Business owners will reap many benefits from tax reform over the coming years, thanks to rate changes and new deductions. In the short term, however, there are several tax-minimizing strategies owners can act on now to increase the savings on their 2017 tax returns – one of which is conducting a cost segregation study.
What is a cost segregation study?
Business owners may have significant unrealized tax savings in their property and facilities. The standard tax depreciation life for a commercial building is 39 years and 27½ years for a residential building. A cost segregation study identifies, segregates and reclassifies the building-related cost into “personal property” or “land improvements,” which have shorter depreciable lives and accelerated depreciation methods for tax purposes.
Cost segregation applies to acquired or newly constructed properties, including renovations, expansions and tenant improvements, and can be performed on current year or prior year properties.
Additionally, bonus depreciation is applicable to the personal property and land improvements identified under cost segregation, which makes this strategy even more important and beneficial to taxpayers.
How does tax reform impact cost segregation studies?
The Tax Cuts and Jobs Act (TCJA):
- Decreased overall individual tax rates to 10, 12, 22, 24, 32, 35 and 37 percent and cut the corporate tax rate from 35 to 21 percent; and
- Increased the bonus depreciation rate from 50 percent to 100 percent for assets acquired and placed into service after September 27, 2017 and before January 1, 2023.
By utilizing cost segregation now for the 2017 tax filing season, taxpayers can:
- Accelerate depreciation deductions in tax years with a higher tax rate than the future tax rates under TCJA; and
- Determine the applicable bonus depreciation rate for the 2017 tax year based on the requirements and timing under the acquisition and in-service date rules.
Short window for greater tax savings
Business owners who acquired, constructed or renovated a building in 2017 or in a prior year without taking advantage of accelerated depreciation methods should consider cost segregation, but it’s important to act now. The lower tax rates effective January 1, 2018 mean business owners have a short window of opportunity to reap the benefits of cost segregation at the higher tax rates from 2017.
RKL offers cost segregation services
Ready to apply this powerful tax savings strategy and potentially increase cash flow for your business? RKL’s team can provide an analysis of the potential tax benefit and cost before engaging in a formal cost segregation study. Contact your RKL tax advisor or one of our local offices to find out whether your company can take advantage of this window of opportunity provided by tax reform.
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Contributed by Deborah S. Rock, CPA, consultant in RKL’s Tax Services Group. With over two decades of public and private accounting experience, Deb is an expert in the area of cost segregation, depreciation, fixed assets and the tangible asset regulations.