Use Cost Segregation Studies to Accelerate Tax Savings

Use Cost Segregation Studies to Accelerate Tax Savings

Posted by Douglas C. Samson, Esquire on 01.07.22

Has your company constructed, purchased, expanded or remodeled real estate? If so, you may be eligible for ten, or even hundreds of thousands of dollars in tax savings through a cost segregation study.

Cost segregation is an IRS-approved strategic tax planning tool that reduces taxable income and increases cash flow by accelerating depreciation deductions. Certain components of your property, including all exterior and interior structures, may be separated from the rest of the property for faster depreciation and tax savings.

For example, rather than 27.5-year (residential) or 39-year (commercial) depreciation for your structure, assets may be broken into 5, 7 and 15 years for personal property and land improvements. In fact, 25 percent or more of the cost of your building may be able to be reclassified.

Tangible Property Rules Change Equation

In 2014, the IRS issued final regulations that more clearly define which business assets can be expensed and which must be capitalized. Under the regulations, any costs simply related to keeping your property in regular operating conditions – or restoring it to like new conditions before the end of its depreciated tax life  – can be expensed. More specifically, the determining factor lies in a case-by-case analysis of the scenario requiring the expenditure, rather than a review of the overall costs incurred.

In the past, cost segregation studies were used solely to break out the personal property and land improvement costs from the overall building construction and acquisition costs. The unit of property was the whole building with all of its components. Now, in addition to the building structure, a property owner has eight additional defined building systems to evaluate with respect to those particular systems rather than the entire building. Examples of such systems include electrical and plumbing systems; escalators and elevators; and fire protection and security systems. The larger the unit of property, the more likely the repair can be immediately expensed. A cost segregation study is essential in determining which improvements can be expensed versus those which must be capitalized.

Depending on the type of facility, studies can produce cash flow as high as $100,000 for every million dollars of real property.

The Value of a Cost Segregation Study

Many business owners and executives are curious about cost segregation studies but are not sure if their business qualifies. The primary goal of a cost segregation study is to determine which components of your property costs can be separated out and depreciated over shorter time periods, therefore speeding up the related tax deductions.

Cost segregation studies can also be used to minimize a taxpayer’s property tax assessments since property tax bills are based on the value of real property. After the breakout of non-value cost items from the real property basis during a cost segregation study, a taxpayer may be able to obtain a lower assessment by subtracting costs that are not real property costs from the reported costs of construction or acquisition, such as contractor overtime hours. 

Other benefits of a cost segregation include:

  • Provides an independent third-party analysis that will withstand IRS review
  • Quantifies a property's major components and leasehold improvements so they can be written off when replaced or renovated
  • Grants the ability to reclaim missed depreciation deductions from prior years without the need to amend tax returns
  • Generates an immediate increase in cash flow through accelerated depreciation tax deductions

The IRS requires an engineer-based report to support the acceleration of depreciation. Tax Point Advisors works with CPA firms and business owners to coordinate cost segregation studies. We offer in-house engineering capabilities and the tax expertise to help you quantify the amount of tax savings you could receive. We also will identify any obstacles preventing a property owner from fully realizing their tax-savings potential.

To learn more about tax benefits from cost segregation studies, call us at 800-260-4138 or please leave us a message below.

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