If your company is planning to build, purchase or renovate a building, or has done so in the past several years, a cost segregation study is a powerful tool that may help boost your cash flow and decrease your tax liability. This FAQ was designed to help you determine whether a cost segregation study is right for you.
Who should consider a cost segregation study?
Any taxpayer could reduce taxes and greatly increase cash flow through a cost segregation study if:
- The company is planning to or has recently constructed or purchased a building
- The company recently renovated an existing building they own or lease
- The construction/purchase/renovation price was at least $300,000
What are the benefits?
The benefits of a cost segregation study include:
- A rapid and significant uptick in cash flow
- A decrease in your current tax liability
- The ability to defer taxes
- The opportunity to reclaim past depreciation deductions
What exactly is cost segregation and how does it work?
Cost segregation is a valuable strategic tax planning tool that separates real property into various depreciable categories, and allows taxpayers to depreciate property over much shorter periods of time than the typical 39-year period.
When you purchase a property, you acquire more than just a structure: you’ve gained a set of building components. While you may look at this as one piece of property, 20% to 40% of the building’s parts and pieces may be looked at differently by the IRS. While structures are normally depreciated over 39 years (27.5 years for residential), it’s possible that some components of your property can be depreciated over 5, 7 or 15 years.
The objective of a cost segregation study is to allocate each of your property-related costs into their appropriate property classes in order to better calculate depreciation deductions. The idea is to analyze – and suitably separate – what’s part of the building, and what’s part of your business.
How does tax reform impact cost segregation?
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.
What types of items are identified and reclassified in a cost segregation study?
Examples of items that could be reclassified include portions of your:
- Parking lots
What types of properties qualify?
Many building types could benefit from a cost segregation study, including:
- Office buildings
- Retail centers
- Apartment buildings
- Manufacturing facilities (heavy or light)
- Grocery stores
- Auto dealerships
- Golf courses
- Research and development centers
I purchased (or constructed) a new building a few years ago? Can I still benefit?
Absolutely. Too many property owners are under the mistaken impression that a cost segregation study must be performed in the year of purchase or construction, and therefore don’t pursue this opportunity. In reality, facility owners are able to perform cost segregation studies on buildings purchased, built or improved in prior years. That’s because current IRS rules allow you to “catch up” the additional depreciation in the current tax year, and there’s no need to amend tax returns. In fact, you could see current-year tax benefits from real estate transactions that took place ten or more years ago depending on the size and purchase price of the building.
Isn’t it just a timing thing? Won’t my building depreciate anyway?
While it is true that your building will depreciate anyway, a cost segregation study can significantly increase your cash flow in the short term, and it provides long-term benefits due to the time value of money (a dollar is worth much more to your business today than it will be in 39 years). Click on this case study for a demonstration of the benefits of a cost segregation study.
How long does a cost segregation study take to complete?
A cost segregation study typically takes 30-60 days to complete. The timing is often based on the size of the project and whether all of the information and documents are provided up front.
What documents are needed to complete a study?
Types of documents typically include: architectural drawings, construction contract, construction budget for the project (if not included with the contract), contractor’s payment applications throughout the project, change orders, contractor’s final application for payment and final project costs breakdown.
What does a cost segregation study typically cost and what’s the return on investment?
The cost and ROI of a cost segregation study will vary depending on the size of the property, building type, and other physical characteristics. Fees typically range from $5,000 to $15,000 to complete a study, and our clients have realized an average ROI of 54 to 1. That’s right, if a cost segregation study costs a company $10,000 to conduct, they would likely realize a net present value benefit of $540,000 (depending on property type and purchase price).
Can’t I do a cost segregation study myself? Why do I need to work with a firm that specializes in conducting cost segregation studies?
The IRS requires engineering-based cost segregation studies to be performed. Your study should be conducted by a firm that demonstrates expertise in engineering, construction, tax law and accounting principles. Clark Schaefer Hackett’s cost segregation practice is led by Brendan Walsh, a licensed attorney and Certified Cost Segregation Professional (CCSP) who has more than 10 years of experience in cost segregation. Brendan is one of only three individuals in the State of Ohio credentialed by the American Society of Cost Segregation Professionals. Nationally, Brendan is one of only 32 CCSPs.