Cost Segregation began in the early 1980’s and is an established IRS tax law accelerating depreciation for for-profit commercial property. Because the benefit of cost segregation can be significant in amount of tax savings, savvy, knowledgeable real property owners utilize cost segregation as a routine step in the process of preparing their income tax returns. With the popularity of cost segregation, many commercial property owners are unclear about how cost segregation fits into tax law. A fully engineered study works for older or newly constructed properties but is most efficient for new buildings projects while they are still in the design stage or under construction.
Existing commercial property owners are often overlooked as we can “look back” and catch up all remaining depreciation without amending the tax return.
Cost segregation has evolved from years of litigation and rulings rather than from a Code section or succinct ruling, the legal basis underlying cost segregation can be confusing. A common perception is that cost segregation is a method that is an elective provision that the IRS considers to be an aggressive filing position. This perception sometimes causes real property owners to avoid cost segregation and, in turn, miss out on benefits that can be substantial.
Our fully engineering approach to cost segregation analysis is unique in the industry. Using a customized engineering software built for our customers’ needs, we are able to utilize other often unused tax laws due to the software’s ability to perform this to our exact instructions. We also plan to inspect all subject properties to secure photographs documenting those components that qualify for accelerated depreciation. Our studies reconcile ALL project costs, and include a complete analysis of all property components, including 39-year assets. This detail allows owners to take advantage of future write-offs with this comprehensive management tool allowing a simple reference to retire asset components on demand.
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.
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!