These days, most business owners know that lines of credit and money available to grow business are tougher to get than tournament badges into Augusta National Golf Club to see the Masters—with or without Tiger Woods on the course. The American Recovery and Reinvestment Act of 2009 was intended to have a significant impact on businesses and on the credit crunch by providing tax incentives and financing opportunities that would help them create jobs. However, finding a bank willing to take the time to process a loan and/or take a chance on helping a worthy venture is a daunting challenge for most entrepreneurs.

Because money is so tight, many business owners have been forced to layoff employees, cut discretionary expenses and/or settle for inferior raw materials in an effort to reduce costs and protect their profitability just to remain a viable, ongoing enterprise. But, there may be an avenue of relief to survive this current economic crisis that has not been fully considered. It’s called cost recovery and its practice has only been available to large-cap companies—until now. Curious to see if it’s a possibility for your company? Let’s investigate.

Defining cost recovery
At a networking meeting recently, I met Ken Boehm, Senior Advisor with Cost Recovery Advisors (www.costrecoveryadvisors.net)—an expense recovery consulting firm in Norcross, Ga. Since I had never heard of the term ‘cost recovery’ prior to meeting Boehm, I asked for the opportunity to interview him and learn more.

BusinessDictionary.com defines cost recovery as “the recoupment of the purchase price of a capital or qualified asset through depreciation over a prescribed time period.” Boehm shared, “The scope of cost-recovery efforts today has expanded into not only accelerating the depreciation of assets such as buildings—sometimes called cost segregation—but also finding errors in Worker’s Compensation insurance, and negotiating better rates in waste management, energy and telecommunications expenses.”

I asked if there were many consultancies similar to Cost Recovery Advisors (CRA) nationwide and Boehm explained that there are a number of cost recovery auditing firms that specialize in one or two specific areas, but only a few consultants that would coordinate the auditors in a manner such as CRA prefers to work. In fact, Cost Recovery Solutions (www.costrecoverysolutions.com) of Newport Beach, Calif. offers a suite of services including healthcare cost control, accounts payable audits, document fleet management, and freight and supply chain solutions, to name a few.

The focus of cost recovery consultants is to identify expense areas that have been overpaid and recoup the funds and/or assist in filing for federal, state and local tax credits for which clients are eligible. One can expect a cost-recovery consultant to use a “survey approach” during an initial meeting to determine what services or audits are most appropriate and quantify the potential benefit. Most services are handled on a contingency basis, which, according to Boehm means, “If we can’t save you money, you don’t pay us. It’s that simple.”

Potential savings
I inquired as to where the greatest benefit to a business may exist. Boehm did not hesitate to answer. “There are two recovery-rich areas—applying for commercial property tax benefits and having a Worker’s Compensation analysis completed.”

The Economic Recovery Tax Act of 1981 and its modification, the Tax Reform Act of 1986 introduced the straight-line method for depreciation over 39 years of commercial buildings. At the same time, the Internal Revenue Service, recognizing that many parts of such a building would wear out well short of 39 years, allowed building owners to reclassify certain components—electrical and plumbing systems used for operating equipment and production, HVAC units that meet the sole justification test, office furnishings and retail accessories (shelving, for example)—and depreciate them on an accelerated schedule.

Every $100,000 in costs reclassified can yield more than $20,000 in net present-value savings. And, that can provide an immediate increase in cash-flow through tax deductions, a reduction in both income and property taxes, and an easy opportunity to claim “catch up” depreciation on previously misclassified assets. Ironically, most accountants and CPAs are unaware of this federal tax savings program or don’t have the necessary engineering expertise in-house to initiate and complete the process. In such an effort, engineers and accountants work in tandem to capture savings for the client. Unlike many of the other services, there is an upfront fee for this work, but the potential savings usually outweighs the cost of the project.

In the case of Worker’s Compensation premium overcharges, Boehm stated that, in CRA’s experience, seven out of 10 clients have overpaid their insurance carrier. A comprehensive analysis of a company’s insurance policy goes back five years; locates errors in industry and employee job classifications, payroll exclusions, experience modification rates, reserve accounts, and loss runs; and finds refunds that are required by law to be awarded. CRA was able to secure a refund of $150,000 for one of its clients.
Why would a business owner be reluctant to have a Worker’s Comp audit conducted? “Many business owners are under the impression that when their insurance carrier conducts an audit, it is to find such refunds,” Boehm explains. “Truth is; the audit is done to make sure the insurance company got what was due, not to find ways to save the policy holder money.”

Give me some credit
There are a number of other ways businesses can recover costs. In some states, a Retraining Tax Credit is available to any business that has operations in that state, trains resident employees on new technology and pays state income taxes. In Georgia, the tax credit could be up to $500 per employee.

The Manufacturer’s Payroll Credit is a federal tax program that is a wage-based credit to grant money to manufacturing, design and engineering industry jobs. The credits are intended to increase cash flow by identifying companies that invested time, money and resources for the advancement and improvements of its products and processes and give money back as an incentive to conduct future research and development as well as deferring current taxes.

If you do seek out the services of a cost-recovery consultant, ask if they will provide an energy analysis, where hidden usage charges, misapplication of plan charges, and overpaid taxes and fees are probed. When billing discrepancies are found, you should expect the cost recovery consultant to negotiate on your behalf and obtain a refund settlement along with better rates going forward. Further, your company may qualify for Federal Energy Policy Act of 2005 Tax deductions of 60 cents to $1.80 per square foot and/or other tax credits or savings your business may be entitled to.

Similar analyses are possible for waste management and disposal services and your telecommunication bills. Often, businesses that aren’t large enough to pursue some of the aforementioned benefits still may qualify for refund credits and negotiated rates with waste management and telecommunications providers.

Regardless of which cost recovery consultant or audit firm you consider using, be sure that they support you after-the-fact by offering full audit protection, should the government decide to question your filings. Good luck!

Are You Talking To Me?

Would your business benefit from seeking a cost recovery consultant? Ken Boehm, Senior Advisor, Cost Recovery Advisors, says that any organization that meets any of the following guiding parameters would be a likely candidate.

• • A profitable business which pays taxes,
• • Owns commercial property valued at around $750,000 and has been built or renovated within the last twenty years,
• • Has a total payroll of over $1 million,
• • Pays Worker’s Comp insurance premiums of at least $50,000 annually,
• • Occupies more than 50,000 square feet of space, or has yearly utility costs of greater than $100,000,
• • Is billed more than $500 monthly on waste removal management, or
• • Spends $500 or more each month on telecommunications—that is, phone, wireless and Internet.

Broad Strokes
This month’s broad strokes include:
 

• • Small- to mid-sized businesses can consider the practice of cost recovery as a means to improving cash flow and enhancing the bottom line.
• • Cost-recovery consultants/auditors identify expense areas that have been overpaid and recoup the funds, and/or assist in filing for applicable federal, state and local tax credits.
• • Cost recovery consultants often use a “survey approach” during an initial meeting to determine what services or audits are most appropriate and quantify the potential benefit.
• • Most services are handled on a contingency basis—making exploring the possibilities nearly risk-free.