You’ve made a significant investment in your organization by purchasing, constructing or upgrading property. But you may be overlooking a smart tax strategy. Cost segregation studies separate real property into various depreciable categories, and allow taxpayers to depreciate property over much shorter periods of time than the typical 39-year (or 27.5-year) period. By taking deductions sooner, you lower your current-year tax liability and free up more capital.
Increase cash flow and reduce taxes
How It Works
When you purchase a property, you’ve purchased a building and its components. While the real property is typically depreciated over 39 years, 20-40% of the purchase can often be separate into personal property and depreciated much more quickly (usually 5, 7 or 15 years). This decreases taxes and boosts cash flow.
Our Proven 4-Step Process
In order to segregate the building into proper asset classes (e.g., land, land improvements, building, equipment, furniture and fixtures), an in-depth, analytical approach is used, which involves a complete review of available architectural drawings. In addition, a thorough on-site inspection is performed to visually identify the proper asset classes for the building and its components.
- Examine all construction drawings, construction contracts, payment applications, change orders, project costs breakdowns, and depreciation schedules, as available.
- Perform a thorough on-site inspection and visually identify or confirm the proper asset classes for the building and its components.
- Classify the building/construction cost into the appropriate depreciation categories as personal property or real property.
- Estimate the cost of property components using industry-standard cost estimating data, when actual project cost information is not available.
It’s not enough to simply classify the assets into the appropriate categories without a thorough explanation as to why the classification decision was made. Our analysis will include specific citations of the legal sources that justify the classification of the assets, as well as a detailed explanation of the rationale for making such classifications.
- Assemble the results of the asset classifications into easy-to-read tables showing how costs were allocated, how estimated costs were reconciled to actual building costs, and the proper tax life for each property component.
Substantiate Our Findings
We prepare a detailed, comprehensive report describing the cost segregation analysis, which includes all of the project information necessary to substantiate the classifications. The cost basis of each asset is justified and supported. Total allocated costs (i.e. materials, labor, and indirect costs) are reconciled to total actual costs.
Implementation and Filing
We will prepare the necessary tax forms to be filed with the IRS indicating your implementation of the cost segregation analysis. We will assist your internal staff to make sure the asset allocations are properly recorded. Also, we are available to represent you in the event that any of the asset classifications are questioned in a government audit.
- Prepare, where necessary, Form 3115 (Application for Change in Accounting Method) to adopt the cost segregation class lives.
The results of a cost segregation study can help your bottom line with:
- Substantial accelerated tax deductions
- Increased cash flow
- Special depreciation allowances (i.e. Section 179 or bonus depreciation)
Our work is performed in accordance with current tax authority, including the Internal Revenue Code, court decisions, revenue procedures, revenue rulings and Treasury regulations. Further, our analysis uses the standards set forth in the Cost Segregation Audit Techniques Guide utilized by the Internal Revenue Service.
Our Expertise – Your Satisfaction
Clark Schaefer Hackett’s tax team is proud to offer strategic advisement that appropriately reduces tax burden. At CSH, we don’t just serve clients; we create remarkable client relationships.
To further explore Clark Schaefer Hackett’s cost segregation services, contact Brendan Walsh.