If you have acquired, constructed, leased, or renovated commercial property in the past 10 years, you may want to consider a cost segregation study. These studies shorten the depreciation time for taxation purposes, which reduces current income tax obligations and generates an adjusted cash flow to the owner. Properties already in service are often overlooked when it comes to cost segregation, however a property does not need to be newly constructed to reap the benefits of this tax planning strategy. A tax deduction today is worth more than a tax deduction next year, and worth much more than 40 years from now. Cost segregation operates on this same principle of the time value of money – by decreasing current income, you defer tax payment, creating a financial gain today!
What Is Segregation?
A “fully-engineered” study that allows building owners to write off their building (new & existing) in the shortest amount of time permissible and the depreciation is brought forward.
♦ These savings hidden in the walls, floors, ceilings, breakers, wires and even the landscape outside are reclassified by breaking down the components of the building
♦ These items depreciate at different rates. Through this differential, commercial property owners or lessees can increase cash flow and receive additional tax deductions.
♦ Cost Segregation began in the early 1980’s
The IRS states in their 2004 Cost Segregation Guide:
“The preparation of accelerated depreciation studies requires knowledge of both the construction Process and the tax law involving property classifications for depreciation purposes.”
Why are studies conducted by engineering firms vs. Accounting Firms?
The preparation of studies requires knowledge of the construction process and the tax law involving property classifications for depreciation purposes; a preparers credentials and level of expertise has a bearing on the overall accuracy and quality of a study. In general, a study by a construction engineer is more reliable than one conducted by someone with no engineering or construction background. Experience in cost estimating and allocation, as well as knowledge of the applicable law, are important criteria.
Benefits of a Cost Segregation Study (No Amending of Return)
♦ Reduce Individual and Corporate Income Tax
♦ Increase Cash Flow by Reductions of Taxes Paid
♦ Correct Mis-Classified Assets on a FAS
♦ Catch-Up Depreciation on Assets Going Back 15-years
♦ Potential to Reduced Property Insurance (personal property is less expensive to insure than business property)
Hayley Capital Sample Results
Cost Basis: $12,000,000
Accelerated: $4,560,000 (38%)
1st Year Tax Benefit: $828,308
5-Year Tax Benefit: $3,910,572
Cost Basis: $4.506, 400
Accelerated: $2,298,264 (51%)
1st Year Tax Benefit: $385,933
5-Year Tax Benefit: $1,979,054
Cost Basis: $725,000
Accelerated: $362,500 (50%)
First Year Tax Benefit: $76,319
5-Year Tax Benefit: $343,868
The Journal of Accountancy says,
“Cost segregation is not a tax shelter. It is an IRS defined and guided tax reduction tool. Ninety-percent of all commercial property owners are overpaying their federal income taxes”