Watch the video
Run-time: 02:11 Get a helpful overview of the how’s and why’s of cost segregation studies, a powerful tax savings strategy that could increase cash flow for your business.
Accelerated tax deductions and increased cash flow are two things all businesses would like to achieve, but there are companies that have not yet considered cost segregation analysis as a way of attaining these goals.
How Does a Cost Segregation Study Work?
The first question many ask about this process is: how does it work? Cost segregation studies analyze the cost associated with a building to identify the portion of that cost that can be considered “personal property” or a “land improvement,” which are depreciated over a shorter life for tax purposes. Keep in mind that what we call a “building” has a long tax depreciation life – a commercial building is depreciated over a 39-year period, and residential buildings have a 27 ½-year depreciable life.
This reclassification results in accelerated tax depreciation in the earlier years of the building, which means reduced taxable income and increased cash flow. Cost segregations are applicable to:
- Construction of a new building
- Renovation or expansion of current facility
- Purchase of a building
- Renovations made to a leased building
- A building already owned
What if You Purchased a Building Years Ago?
There are apparent tax benefits to conducting a cost segregation during the early stages of a property’s life. But what if you have already owned your facility for several years? Have you completely missed out on valuable tax deductions? No. Cost segregation analysis can be applied to past projects as well as current ones.
If you’re not performing a cost segregation study today on a building that you have already owned for some time, favorable IRS rules allow taxpayers to change their accounting method to recognize these changes to shorter asset lives without amending past tax returns. In that case, all of the prior “missed” depreciation can be claimed in the year that the study is performed, and the accounting method change application is filed with the IRS.
What is the Real Benefit of Cost Segregation?
Some of you might be wondering: what is the real benefit to a cost segregation study? After all, you are still going to get the same tax depreciation deduction over time whether or not you use the cost segregation approach.
The question is one of timing. You can take a portion of your building cost and have it depreciated over these shorter tax asset lives of five, seven or 15 years instead of the typical 39 or 27½ years. Getting accelerated depreciation deductions means you pay less tax in the earlier years of your building project. Who couldn’t use that additional cash flow to pay down some debt or reinvest in their company?
Interested in finding out how a cost segregation study can benefit your business? RKL is unique in Central and Eastern Pennsylvania for our depth of knowledge and experience with this tax-saving tool. Our team of specialists can provide you with an initial analysis of potential tax savings to help you make an informed decision. Contact Rob Gratalo, Tax Services Group Partner, at 717.843.3804 or firstname.lastname@example.org to learn more.
Contributed by Deborah S. Rock, CPA, manager 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 studies. She also has extensive experience in state tax consulting including nexus studies, sales tax consulting, tax advantage restructuring, and process improvement.