Cost Segregation Defined:
Cost segregation is a comprehensive analysis of building capital expenditures for the purpose of maximizing allowable depreciation. Cost segregation services identify and reclassify project costs from 39-year or 27.5-year depreciation to 5, 7, and 15-year depreciation. Reclassifying these costs generates significant income tax benefits and increased cash flow. These services can be beneficial for any facility you have recently purchased, constructed, or remodeled.
Examples Of Eligible Facilities:
Cost segregation services have benefited a wide variety of clients with facilities such as:
- Office Buildings - Apartment Buildings - Restaurants
- Health Care Facilities - Manufacturing Plants - Grocery Stores
- Hotels - Banks - Retail Centers
- Assisted Living Facilities - Automotive Dealerships - Warehouses
Project Example:
A facility is constructed, purchased, or remodeled for $2,000,000 not including the cost of land. Without a qualified cost segregation study, all of the costs are allocated to 39-year real property. Depreciation expense is approximately $51,300 per year under this method. The Facility Owner has a cost segregation study performed for the facility. The results of the study determine that 30% of the facility costs can be allocated to personal property with a depreciable life of 5 years and 15% of the costs can be allocated to land improvements with a depreciable life of 15 years.
As a result of performing a cost segregation study, the Facility Owner receives the following income tax benefits:
Increased Income Tax
Depreciation Savings at 45%
Year 1 $ 122,500 $ 55,100**
Year 2 $ 197,400 $ 88,800
Year 3 $ 117,800 $ 53,000
Year 4 $ 69,100 $ 31,100
Year 5 $ 66,800 $ 30,100
Total $ 573,600 $ 258,100
** With recently enacted 50% first year special depreciation allowances, the facility may qualify for first year tax savings of 227,300.
The Cost Segregation Process:
Analyze project drawings and specifications to identify assets that qualify for accelerated depreciation. For an existing facility, such information is not always available, and it is possible for a cost segregation to be performed with no information other than the facility's total capitalized cost.
· Review copies of contractor payment requests, private vendor invoices, change orders, and other construction or accounting documents to segregate costs into proper asset classifications for federal income tax purposes.
· Physically inspect the property to observe the nature and function of the property and its assets. Photographs are taken to assist in visualizing the property for later analysis and for documentation to support all asset classifications.
· Identify assets that need a specific cost breakdown. If the contractors involved are not able to supply this information, the cost of assets will be estimated using nationally recognized construction cost estimating manuals.
· Formulate results into a written report that includes detailed information about the project, asset photographs, an asset classification spreadsheet that segregates all assets into 5, 7, 15, and 27.5/39-year tax lives, and the cost segregation methodology used for each asset classification. The report also includes supporting references to the internal revenue code, court cases, tax citations, and revenue rulings.
Project Timing:
- Contact us early during the planning stage of a newly constructed facility or facility remodel/expansion. Early project choices made during the drawing and construction phases on materials and design can actually increase the amount of personal property ultimately classified for accelerated depreciation.
- Contact us today for an estimate of the potential tax savings. Recent IRS rulings allow taxpayers to claim understated depreciation without amending federal income tax returns provided a cost segregation study and the appropriate income tax forms are completed and filed with your current year's federal income tax return.
