Basic Facts of Cost Segregation

Cost Segregation Study Tax Reporting
Cost Segregation

Cost segregation is a process which involves separating personal property assets from real property assets for the purpose of shortening the time of depreciation and reducing tax liability. In a cost segregation study, assets are classed together according to their depreciation period. Cost segregation has the potential to save building owners large sums of money because it enables certain costs to be depreciated over a much shorter period of time (5, 7 or 15 years) than they normally would be (27.5 or 39 years).

Personal Property Assets

Certain elements of a building may be categorized as the “personal property” of the owner as opposed to real property for tax purposes. For instance, non-structural elements – such as wall covering, carpet, lighting, certain parts of the electrical system and others – may be categorized as personal property in most instances. Certain types of land improvements – such as landscaping and sidewalk improvements – may also be categorized in this manner. When categorized in this fashion, these elements will have relatively shorter “useful lives” than they otherwise would have, and consequently owners may have a reduced tax burden and may take advantage of depreciation deductions.

Typically, cost segregation studies are financially prudent for buildings which have been bought or remodeled for over $200,000. Cost segregation studies can be performed on any building which has been bought, constructed, expanded or remodeled since 1987. Hence, studies can be performed “retroactively” on buildings which are not newly completed.

Cost segregation can be a tremendous positive force for business owners as it can give them access to cash much more quickly than would otherwise be possible. In the world of business, timing is of immense importance, and so taking earlier deductions can literally alter the whole direction of a company’s long-term future.

Cost Segregation Studies

The IRS scrutinizes cost segregation studies very thoroughly. This is because such studies can – and frequently do – translate into many thousands of dollars in tax savings. When hiring someone to perform a cost segregation study, it is important that your hire be well-informed not only on the relevant architectural and engineering specifications but also on the applicable law. Simply hiring a construction engineer or architect with no prior experience with cost segregation analysis is unadvisable. There are heavy penalties imposed by the IRS when cost segregation is used improperly and so it imperative to hire a qualified specialist to perform the analysis.

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As we’ve seen, cost segregation has the potential to save business owners lots of money. To learn more about cost segregation, curious readers should view the following presentation by Huddleston Tax CPAs principal and founder, John Huddleston

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