Cannabis Knowledge & Insights

Tax Savings Strategy: Cost Segregation Study for Cannabis Companies

With the heavy restrictions from IRC280E, many cannabis operators are facing huge tax bills that can crush their business.  

Most taxpayers are great at completing the defensive aspects of taxes such as filing the right forms on time, but how can they go on the offense and gain more control of their taxes?

Cost segregation is one offensive strategy that has stood the test of time and may be a way for cannabis businesses to claim tax deductions without violating the 280E.

In this video, we will cover:

  • What Cost Segregation is
  • How these studies are performed
  • The implications of the study
  • How to perform a Cost Segregation Study

If you would like to have a cost segregation study for your cannabis company, then please reach out to us by clicking the “Get Started” button below or give us a call at 800-674-9050.

Get Started

Full Transcript

Hey everybody, I want to welcome you for another exciting Webinar. My name is Marco Glisic, partner at Green Growth CPA’s. In today’s webinar we’re going to cover cost segregation. It is a very exciting topic and reason I’m so passionate, excited about it is that it has proven to be an amazing tool when it comes to tax savings and cutting down your tax bill. And it’s an offensive tax tool. The way I like to think about tax and a lot of ways as a sports game, you kind of have the defensive aspects and then you have offense aspects of the game, right? So you know, kind of think about your tax compliance, you know, filing the forms on time filing the right forms, you know, filing the forms properly. All of those are defensive aspects of your tax situation and they’re very important and doing them correctly really minimizes your tax exposure.

A lot of cases your tax liability. But what I can see often being overlooked are the offense aspects of your tax situation. And that’s where really the cost segregation has proven to be an amazing tool and it has stood the test of time and it has stood the test of courts. It’s been one of the tools that’s been challenged by IRS in many tax courts, you know, over decades and every single time if it was done to right way and done properly cost segregation has stood that test. So it’s a proven tool that I’ve seen a lot of business owners overlook and some I’m really excited and passionate about it to share with you today.

Before we dive into materials, also want to just quickly cover a little disclaimer. So the information containing this webinar presentation is meant for guidance purposes only and not as a professional legal or tax advice. Further it does not give personalized legal, tax, investment, or any business advice in general.

The agenda for today’s Webinar. So we’re going to cover what is cost segregation, how does the cost segregation work? What qualifies for Short duration appreciation, what that building’s qualify. Then really what implications would this cost segregation mean for you and your business and your tax bill more importantly. And lastly, how to perform a cost segregation study.

So let’s start off with cost segregation. What is cost segregation? The standard definition is that essentially it’s a process of identifying personal property assets that are grouped with real estate property assets and then reallocating those personal property assets for federal tax reporting purposes.

Now there’s a lot there. It’s a very convoluted, but essentially what it means is that by applying cost segregation properly, you can really minimize your tax bill in the current year. So let’s kind of break that apart a little bit more. You know, how does that work?

So essentially when you’re looking at your property, you can kind of view two ways. One is it’s as a real estate property or a personal tangible property. With real estate, personal property you depreciated over 20 plus years, you know, so the chances of if you have some sort of a building lease hold improvements, it’s going to be anywhere from 15, 20 to over 30 years. So really the only way for you as a business owner for this asset that you’ve paid hundreds of thousands or millions of dollars, you’ve invested in the business you’ve invested in the US economy. The only way you’d be able to take advantage of that if you’re depreciating under the real estate property rules is going to be, if you stay in that building for you know, 15 20, or 30 years. And chances are you probably won’t, right?

Or you just don’t know, right? Chances are you must stay in that business for three years, five years, 10 years or who knows? Maybe you’ll do it for 20 or 30 years. But there’s a lot of uncertainty associated with that. And a wise thing to do from tax planning perspective is really to try to extract and maximize those deductions and depreciation sooner rather than later. And that’s really where cost segregation comes in. It really helps you on lock that depreciation. And so the way you go about it is you go through the costs that are right now associated with that building or a lease hold. Think about different types of items. Mechanical, electrical or what not that are right now in that building and they’re being treated as real estate. Effectively what you’re doing then, you will reclass them from the real estate property to personal, tangible property.

And now with personal tangible property, you’re following different depreciation rules. So now the personal tangible property you can depreciate a lot quicker and two, you can take advantage of the new bonus depreciation that’s been enhanced with the Trump’s new tax law. So now instead of waiting for these benefits, tax deductions for, you know, 20,30 years, you’re now unlocking them immediately. So for this reason, it’s proven to be an amazing tool when it comes to tax planning and lowering your bill right away.

You know, let’s kind of cover a couple items that do qualify for this short duration depreciation, right? They do qualify as personal, tangible property. Since we kind of think about a cannabis operation, it’d be things like task specific lighting. Think dedicated electrical, mechanical plumbing systems, specialty mechanical systems used for climate control. So a lot of growers are going to have these removable floor coverings, hydroponic systems, security systems, various land improvements.

As you think about your operation, your buildout big chunk of that buildout that costs, you know, a hundred thousands or millions of dollars, a lot of it will actually qualify for the short duration depreciation. If this is your situation, then this can be a great tool for you.

Let’s cover what type of buildings qualify. And so it’s really going to be any commercially owned property or rental or lease hold that is currently in service. It could be a leasehold that you’ve done a lot of updates and improvements. It can be an acquired buildings. So you literally just kind of went out there and you purchased the building. Or it could be even internally constructed building, you know, let’s say you have a piece of land and you’re building your operation on there. That internally constructed structure and building would qualify for it. So really as long as it’s in service and you have ownership of it, you’d be able to qualify for it whether it’s a rental lease hold or you straight up purchased it or constructed it.

So, you know, we’ve covered a lot here, a lot of it is various tax concepts, but the question is really what does this mean for you and your business? And this is the exciting part. What we’ve seen over and over is that potentially you can write off anywhere from 18 to 30% of your facility expenses, which is just tremendous. You know, and, roughly what we’ve seen is anywhere from 180,000 to 300,000 additional depreciation per million dollars spent minus the land. So this can be a big mover, a big mover and shaker that can have a huge impact in reducing the tax obligation for current year.

Now how do we perform a cost segregation study? It’s very involved work which consists of working with a CPA and forensic engineering team. And the good news is that we do have a seasoned team, consisting of ex big four professionals who have the necessary skill set and background and have gone through various court cases and audits and have stood the test of time and stood the test of court cases.

Things will ask from you is the following information, things like address in serve date, the purchase price less the land value improvements, put to date. A lot of this can be found on your fixed assets schedule or fixed asset register, types of buildings, federal marginal tax rate. If it’s subject to AMT, square footage of the asset, you know, kind of those detail, fixed asset registers and schedules. How the property was acquired, you know, was an inherence. Was it purchased, was it section 1031, or new construction. Once we have this information, we’d be able to provide you with an estimate and it really showcase to you the ROI on this type of project. How much would be able to accelerate your depreciation and what would that mean for your tax bill? Once that’s in place and we see the value in it, you know we have again, a team of CPAs and forensic engineers who can get deployed, work through the property, take the pictures, analyze the property, and really provide all the necessary documentation that IRS will need.

From there we delivery with a couple of different things. One is the reporting fully supports the positions. And again, these reports have stood the test of time and the tax courts. Secondly, we provide you with an actual fixed assets schedule that shows the new depreciation. So whether, we’re doing your taxes or you have a different tax preparer now they have a fixed asset register they can run with and they can just plug in the tax return. And then lastly, in case you’ve been, you know, missing out on this deduction for years. And we’ve seen this in a lot of cases. I’ve seen majority of business owners I do talk to have not considered it. A lot of tax professionals I’ve talked to are not aware of it. So if you have gone for years, missing this deduction. The good news is that we can file a form for you, which is going to go back and recapture the depreciation so you can get the benefit of it in this year. And the good news is that we don’t have to amend your return. All we’re doing is we’re effectively filing a very simple form that allows you to recapture that depreciation.

And before we conclude, you know, a couple of key takeaways, costs segregation can be a great way for a cannabis business to claim those additional tax deductions without violating 280E. The main concept here is that we’ll be depreciating some of your assets on a shorter duration timeline and that’s fully supported by our engineering work. And lastly, it’s important to really work with a firm that has experience with this and it has seasoned professionals with the right experience when it comes both on the tax CPA side, but then also on forensic construction engineering side to perform that study that can stand the test of time and the test of tax court cases.

If you’re interested in cost segregation, if you are in a position where you have incurred build out costs, you’re sitting on property or significant lease hold improvements, this can be a really a great way for you to maximize your deductions and reduce your tax bill.

Please reach out to us and get in touch with us on our website, Or call us 1-800-674-9050.

One thing I’ll mention here, that’s very important, do not wait until January 1st to April 15 to do this and the reason why is that you don’t want to do this the last minute. This is something that we can do right now. Again, it’s an offense aspect of your tax situation and let’s really unlock those deductions right away. You know, let’s recapture the ones from previous years and unlock the future ones so we can start minimizing your tax bill today. Again, if you want to get in touch with us, call us directly at (800) 674-9050.