Cost Segregation Studies

Syndicated from John Deirmenjian, CPA.

Cost Segregation Studies can provide a range of significant benefits to businesses. These studies can be applied to buildings that have been purchased, constructed, expanded or remodeled since 1987.

In order to realize the maximum available benefits under current tax law, the IRS requires Engineers, CPAs, and possibly other professionals, to perform a Cost Segregation Study using the Detailed Engineering Approach.

Reclassification – Bonus Depreciation

The most notable benefit of this study is to maximize tax savings by adjusting the timing of deductions. This is accomplished by allocating eligible building costs from a 39 or 27.5 depreciable property classification to a 5, 7, or 15 year classification. These reclassifications may also allow for bonus depreciation, such as a §179 deduction, that would further increase savings. The present value of these savings is contingent upon the type of property evaluated, effective tax rate, and the rate of return used for the calculation. This spreadsheet can be used to estimate the amount of savings that could be realized. Please note that this spreadsheet excludes bonus depreciation, thus using a conservative approach.

A Cost Segregation Study can be completed at any time during the life of the building, so long as it has been placed in service by the taxpayer during or after 1987. However, it is more beneficial for the taxpayer to complete the study early in the asset’s life as opposed to later, due to the nature of present value calculations. If a taxpayer does choose to do a study later in the property’s life, recent tax law amendments have allowed for any retroactive tax benefits realized from the study to be recognized in their entirety during the year the study is completed. This, in turn, could produce or free up significant cash flow depending on the magnitude of the adjustment and/or whether a NOL carry-back or carry-forward occurs as a result of the adjustment.

Cost Segregation Study – The Audit Trail

By performing a Cost Segregation Study, an audit trail is simultaneously created, providing sound documentation regarding asset capitalization. As a result, IRS inquiries can be easily resolved and unfavorable audit adjustments can be avoided. Reduction of real estate tax, sales & use tax, and transfer tax can be another favorable advantage of completing a study. It can also provide great benefit to estate planning and like-kind exchanges by freeing up considerable cash flow.

Here is a list of some of the building types that may undergo a cost segregation study:

  • Amusement Parks
  • Apartment Complexes
  • Automobile Dealerships
  • Casinos
  • Distribution Centers
  • Fast Food Restaurants
  • Food Processing Facilities
  • Gas Stations
  • Golf Courses
  • Manufacturing Plants
  • Medical Centers
  • Nursing Homes
  • Office Buildings
  • Retail Chains/Franchises
  • Shopping Malls
  • Self Storage
  • Sports Stadiums
  • Supermarkets

Cost Segregation studies are among the most significant and effective tax saving strategies available to taxpayers, and should be considered by those that qualify.

See what the IRS has to say about Cost Segregation.

This post was written by Contributing Author Jason Deirmenjian, CPA of Plus Ultra Certified Public Accountants, 3225 S. MacDill Ave., Ste 129-102, Tampa, FL 33629. Phone: (813) 402-2556; Fax: (813) 944-5186.