Are You Purchasing, Constructing, Improving or Inheriting Commercial Property?
If so, you could benefit from a cost segregation study.
Historically, tax professionals have categorized realty acquisitions and newly constructed realty property into two asset classes: land and building. Land is not depreciable and, depending upon the building’s purpose, the building is depreciated over a 39 year or 27.5 year recovery period.
A cost segregation study allocates the property into two further asset classifications: land improvements and tangible personal property. This way, property owners can depreciate the “carved out property” into shorter lives—specifically, 15 year, 7 year and 5 year lives.
Why They Matter
These studies benefit the taxpayer through improved cash flow by virtue of upfront tax savings and corresponding tax deferrals. Essentially, such benefits are derived from two sources:
- Increased deductions arising from costs being shifted from nondepreciable land to depreciable property (land improvements); and
- Time value of money impact of accelerating depreciation deductions to earlier tax years.
For example, if a building were placed in service in 2019, every $100,000 carved out as tangible personal property will yield a depreciation deduction of $100,000 versus $2,500 if it were treated as a building. As can be seen, significant tax savings were achieved, primarily due to the special “100% bonus first-year depreciation allowance.” Therefore, using the same example every $100,000 carved out as tangible personal property will yield Federal tax savings ranging from $21,000 to $37,000.*
An additional and often substantial benefit of a cost segregation study is that it allows property owners the ability to write off the segregated assets (e.g. roof, windows, boilers, etc.) should they later become obsolete, damaged, or replaced.
We Help You
We work closely with the client, the client’s accountant, the construction engineer, construction manager, engineers and appraisers to break out portions of the realty and assign the associated costs into the proper asset categories. Because cost segregation is factually intensive, we rely upon a myriad of tax court cases, rulings, memorandums, pronouncements and promulgations issued over the past 40 years as support for the study.
Give us a call or contact us to receive a free consultation to determine if a cost segregation study can maximize your deductions.
In connection with our analysis, we issue a comprehensive report that includes explanations on the segregation of the property, testing procedures, estimated tax savings, as well as a detail of the various pronouncements and tax court cases relied upon. Depending upon the size and complexity of the project, hundreds of assets can be identified in a 100-200 page report.
For a free estimate, contact us today!
*Example assumes building is nonresidential real property. Significant tax savings were achieved through a special “100% bonus first-year depreciation allowance” in effect for qualifying property placed in service between September 28, 2017 and December 31, 2022. Federal income tax savings are dependent upon a variety of factors, including but not limited to form of entity (i.e., C-corporation vs. Pass-Through Entity) and the owner’s personal income tax bracket.
As required by U.S. Treasury Regulations governing tax practice, please note that any tax advice contained in this communication (including attachments) was not written or intended to be used for and cannot be used by the recipient or any taxpayer for the purpose of avoiding penalties that may be imposed under the Internal Revenue Code or applicable state or local tax law provisions.
Speciality: Business Valuation and Cost Segregation