Material Handling

 

Material handling is just as important as anything during facility planning. The costs of improper planning can lead to loss of efficiency and productivity which in turn increases the costs and drives down profitability. From an efficient material handling system, a lot of value could be added to the routine and regular activities. Besides, the main aim of the material handling system designer must be to reduce the total cost of material handling without putting any impact on service level and productivity. If the order picking operations are improved, travelling time and time spent on filling orders reduced, space utilisation is done by improving storage methods a lot of material cost can come down. For any facility, material handling is of critical importance as it is nothing short of an opportunity to save more costs. Having said that, it is important that material handling should be done during the planning of the facility.

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The New Workplace

For decades, the workforce of America has had two standard options: full-time or part- time. However, today, in the new work place some employers are now offering flexible work schedules to accommodate a growing number of employees that do not want to work a traditional 9-5 schedule. According to the United States Department of Labor “A flexible work schedule allows employees to vary their arrival and/or departure times.” At Lindon Engineering Services, employees follow a more personalized work schedule, while the company still performs at peak efficiency.

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PATH

As the 2015 tax season comes to a close it is time to prepare for the new provisions associated with Protecting Americans from Tax Hikes (PATH) Act of 2015. The biggest revisions to the depreciation regulation that will ultimately benefit clients are:

• The extension of bonus depreciation through 2019
• The addition of Qualified Improvements (QIP)
• Modifications to Qualified Leasehold (QLHI), Restaurant (QRP), and Retail (QRIP) Improvements

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REMODELING PROJECTS (Asset Disposition)

Recently we have performed a number of cost segregation studies on remodeling/renovation projects. Among the questions that have arisen in reconciling the cost of the renovation are those related to the disposition of the cost of assets that have been removed and those remaining from the previous facility. For the most part, we have ignored the cost of the existing building and improvements resulting in their remaining on the client’s books even though some of the assets have been demolished. 

The recent release of the Temporary Regulations under 263(a) has changed the manner in which the residual basis of existing assets is handled following removal on a remodeling project.

In the past, demolished assets had to be carried on the client’s books until the full cost had been recovered and ultimately retired. Now, however, the value of the removed assets can be written off as abandoned components (Note: This only applies to 39-year real property). Not only does this regulation take effect immediately, but an owner can also write off removed components from remodeling projects performed during the past ten years by filing a Form 3115 (Change in Accounting Method).

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CONVEYING SYSTEMS

One of the topics we receive considerable inquiries relates to conveying systems in auto dealerships and other commercial businesses. Conveying systems consist of equipment that move materials or people and include passenger conveying systems, parts lifts, freight elevators, vehicle lifts and material hoists. The function of each conveying system determines its useful, depreciable life.

Passenger conveyor systems such as elevators, escalators, and moving sidewalks are used to transport passengers in horizontal, vertical or inclined directions. These systems and their associated components including handrails and smoke baffles, for example, are designed to remain in place and are considered 39-year real property since they relate to the normal operation of the building.

Parts lifts, belt conveyors, roller conveyors, etc. are used to move supplies or materials, typically to a storage room or mezzanine located on another level. These are similar to elevators except they are usually not equipped to move people and may lack some of the safety equipment found on elevators. Most parts lifts/conveyors are self-supported, requiring no structural modification to the building. Because the primary function of these lifts is moving inventory and other materials used in the business they are typically classified as personal 5-year property.

Freight elevators are designed to carry goods rather than passengers; however, since they are designed to carry passengers as well as materials, they have been associated with elevators and have a useful, depreciable life of 39-years. Freight elevator designs are more durable and less aesthetic and they vary from parts lifts because they travel faster, travel to greater heights, have greater capacities and have automatic operation. Of particular note are the elevators that move automobiles in multi-story dealerships and parking garages. These items have typically been considered to be similar to passenger elevators and assigned a 39-year life despite the fact they serve a unique function related to product handling.

Vehicle lifts and hoists are considered to be tools/equipment in maneuvering automobiles or their components into maintenance positions and are treated as personal property with a 5-year depreciable life. Cranes, overhead hoists and trolley beams will be discussed in a future newsletter because of their unique applications.

Finally, mechanical, electrical and instrumentation utilities supporting the conveying equipment deemed to be personal property should likewise be depreciated as 5-year personal property. Mr. Archer is a Civil Engineer with a Masters degree in Business Administration and a Masters Degree in Engineering Management. He is an Adjunct Professor of Engineering Management at the University of Louisville and is the President of his own engineering company, Lindon Engineering Services, Inc

 

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Where do all these Research and Development Costs Go? (R & D Series Part II)

It probably doesn’t come as a surprise that funding spent on research and development (R & D) is at an all-time high in the United States, reaching over $499 billion during 2016. The United States ranks number 1 in research and development expenditures surpassing China by 15%.  The industries spending money on research and development widely varies, with manufacturing industries taking the lead in expenses and nonmanufacturing industries claiming the least of expenditures. Companies spending funds on R & D include as little as 5 employees to over 25,000 employees. 

So where does all this funding come from? During 2015, it was recorded that business funding amounted to $355 billion and federal funding was estimated to be $113 billion. Research and development activities have been distributed between three categories: basic research occupying 13-18%, applied research consuming 19-23%, and experimental development between 61-65%. Federal funding encompasses the majority of basic level research, primarily funding for universities and other institutions of higher education, which conducts almost half of basic level research. Meanwhile, private businesses account for 52% of applied research funding and 82% of development funding according to a 2014 study. 

Now that we know where most funding comes from, it is wise to figure out where the money was spent. Salaries and wages consist of one-third of R & D expenses, materials and supplies occupy another third, and the remaining third is capital spending.

The end goal for the billions of dollars spent in research and development varies based on the investing industry. It can be an increase in productivity, betterment to a product, or development in the health industry. But the benefit of R & D doesn’t have to stop there. The IRS developed a Research and Experiment (later changed to the Research and Development) tax credit during 1981 to create jobs and aide in the development of technology. The credit was temporary, being extended by Congress more than a dozen times until the Protecting Americans from Tax Hikes Act of 2015 made the R & D credit permanent. Check back in soon to see how the R & D tax credit can rejuvenate R & D funding for businesses. 

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Cost Segregation: A Review

Following the Tax Court decision regarding Hospital Corporation of America (HCA) in 1997, the application of cost segregation methodology to all commercial, industrial and retail facilities became widespread. Based loosely on the provisions of the Investment Tax Credits of the late 1970s, cost segregation became a popular means for deferring a company’s tax liability and providing a short-term cash flow increase. Recall that the basic premise of cost segregation is to identify the elements and/or systems of a facility that may be reclassified as personal or land improvement property and depreciated at the appropriate accelerated rate. The problem that arose immediately was the absence of a detailed list of acceptable items eligible for accelerated depreciation. This problem also presented obstacles for the Field Auditors of the IRS since some of the segregated components were technical in nature – a fact that was not lost on the Service. 

To combat this deficiency, the IRS prepared several Audit Guideline Directives for their field inspectors to use in audits of specific businesses (i.e. restaurants, automobile dealerships, pharmaceutical companies and casinos/hotels). One of the major points presented by the new guidelines included a requirement for the cost segregation study be performed by an individual with expertise and experience in facility design/construction and the tax law related to depreciation. This provision detailed the qualifications of individuals performing a cost segregation study and a detailed description of the methodology, reconciliation of total costs, and the treatment/identification of indirect costs among other things.

Cost segregation has now evolved through the years as a method to depict a company’s depreciation expense more accurately and to allow a business to recover their investment costs in a more timely manner. Simply put, cost segregation, when applied properly, allows a company to increase its short-term expenses and simultaneously decrease their short-term tax liability. By comparing the straight-line depreciation of a facility versus a segregated depreciation distribution, a company can realize a positive cash flow annually before the straight-line method exceeds the segregated depreciation total on an annual basis. The cash flow is a real cash savings in tax liability. It is helpful to keep in mind that depreciation is not a cash transaction whereas the tax expenditures are, thus creating a real cash flow that is cumulative until the straight-line depreciation exceeds the segregation depreciation annual amounts.

Business owners would be well-advised to investigate the applicability of a cost segregation study for their newly acquired properties (whether constructed or purchased) as soon as is practical. The starting point is to consult the company’s accounting firm to determine whether a study makes sense and is practical in terms of timing.

 

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What is Research and Development? (R & D Series Part I)

What is Research and Development (R&D)? Seems like the answer should be simple… I mean just look at the name! The simple answer is, it’s the investigation of business activities to improve or create products and/or procedures. 

R&D events can be an internal operation or outsourced to specialists. Many small business owners take advantage of outsourcing R&D work because they lack knowledge of design and engineering for their new-found concepts. R&D activities  

vary from industry to industry, but they always contain these three steps:

1.      Basic Research – The exploration to obtain a more complete understanding of fundamental aspects of a concept. 

2.      Applied Research – The investigation of methods to obtain specific objectives regarding product or processes. 

3.      Development Research – The examination of the implementation of research knowledge and designs for production.

There is no guarantee to the outcome of R&D. Many companies spend a large amount of money on research and development activities and never realize a return on their investment. Some companies utilize R&D with the knowledge that they will not immediately profit, but instead focus on the long-term profitability.  How much is spent on R&D isn’t a measure of success, rather, it is the balance between technical risk and market risk, all of which need proper investment and management. Forbes uses this equation to model the success of research and development: innovation =  invention + customer value + business model

There are many factors that contribute to the decision of whether to pursue R&D. The following are the top four:

1.      Proprietariness – Is the nature of the research unique such that it can be protected through patents or non-disclosure agreements? Having that level of protection makes R&D much more valuable. 

2.      Timing – Starting R&D is best when the market for the product is slow or moderate in growth.

3.      Risk – R&D is a high-risk activity. Lowering the risk could mean acquiring the research to produce marketable products or processes. 

4.      Cost – Expenses for R&D activities can be very costly and produce a negative cash flow before returning a profit. In the next article, I will discuss how much and what is spent on Research and Development. 

Whether success or failure, all those expenses don’t have to be a burden of loss. The Research and Development Tax Credit, made permanent through the Protecting American against Tax Hikes (PATH) Act during 2015, allows businesses a credit for qualified research activities and expenses. This will be discussed in a later article. 

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Study Timing

For a Cost Segregation (CS) study, timing is important. The analysis cannot be completed until the construction work is complete and the total cost of the construction work has been finalized. And, ideally, the CS should be done before the tax filing for the year the building is placed in service. This results in a maximized cash flow for the facility owner, by realizing their tax savings as soon as possible. That is not to say that a CS should not be done after the first tax year of the building being operational. Carry-forward costs allow the property owner to realize unclaimed tax deductions that they may have missed in the years since the building was placed in service. However, these savings are slightly lower than they would have been if they had completed a CS at the time the building was placed in service.

A similar situation is true for our Business Solutions Services (BSS) studies. When planning the operations of a facility, the greatest opportunities for cost savings occur during the facility planning stages. This is because the difficulty and cost of altering the layout of a facility or relocating a facility is extremely high. Using detailed information about daily operating procedures to guide the facility design process can help minimize operating costs over the long-term. Even if a business is past the facility planning stage, there are still several other ways that BSS can help reduce costs. Besides the layout of the facility, significant opportunities for savings can lie in material handling, process improvements, inventory and production control policies, workstation design, and more.

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Confessions of an Engineer Co-Op

Co-operative education gives students an opportunity to test skills learned in the classroom, and to expand their knowledge through work related experience. Every co-op student has a differing experience and opinion on the program.  This was not only my first year as a co-op, but my first job as well. In the beginning, I had some anxiety and at times self-doubt. As my first semester of co-op at Lindon Engineering Services is ending, I have been reflecting on my experience.

Once I started, I was surprised how much responsibility I was given. I found myself applying principles learned in class and gaining real world knowledge. Although I had some basic understanding, I still needed guidance. My co-workers were friendly and willing to help, and they were incredibly patient with me while I was learning the job. The answers I received were fully explained with the how’s and why’s something needed to be done. Coming from a fast-paced school environment, the one-on-one interactions I had with co-workers and my supervisor was a breath of fresh air compared to the mentors in the past. Although my co-workers were supportive, there were several instances where I was required to apply critical thinking skills and problem solve on my own.

While working for forty hours a week, I am also taking an online course that I work on when I get home. Being a student while working is at times challenging. Juggling a full work schedule and class work has required me to improve my work ethic and my time management skills. I now say to myself: “You need to dedicate this specific time to work and study, then you can have the rest of the night to relax,”. Sounds easy, but from the perspective of a student who really likes naps, the resolve to dedicate specific times to work on and complete work is more beneficial towards my health as a student and to my grades.

To conclude, being a full-time working student is a milestone in my life. I am thankful for my coworker’s example of patience and guidance. Performing research for my job and school work has become easier because I now have the resolve to research topics thoroughly and use patience to complete projects and reports. My co-op experience has allowed me to see how school work relates to the real world, helped me develop better time management skills, and have more confidence in myself.

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