Believe it or not, major real estate companies could be paying millions of tax dollars needlessly, simply by missing tax credits and incentives related to parts of their buildings that are nonstructural, that create new jobs or help the environment. Why are these missed? Because many accounting firms lack the specialized engineering and scientific expertise to find these opportunities.
That’s why Julio Gonzalez founded West Palm Beach, Florida-based Engineered Tax Services (ETS) in 2001 — to help clients find the real estate deductions other companies can miss. Today, the firm has 26 offices and more than 100 employees around the country, comprising accountants, tax lawyers, engineers and scientists, who work with major development firms including Related Cos., professional football teams and more than 1,000 accounting firms.
“I started my accounting career in the late 1980s, working for large regional accounting firms,” said Gonzalez, the company’s CEO. “The reality was that the Fortune 500 companies had access to real estate tax credits and incentives that Main Street firms didn’t, simply because they didn’t have licensed engineers available to them. I wanted to be a resource for companies that would never have these services otherwise.”
Gonzalez estimates that up to 90% of property owners do not take advantage of all of the benefits the tax code offers, including cost segregation, research and development credits, and deductions to promote energy efficiency — they don’t know about them.
“The biggest mistake property owners make is that they’re just doing what everyone else does, investing based on estimated returns,” Gonzalez said. “But if they optimize their investment utilizing tax, they can double or triple their returns, bringing building value up substantially.”
Chief among the tools ETS employs is cost segregation. The concept has been around for decades, Gonzalez explained, but became more prominent in the late 1990s. Under the traditional tax code, a building depreciates over decades, spreading deductions over a very long period of time. Instead, real estate buyers can opt to depreciate their investments by the components in the buildings. ETS’ engineers can visit a building, determine what parts of the building are nonstructural and find the appropriate deductions that can allow investors to expense up to 50% or, in some circumstances, even 100% of the purchase of a building up front. This could allow a 50% return on investment at a 50% federal and state tax bracket.
Though the initial gathering of information, including construction drawings, site surveys and more about the facility can be timeconsuming, the analysis it produces can be very profitable. For example, an apartment building purchased in Concord, New Hampshire for $983,000 would have generated a depreciation of $21,237.66 in its first year. Through a cost segregation study, ETS helped the investors realize a depreciation of $417,030.77 for the first year, allowing them to reduce their tax liability significantly.
“We can find 30% to 50% of building expenses immediately,” Gonzalez said. “I could take $5 million to $10 million and expense it immediately, lowering my tax liability.”
In fact, he notes, cost segregation is a premier strategy to preserve net worth, he continued.
“You can’t expense stock or bonds,” he said. “But you can expense real estate and, through cost segregation, create long-term value.”
ETS’ experts also can help companies utilize Research and Development (R&D) tax credits. Designed to promote innovation and technical design, the credit offers tax credits for developing or enhancing products or manufacturing processes, new drugs and technical advances in the construction design industry.
“We can find 30% to 50% of building expenses immediately.”
“We’re designing buildings to new concepts. For Florida hurricanes, we now are building for higher wind thresholds, while in California, builders are innovating for fire and earthquakes,” Gonzalez said. “They can earn credits for this.”
Other credits can be offered to companies upgrading historic buildings to a higher condition as well as by properly classifying deductible repairs, he added.
Still more science- and engineering-based real estate deductions relate to sustainability. Section 179D offers commercial building owners deductions for installing qualifying systems for energy efficiency; the 45L credit offers incentives equal to $2,000 per residential unit or dwelling to the developers of energy-efficient residential buildings that are three stories or less. Other ETS real estate-related services include insurance replacement appraisals and disposition studies that can help owners write off the remaining depreciable value of buildings they plan to renovate or demolish.
ETS also serves other industries, ensuring that aerospace, agricultural and life science companies take maximum advantage of their own R&D tax credits, among other incentives. And business will continue to grow. As the tax code continues to change, specialized services, such as those provided by ETS, become even more important, Gonzales continued.
“There are fewer state and local tax deductions, so people are looking for more write-offs,” he said.
Already, 2019 tax increases are affecting the real estate markets in New York, he observed. In California, an amendment to Proposition 13 (a tax cut act from the late 1970s) that would exclude most commercial properties from the law’s tax limits is likely to be on the ballot this November.
“These kinds of strategies can help offset the impact of the changes in local and state tax deductions,” Gonzalez observed. “It’s important that people in California and New York be aware of these possibilities.”
A frequent speaker on tax reform and tax planning for wealth preservation, Gonzalez visits Washington, D.C. to consult on tax reform and also manages his own real estate investments. In November, he received the 2019 Global Excellence Award for Best Specialist Tax Engineering Services Provider from AI Acquisition International. Gonzalez was also recently named one of the 30 Best CEOs of the Year by Silicon Review for 2020 and inducted into the CEO Today Hall of Fame. Meanwhile, he serves on multiple boards and works with a number of charities. He recently joined the board of Companions for Heroes, a nonprofit organization that saves shelter dogs by assisting military veterans, active-duty military, law enforcement and first responders suffering from post-traumatic stress disorders. Gonzalez also founded Entrepreneur Frontier, a foundation to help new business owners reach their goals.
“For me, charity is vital and where I focus a lot of my time,” he said. “It’s important to be involved in our communities.”