You’ve made a significant investment in your organization by purchasing, constructing or upgrading property. But you may be overlooking a smart tax strategy. It’s a given that you want to increase your cash flow and reduce your taxes. A cost segregation study can help you do that by depreciating real property over much shorter periods of time than the typical 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 reclassified as personal property and depreciated much more quickly (usually 5, 7, or 15 years). Flooring, signage, landscaping, and parking lots are examples of components that can
often be reclassified.
Tax Reform = Increased Benefits
Recent tax reform greatly increased the benefit of cost segregation. Under the new law, additional depreciation is available for property components that are assigned a depreciation life of 20 years or less. This “bonus depreciation” is now available on both new construction and acquired properties at a rate of 100% (up from a rate of 50% under prior law). This change makes cost segregation even more impactful.
For example, if you buy a commercial property for $1,000,000 (excluding land), the impact of cost segregation is illustrated at the right.*
First year depreciation is over 25 times greater when applying cost segregation!
These same benefits can apply to remodels, expansions, build-outs, residential rental property, etc. Changes to 179 expensing rules also favor taxpayers under the new law — roofs, HVAC systems, fire alarm systems and security systems may be eligible for 100% expensing in the first year!
The bottom line is, our clients who invest in a cost segregation study achieve an average ROI of 54 to 1, and tax reform will only make these benefits greater.
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.
CSH’s Certified Cost Segregation Professionals have the highest level of accreditation in the industry, and we’re one of only 16 firms in the country to employ such experts.
Our Proven 4-Step Process
Our in-depth, analytical approach involves a complete review of available architectural drawings. A thorough onsite inspection is also 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.
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.
No-Cost Feasibility Analysis
We offer a no-fee, no-pressure cost segregation feasibility analysis, so that you can consider whether a study will benefit your company. The process is very easy. We just need to know the property acquisition cost (less land value), the placed-in-service date, building square footage, and use of property (manufacturing, office, retail, etc.) in order to prepare a cost segregation benefit estimate.
If you have any questions about cost segregation studies or whether a study might be appropriate given your company’s unique situation, contact Brendan Walsh at firstname.lastname@example.org.