Cut your tax bill with a cost segregation study
Posted On: 3-4-2015 | Posted By: Chris Schneider, CPA, CVA
If you own real estate and have been involved in a commercial construction, expansion or renovation project, you might qualify for immediate tax savings by conducting a cost segregation study.
The proper classification of property construction or acquisition costs can result in significant savings of tax dollars.
A cost segregation study helps building owners enjoy significant tax savings by taking advantage of IRS-allowed depreciation expenses. In general, a commercial building is depreciated over 39 years, which means tax deductions for the cost of the building are recognized over 39 years. However, there are often components of the buildings with much shorter depreciable lives. A cost segregation study is the process of identifying and classifying those components.
Often times, items that could be classified with shorter class lives (such as 5, 7 or 15 years) are incorrectly included with the building cost and depreciated over 39 years. Examples of property qualifying for shorter depreciation lives include process-dedicated HVAC, electrical or plumbing; carpeting or other floor covering; and decorative items such as lighting and millwork.
Items that are part of the property but outside the building shell also qualify for shorter depreciable lives, such as landscaping, storm water control, parking lots and other land improvements. By segregating the cost of this short-life property from the building, a taxpayer can recognize greater tax deductions in earlier years and, often, improve cash flow.
Typical studies result in 20 – 40 percent of the building cost being classified in categories that accelerate depreciation when compared to the standard building depreciable life. The result is larger annual depreciation deductions in the initial 5 – 15 years a building is in service. In addition, recent projects have produced current year income tax deductions of 9 – 20 percent of the building cost. These accelerated deductions can produce substantial current tax savings. For example, a $600,000 building could produce a current year reduction in tax liability of $20,000 or more.
WK cost segregation studies are based on detailed records and invoices obtained from architects, engineers and contractors performing new construction or remodeling projects specific to your property. Although not necessary, the optimal time to obtain these records is during the construction process. Relying on actual contemporaneous records has been identified as a preferable method in IRS Technical Guides for Cost Segregation. Communication between the accounting consultants and the construction professionals during the project allows for an efficient exchange of appropriate information.
The proper classification of property construction or acquisition costs can result in significant savings of tax dollars. Our experienced cost segregation professionals, including Leslie “Trae” Lorts, CPA, CVA, Troy Norton, CPA/ABV, and Chris Schneider, CPA, CVA, can help determine if a cost segregation study is right for you. For more information, you can reach one of them or your WK advisor at (573) 442-6171 or (573) 635-6196.