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• April-May 2005 Issue
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Capital is needed to purchase heavy machinery, tools, computers, trucks and specialized vehicles to lift, smash, mix, grind and spray. Between a construction company's clients, suppliers and internal needs there is a sizeable amount of fixed asset planning and record-keeping opportunities. Very few firms focus on assets in their business development process even though a significant amount of money is spent on them. Think outside the box for a moment.

A good accounting firm can 'connect the dots' and target a contractor, the contractor's client, and the contractor's supplier with one integrated strategy. The trick is to focus on the inter-connected fixed asset link that ties these prospects together. A supplier has more storage- and transportation-related assets. The contractor uses more tools and heavy machinery. The client ends up with the final building. Each of these prospects can benefit from enhanced depreciation management strategies.

Why fixed assets? They represent potentially material tax opportunities, which can be converted to cash to fuel today's needs. To get their attention, demonstrate the potential financial impact of prior depreciation decisions. $100,000 in missed depreciation is worth about $40,000 less in taxes for the current year. Why should a construction company spend money and time to secure financing when the cash may exist if they reviewed their previous fixed asset accounting decisions?

The conservative nature of accountants creates these opportunities. 'Safe' thinking translates to longer depreciation decisions because 'deferred' deprecation is not something the IRS challenges. Since all construction projects require a large amount of fixed assets, as a rule of thumb, the more assets the greater the chance for error or misinterpretation, which creates asset reclassification opportunities.

Depreciation expense impacts cash flow by impacting tax liability. Once assets are purchased, no one seems to monitor the depreciation decisions. Often, the final assessment is left to an internal accounting resource that may not be familiar with the nuances of fixed asset depreciation. If an organization under depreciates assets, they end up pre-paying federal taxes. Improperly classified assets reduce available cash because it is used to pay tax liabilities that could have been avoided.

Continue the trail. With cash now used to pay taxes, additional borrowing may be required to fuel operations or invest in new equipment. Acquiring funds increases costs and consumes time. Depreciation decisions impact the entire operation and can create a domino effect.

Practitioners should use asset reclassification as a business development idea. Most accountants are aware of cost segregation, but there is a major difference between asset reclassification analysis and cost segregation. Cost segregation only addresses a building. It breaks out components of the building such as lighting, curbs, doors, etc. into shorter lives than 39 years and accelerates depreciation of the pieces. Most accountants are not familiar with asset reclassification analysis. This addresses all of the fixed assets in a business. It includes the building and any depreciated fixed assets. Concentrating only on the buildings ignores the majority of the assets.

Fixed assets are door-opening tools for practitioners because there is human judgment in the process. Assets are not exciting, and the only focus on them after the purchasing decision is normally for inventory tracking purposes. This is a sleepy, but powerful area.

The four primary business development opportunities for practitioners are as follows: