10 Myths About Cost Segregation Studies
My accountant probably did one. Unless it was done subsequent to May 13, 1996 when the tax laws changed, then you are probably depreciating your assets incorrectly. In the case of purchased buildings, if you do not have a specific appraiser’s report or a professional who has construction cost estimating expertise using national industry costing manuals such as RS Means or Marshall and Swift breaking out the various building components, then you definitely did not have a cost segregation study performed on the building.
A cost segregation study won’t save any money. This is true only if the entity or pass thru entity is losing money and has no ability to either carry back or carry forward the losses generated. Otherwise, the savings generally range from 35% to 46%* of the additional depreciation generated from the study. For example, if a cost segregation study results in additional depreciation of $1,000,000, then a taxpayer in the 46% tax bracket would save $460,000 in federal and New York state taxes over four years.
We don’t have any assets to reclassify. Generally, 20-55% of building costs can be reclassified to shorter depreciable lives.
Our chances of being audited will increase. Not according to the IRS. You are filing an automatic change in accounting method which the IRS has pre-approved assuming the form is filed correctly. In addition, the IRS has issued a publication to follow in order to properly record the changes in depreciable lives. Keep in mind that you are going from an incorrect method to a correct method and the changes made are generally black and white issues within the tax code.
There is no support if the IRS does perform an audit. There are over 75 IRS rulings, procedures and court cases which allow for cost segregation studies. The report we provide details out every change with applicable support and documentation. Our firm has spent over 1,000 hours on researching cost segregation studies and performed hundreds of such studies.
We will get the deduction in the future anyway. Yes this is true, but a cost segregation study in effect gives you an interest free loan from the government for the first 15 years which you will then repay interest free over the remaining 25 years. Who do you want holding your money? There are also advantages to doing a study if the building is going to be sold or upon the death of a building owner.
We are in an alternative minimum tax (AMT) situation and/or the cost segregation study will put us in one. Congratulations! You are probably flush with cash. If this does occur, the savings will be at the 28% federal tax rate and not the 35% to 39% tax rate. Of course the amounts are large enough so it shouldn’t matter. In addition, the AMT taxes can be used against regular taxes in future years.
My CPA has segregated percentages of construction costs based on invoices or contractors application for payment, so our company is already benefiting. Without the contractor/engineer expertise coupled with the tax law guidance, there will likely be valuable tax benefits left on the table. More importantly, this methodology will not withstand IRS scrutiny.
A cost segregation study will complicate estate planning. Yes it might, but the rewards of performing a study have great financial benefits if the owner of the building dies before the building is fully depreciated. Due to the “step-up in basis” rules, it is one of the rare times a taxpayer can “have his cake and eat it too.” If done properly, a cost segregation study is an estate planning home run.
There is no negative impact to not performing a cost segregation study. This is an incorrect assumption. IRS regulations require that a taxpayer compute depreciation on hat is allowed or allowable. Therefore, if you improperly depreciate a 7-year asset over 39 years, the IRS could disallow the depreciation on the asset beginning in year 8. In addition, if the building is sold the IRS could increase the gain by reducing the basis in the building by the depreciation that should have been taken in prior years, but was not.
*Assumes federal tax rates between 28% and 39%.
How Cost Segregation
Can Substantially Lower Your Tax Bill
Cost Segregation is a process to identify personal
property assets that often get buried or lumped together within
the real property asset. Our consultants reclassify those
asset costs to the shortest possible depreciable life to enable
the real estate owner to maximize their tax depreciation deduction,
thereby reducing current income tax obligations. If you are undertaking
construction, renovation or purchase of a building, you may be eligible
for substantial state and federal tax savings.
Certain assets related to the project may qualify
for accelerated depreciation, meaning you can take larger tax deductions
over a shorter period. The benefits of larger tax deductions include increased
cash flow and lower cost of capital in the first few years
following a project or purchase. A cost segregation study, conducted
by the qualified professionals at Cost Segregation Partners
can help you identify opportunities to claim accelerated depreciation.
Substantial tax savings for your business may lie in the floor beneath
your feet, within the walls around you or even in the shrubs outside
your building. But only a cost segregation study, performed
by a qualified CPA, can tell you for sure.
What is it For?
A cost segregation study is a strategic analysis
that allows companies that have constructed, bought, expanded or
remodeled real estate to increase their cash flows by accelerating
depreciation-related tax deductions. To do so, the study identified, segregates and reclassifies
property costs currently being depreciated over the typical 39-year
depreciable period to shorter depreciable periods of 15, 10 seven
or even five years. This means you can enjoy tax deductions right
now that you’d otherwise have to wait years to receive. So
you’ll not only increase the net value of current tax savings,
but also boost your cash flow.
A cost segregation study may be a particularly
wise move if you’re:
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Building a new
facility |
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Acquiring an
existing building |
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Improving, renovating
or expanding an existing building, or |
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Conducting leasehold
improvements on your current facility. |
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The analysis works most efficiently for new buildings under construction,
but it can uncover retroactive deductions for older buildings as well.
Who’s involved?
A cost segregation study is not a mere depreciation analysis. It
calls for far more than just classifying line items from construction
invoices. The process requires a team of experts well-versed
in accounting regulations and tax laws, as well as engineering and
construction principles. Your CPA will play a starring role,
quantifying building components and estimating the costs of those
components under IRS guidelines. The team may also include a
contractor, engineer and architect.
Together, they’ll analyze detailed working drawings, mechanical and electrical
plans, and blueprints to segregate the structural, electrical and mechanical
components from those linked to personal property. The study will also
allocate “soft costs,” such as architect and engineering fees, to
all components.
How Much Can You Save?
Property owners often view building components
as parts of the entire structure and depreciate everything over
39 years. But many
expenditures fall into categories with much shorter depreciable lives.
For instance, you may be able to define the parking lot as 15-year
property, and landscaping and shrubbery for the outside of the building
as 10-year property. You could also classify lighting and plumbing
fixtures, as well as carpeting using in a new showroom, as seven-year
property. And don’t forget items such as electrical and
ventilation systems, phone lines, computers and furniture,
which can be classifiable as five-year property.
Also, the current Section 179 expensing rules still apply
for depreciation if you operate your business as a limited
liability company and hold your building in that entity. And
perhaps best of all, the fee for the const segregation
study that brings about these savings is generally only 10% to 20% of the resulting
cash flow increase.
Who Benefits
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Apartment Complexes |
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Automobile Dealerships |
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Distribution
Centers |
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Fast Food Restaurants |
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Food Processing
Facilities |
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Hotels/Motels |
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Manufacturing
Plants |
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Medical Centers |
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Nursing Homes |
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Office Buildings |
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Retail Chains |
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Shopping Malls |
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Sports Stadiums |
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Supermarkets |
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Investment Eligibility
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All post 1986
real estate construction, building, acquisitions or improvements |
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New buildings
under construction |
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Existing property
constructed anytime, but placed in service after 1986 |
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Purchase of
existing property |
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Existing buildings
undergoing renovation or expansion |
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Office leaseholds improvement and fit outs |
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Our dedicated Cost Segregation consultants have completed over 2,500
Cost Segregation Studies for clients throughout the United States ranging
in size from a $1,000,000 facility to a $200,000,000 facility. Tax enactments
by President Bush in 2002 have amplified the need for Cost Segregation
with the right team of qualified engineers, appraisers and CPAs. As
the tax law is unjust with the recovery period on commercial real estate
and leasehold improvements to 40 years, it now becomes imperative to
review your real estate to shorten the recovery life on assets buried
or hidden within the building.
Download our Cost
Segregation Study White Paper 
IRS Cost Seg Guidelines
