tax if it's taxable. So if they're not certain of a taxability of a transaction, they're going to charge the tax. They're incented to do that. They want to get it right because they're liable for collecting it and the vendors are going to charge tax if they're not sure to cover it, just to cover their end of it when in doubt they're going to charge tax on the use tax end of it. If you're on the purchasing side of it, you can have a very knowledgeable staff about the sales tax rules, but there are gaps in bottlenecks in the procure to pay process. It's a multi-step process, often multi-layered approval in which misinformation and inaccuracies can easily occur and go on notice for months. So what happens is the bigger the company, these transactions from sending out a PO to ultimately paying for something, it's passing through multiple people, it's using different technologies and different things can happen to muddy it up and it goes unnoticed.

You can add then state related errors occur where an item is taxable in one state and exempt in another vendors charge the tax because they're unsure or unclear to the taxability and accounts payable might just assume that the vendor is correct and pay the tax. Sometimes technology or software can get corrupted. It can reset itself, is not routinely monitored for accuracy. We see that very routinely. And taxes charge or paid incorrectly goes unnoticed for long periods of time. If you just think about how an operating system can do an update overnight and reset certain system settings, user doesn't notice it until they run across. They come across it randomly or just think about how Excel can crash while you're utilizing it. We probably have all been there and it doesn't auto recover, but some settings or unseen changes were lost. How about or security software interference or firmware glitches?

It just happens routinely. And I think when you start thinking about how we apply all the technology we use in our everyday lives, it makes a lot of sense where these things can occur and it gets overlooked. Users are not aware of systemic issues. They assume everything is fine, is accurate, fine and accurate tax gets paid incorrectly and goes unnoticed until something happens. So how do you protect yourself against this? A really cost effective and efficient way to do this to combat these occurrences is to have somebody perform a forensic refund review, which is basically it's a thorough review of all invoices, fixed assets, use tax returns and capital improvements to identify if any taxes were paid or not paid in error. Once we review all these results. So what we do is we take a look at their capital projects, we get a vendor run of all the vendors and what their expenses were and we take a look at their use tax detail and review all them and then we get access to their actual invoices and that could be either electronic or on paper.

And then we review in detail every transaction of a certain dollar amount or higher and we question if there was any exemption that was applied or should have been applied. And then we document all that onto an Excel spreadsheet and the documentation includes the date, the vendor, the item number, the amount of the purchase, the amount of the tax, and then a reason why we think a refund might be available. And we present that to the client and if the client is comfortable with what we're presenting them and they want their refunds, we then file a refund claim with the appropriate taxing authority. Usually it's the Department of Revenue in a given state and it goes through usually a six month process. Once it's approved, it's usually another 45 days till a check is cut and then the check is cut and received by the taxpayer. While we're doing these reviews, we're also looking to see if there's any exposure that could occur and it does happen where they should have been paying or accruing tax the taxpayer and they did not. And we will identify all that upfront and show the taxpayer both where they overpaid and where they underpaid before they have to make any decisions about if they want to go back and try to get a refund.

And it's something that in this point in business, this industry came about sometime in the late eighties. It was mostly focused on the manufacturing industry and it just evolved because it knows no specific industry, although we do find a lot of opportunities in things that fall under capital improvements and construction of real property depending on how the state's language works. So it's something that should be done every two to three years by most companies. It should just be a common business practice that they have companies, someone like us or someone else to come in and look backwards. The companies don't have a lot of resources to spend time looking on backwards transactions or transactions that occurred in the past.

So what types of things are exempt from sales tax? Where can, what transactions occur, where the refunds should be found? And there are several large areas that we focus on and we know when we go on to do these refund reviews that we're going to find opportunities to get companies money and the primary areas or capital improvements, so repairs, renovation work, things that would qualify as real property. The thing to think about is each state has a very nuanced differences in language so that tax can be mistakenly charged or paid. Usually the issues occur at the subcontractor level where the staffs are not very deep and they might not even have a professional on staff. So when you're dealing with a construction management firm and you're paying a lump sum, that's not usually where the opportunities lie. It's when we start looking at, again, these repairs and improvement projects and capital improvements where a subcontractor's coming in, they're not technically very deep with tax people and when they're not sure what to do, they're charging tax.

And I did not realize we're going to have this thing in here. So you'll see things like overpayments and renovation scenarios like we talked about with hotel A, B, C, there's not a general contractor overseeing anything and you're working with several different contractors and vendors. That's usually where great opportunities lie. And then once we're in there doing the refund work, we see other opportunities because things happen in business and things get corrupted and mistaken. So we see things usually most states have, there's a lot of different rulings on the uses of software to be using research and development or manufacturing, life sciences equipment and RD equipment, manufacturing machinery, restaurant equipment, even advertising expenses in certain states can be exempt. And when you deal with companies that are focused on something like manufacturing, construction, they're not even thinking about advertising as a way to maybe save some money.

So I got a little lost here, so bear with me because these numbers don't match up. Yeah, the variability of the tax laws in each state can be misleading, confusing, and contradictory. It leads to taxes being paid in error. And we use here an example between New York and New Jersey. In New York, if you repair one broken window, that's a taxable transaction because it's considered a repair. But there is an argument that if you're repairing five broken windows and replacing them, that's considered a capital improvement that would be exempt from sales tax in New York. However, in New Jersey there's no exemption for this and it's taxable. So imagine if you're a contractor doing this type of work and crossing state lines or if you're paying for these services, you need to make a determination on whether to accrue the tax. It just gets confusing, it gets contradictory. And human nature is such that if you're not sure if something, you're going to probably play it safe, particularly when it comes to tax work.

So some other examples of where state variability is a significant impact. We worked for a mortgage insurance company that was based in Pennsylvania and when we looked at their purchases, they had paid over $200,000 in sales tax on software. And when we looked further into it, we learned that they had about 200 of their people were working out of the state of North Carolina where the use of the software is exempt from sales tax. So even though it was all delivered essentially to the state of Pennsylvania, because it was used by their employees in another state, it resulted in about $180,000 refund for 'em. So again, it's a great example of how states crossing state lines can be confusing. And then the other example of this is just language and the definition of something. We worked for a hospital that was a for-profit hospital in the state of Alabama, several hospitals actually, and the language in that state talked about an implant and what constituted an implant and it got a little more detailed, it started asking, the other qualification was if the item was paid for by Medicare, Medicaid or a third party insurer.

And when we looked at it further, we realized that 98% of their procedures were done and paid for by Medicare, Medicaid or a third party insurer. And when we first looked at it, I wasn't even sure where else that would've been paid out of. And we had enough experience with hospitals and the people that work in our group that they pointed out that about 2% of procedures are done out of pocket. So you had these major vendors like Johnson Johnson and Stryker and others, and they were all charging sales tax because they weren't clear how the law was written and they didn't want to take a chance that they didn't collect tax when they should have.

Another in Pennsylvania was, you can see a scoreboard there. It was a multimillion dollar in the nine figures, nine figures, eight figures. But there was a new scoreboard that was installed in a stadium and when the team was consulting with one of the accounting firms and the advice was that it's not really clear if this thing should be exempt or not, so you should pay the sales tax on it. And that we had come in after the fact and done a refund review for them and we'd seen that the tax was on there and you can use nuance to your advantage. So the refund claim that we filed argued that this item was considered a capital improvement because it's wired, it's bolted, it's a permanent part of the building, and it also could be considered online advertising. You could see in that photograph there's some different advertising going on underneath the state wasn't real comfortable with the way the law was written, so they were able to basically settle on the agreement.

It was over a million dollar refund that we were able to help get back for one of our clients. What makes a good candidate? What types of companies do we work for? We're industry agnostic, so we look for certain things though to increase the probability that we're going to help find money for companies. Typically it's a company with 50 million or more in annual purchases or expenses. That's the low end that there's got to be volume, there's got to be activity, there's got to be some confusion or a hundred million or more in revenue. And recent growth, major capital improvements are always great examples, just like the hotel we talked about multiple states. If there's a recent turnover in staff or over several years if they've been audited for sales tax or reuse tax buyers state recently, companies tend to get more conservative and we always look, when we deal with technology, we're very careful to make sure that we're reviewing that because things aren't monitored regularly when companies tend to trust the technology. And that could become a warning signal over time. I think I froze

Avi Jacob: Up where,

Astrid Garcia: Bill, I'm going to jump in here and I'm going to push out poll number five, which we still have pending and then we can come back to your slides.

So poll number five is up right now. For those of you waiting to answer, make sure you make a selection and hit the submit button to register your selection.

Bill Flick: The question is, which of the following is false about forensic sales and use tax recovery studies only need to be performed once especially useful in situations where businesses being done in multiple states may be employed as part of a comprehensive real estate tax strategy in a renovation scenario.

Avi Jacob: And I noticed that we see a lot of questions in the q and a, we are going to have these questions sent to us, so we will answer them and get them back out to you. But with respect to the TPR flow chart, how do you assess materiality? So using that unit of property, we would look at about 30% in comparison to the unit of property that would generally dictate whether or not something is material to the unit of property. Another question I see, bill, you can answer this. Are the state governments resistant to refunding sales tax? Is it complicated process?

Bill Flick: I'll quickly answer that. They're not. Nearly every state is comfortable with sales tax recovery claims, refund claims companies over it's tax that was already paid in error. So the state don't really get very upset about it If you're going to start try to do things where you're arguing and challenging the language of the law and you're trying to get tricky, they don't love that all the time, but if it's something that was legitimately paid in error, they're usually quite willing to pay the refunds.

Avi Jacob: Okay. And then is there any risk of state retaliation or triggering audit

Bill Flick: In the most states? There's a few outliers, but no. The refund side and the audit side are separate parts of the state and they don't always communicate well. Most audits have been scheduled well in advance, usually years in advance. So typically if you're going to try to retaliate, if a state's going to retaliate on a refund claim, it's just going to muddy the group that does the audits muddy up what they already have planned to do.

Avi Jacob: Are kind out of time, yeah, sorry.

Astrid Garcia: Yes, we have about 73% of you guys have answered the questions. Just a reminder, the polls are within the slides widgets, so if you could see the slides, you could see the polls and you can make your selection right on the slide widget, select and answer and hit the submit button. I'll give it about five more seconds and then I'll close it.

Avi Jacob: And then Asher, let's go to the cost segregation and sales and use tax recovery slide.

Bill Flick: Yeah.

Avi Jacob: Is it number four? I was

Bill Flick: Only going to give a few more case studies so we can go there right away.

Astrid Garcia: Perfect.

Avi Jacob: So as everybody can see, cost segregation and sales and use tax recovery are kind of a two-way street. If there's a large renovation that was done, cost segregation should be in the back of your mind. Is this available, is this relevant? And then separately, what are the costs that we may have spent that we should not have spent and therefore eligible for a refund. So you kind of have to look at both and they kind of go hand in hand to make the best situation for clients, businesses, and what the ultimate goal is, save on your taxes and keep more money in your pocket. So thinking holistically, again, we went through cost segregation, the power of qualified improvement properties and how that can be relevant pad elections when you need to do them. The timing is important. 1 79 D deductions and how that plays in related to the energy efficiencies. And then ultimately the sales tax recovery review to try to bring back and recover and get a refund on expenses that you spent that you didn't necessarily need to based on the ambiguity of all the complicated complications is state sales tax and use. And with that, we're really going to close this presentation. Thanks everybody for your time today, and we look forward to seeing you guys again soon. Thank you. Thank you.

^{Transcribed by Rev.com AI}