MLR

Cost Segregation Studies

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… a power tool for tax savings

Could money be hidden in the walls of your property?

Have you recently purchased a new building? Are you planning to construct a new facility? Are renovations of your existing building in your plans?

If you answered “yes” to any of these questions, you may want to consider a cost segregation study – an innovative method that could potentially bring thousands of dollars in tax savings over several years.

An engineering-based cost segregation study is a powerful and strategic tool that allows business and individual property owners to increase their cash flow through depreciation benefits while minimizing their tax liability. It identifies parts of real estate property that qualify for accelerated depreciation – for example, carpeting, fencing and specialty electrical systems. The shorter the depreciation period, the greater the tax savings.

At our firm, we realize how important it is for our clients to take advantage of every tax opportunity. Contact us for a free feasibility study to determine the possible tax savings a cost segregation study would bring you.

What is a cost segregation study?

A cost segregation study is an in-depth analysis of the costs incurred to build, acquire or renovate a real estate holding. Typically, these costs are capitalized and depreciated over 39 years for commercial real estate and 27.5 years for residential real estate.

But many construction-related costs are eligible for accelerated depreciation. These include personal property items with a 5- to 7-year depreciation life and land improvements with a 15-year depreciation life.

Items that qualify for accelerated depreciation include office furniture, carpeting and millwork, as well as some not-so-obvious construction costs like architectural fees, security systems, ventilation and exhaust systems, decorative lighting and fences.

Reducing tax lives from 39 years (using straight-line depreciation) to 5, 7 or 15 years (using accelerated methods) allows an organization to significantly decrease its tax liability and increase its cash flow.

Remember, the shorter the depreciation period, the greater the tax savings. Knowing the difference is critical.

How does it work?

The key to a successful cost segregation study is combining the expertise of architects, engineers and certified public accountants who are experienced in cost and construction estimating, tax codes and providing detailed documentation outlined by the IRS.

In an effort to provide you with a thorough and comprehensive study, our team of cost segregation specialists implements the following seven-step approach.

  1. Review architectural/engineering drawings and specifications, including blueprints, contracts and invoices.
  2. Reconcile all costs associated with the project.
  3. Itemize assets qualifying for shorter life classification.
  4. Physically inspect the facility.
  5. Allocate indirect project costs, such as construction, architectural and engineering fees, permits, etc., to all project-related assessments.
  6. Recalculate depreciation schedules.
  7. Prepare various tax filings and issue a final report.

Who should consider a cost segregation study?

A cost segregation study will reap the greatest benefits if you meet the following conditions:

  • Your property costs more than $1 million.
  • You have owned it for less than 10 years.
  • You are in a high tax bracket.
  • You are not planning to sell the property in the near future.

Significant benefits can be achieved by owner/tenants of various types of property – from industrial buildings to restaurants to athletic facilities.

What is the savings potential?

Every dollar segregated from 39-year property
to 5-year property is worth 22 cents, and
every dollar segregated from 39-year property
to 15-year property is worth 8 cents.

Categorizing as many items as allowable on shorter depreciation schedules can lead to enormous federal and state income tax savings.

For instance, every $1 million in assets reclassified from a 39-year recovery period to a 5-year recovery period results in a net present value of over $200,000.

Additional benefits received from a well-designed cost segregation study include reduction of real estate and personal property taxes, increased cash flow, opportunity to claim “catch-up” depreciation without amending prior returns and information that is invaluable in managing capitalized assets.

How much does it cost?

The fee for a cost segregation study depends on the scope and scale of the analysis and the condition of the available documents. For most of our clients, the benefits of performing this analysis often outweigh the cost by factors of ten times or more. A cost segregation study could easily save you thousands of dollars in tax payments. Our team of cost segregation specialists would welcome the opportunity to research the feasibility of a study for you.

When should a cost segregation study be performed?

The best time to conduct a study is prior to the completion of construction on a new building or during the remodeling of an existing building. This allows for effective coordination between the cost segregation consultant and the general contractor who is familiar with project details and related costs. Ideally, the cost segregation study should be completed during the year the building is placed in service.

However, a cost segregation study is not limited to new buildings or to newly acquired older buildings. It is also available for existing buildings placed in service as early as 1987, for which prior cost segregation opportunities have not been identified. A study can reclassify costs that were incorrectly depreciated in prior tax years and recoup the deductions immediately, without refiling additional tax returns.