By Michael J. Arens, CPA
A cost segregation study can be a valuable tax savings strategy for owners of business real estate. Cost segregation studies are a method for tax purposes that allow both new and existing buildings to be depreciated over a shorter period of time. Cost segregation offers facility owners the opportunity to defer taxes, reduce their tax obligation, and improve current cash flow.
Cost Segregation Defined
Cost segregation allows business real estate owners to reclassify portions of real property (i.e. buildings) to tangible personal property or land improvements. This allows assets to be depreciated over substantially shorter tax lives, allowing for increased depreciation deductions in earlier years. Normally, commercial buildings are depreciated over a 39-year tax life. However, a cost segregation study can reclassify certain costs to a five, seven, or 15-year tax life. These accelerated depreciation deductions result in a lower tax liability and increased cash flow. Through the time value of money, the increased savings can be invested back into the business for future benefit.
The study can be done on a new or existing building. The Internal Revenue Service (IRS) allows an accounting method change on buildings that have previously been placed in service. These expenses allow the taxpayer to “catch-up” depreciation deductions from previous years and deduct fully in the year of the cost segregation study. This often results in significant current-year tax savings.
Cost Study
The process of reclassifying assets by distinguishing between tangible personal property and building structural components can be a complicated one. As a result, the IRS requires an “engineering-based” cost study to be performed to determine the appropriate amount of time permissible to depreciate a structure based on current tax laws.
Engineering-based cost segregation studies provide more precisely segregated property information. A wide range of building components are examined and can be reclassified into shorter-lived asset classes. Some of these items include electrical installations, plumbing, mechanical components, and finishing.
Information Needed to Obtain a Quote
Through our independent membership in the BDO Alliance USA, HBE is able to collaborate with BDO USA, LLP and offer cost segregation services. BDO’s Fixed Asset Advisory Team focuses on cost segregation studies. BDO can offer a free estimate of the fee to conduct the study and the potential amount of tax benefit.
Obtaining a quote is a fairly simple process. The information needed to conduct the study is a depreciation schedule, county assessor data, and a final contractor billing statement if the study is for new construction.
For more information about cost segregation services, please contact our office at (402) 423-4343. As always, our team of trusted advisors is here to help identify key tax planning strategies to minimize your current and future tax liabilities.