Countless commercial property owners overpay federal taxes every year and miss allowable depreciation expense deductions. Under existing IRS tax law, accelerated depreciation expense deductions are available to all federal taxpayers; however, without an engineering-based cost segregation analysis, the taxpayer is unable to take full advantage of the tax law and surrenders significant cash flow to the IRS.
What is cost segregation?
A typical cost segregation study maximizes the tax benefit of real estate ownership by identifying, segregating and classifying a building’s components to asset categories with the shortest possible life, creating significant tax deductions sooner for federal and state income tax purposes.
Cost segregation is determined through an analysis that reclassifies components of a building from 27.5-, 31.5- and 39-year depreciable lives to five-, seven- and 15-year depreciable lives. The benefit comes from accelerating the depreciation tax deductions, which are more valuable today than 39 years from now.
Nonstructural items such as carpet, accent lighting and signage, or exterior items such as paving, sidewalks and landscaping are examples of building components eligible for accelerated depreciation—and can be “broken out” from structural costs and depreciated over a shorter period. However, the greatest savings come from electrical, mechanical and plumbing assets.
Depreciation can increase your ROI
In addition to recently purchased, renovated or constructed properties, a cost segregation study can produce substantial tax benefits for properties already depreciated for as many as 10 years or more by catching up on missed depreciation.
A proven and allowable tax strategy
Cost segregation is by no means an aggressive or risky strategy. For decades, court rulings have supported the practice of segregating costs for tax depreciation on commercial buildings. Subsequently, cost segregation has become an accepted—if somewhat underused—tax planning strategy.
Applying sources such as revenue rulings, court cases, IRS regulations and Senate and Congressional finance committee reports, cost segregation experts can create tax savings starting in the first year.
Is a cost segregation study for you?
It doesn’t really matter what type of real estate you’re acquiring; If the property can be depreciated, a cost segregation study would be a valuable strategy. Even if your real estate project has been completed for several years, the IRS allows for a look-back of benefits from previous years through a change in accounting method.
A cost segregation study requires detective work, which analyzes both actual cost records and cost estimates and may take up to a month to complete. Trained engineering and tax specialists work closely with you and your contractor to identify more assets that qualify, including all assets imbedded in your building’s construction or acquisition costs.
The property owner should be given a detailed report from a CPA so he or she understands exactly what was done.
It’s important however, for property owners to work with engineers and tax advisors who are intimately familiar with cost segregation rules and requirements to make sure the study is in compliance with the constantly changing regulations. Any building put into service after 1987 qualifies and even now, years later, the benefits can be realized.
Brent Ross is president of Brent Ross & Associates,CPAs, LLC. He can be reached at 904-448-6408 or firstname.lastname@example.org.