According to the American Society of Cost Segregation Professionals, a cost segregation is “the process of identifying property components that are considered “personal property” or “land improvements” under the federal tax code.”
What does this mean?
Typically, commercial real estate can be depreciated over a 39-year life. However, the IRS allows certain items, considered to be personal property, to be depreciated over a shorter life – five, seven, or fifteen years – thereby accelerating the depreciation of those assets.
Some examples of these personal property assets include:
- Five-year assets: carpet, vinyl wall and floor coverings, kitchen water piping, primary and secondary electrical distribution systems;
- Seven-year assets: office furniture, fixtures, and equipment; and
- Fifteen-year assets: land improvements (i.e., sidewalks, paving, landscaping).
Land, itself, is never depreciated, as it is assumed to have an unlimited useful life.
In addition, the Tax Cuts and Jobs Act of 2017 and the CARES Act have both provided for bonus depreciation, allowing some personal property assets to be fully depreciated in the first year.
What is the Purpose?
A Cost Segregation Study is a tax planning tool for those individuals or businesses that have purchased, constructed, or remodeled real estate and want to increase their cash flow by reducing current tax liabilities through accelerated depreciation of their assets.
What are the Benefits?
Cost segregation can provide benefits to a company, including:
- Increased tax savings by adjusting the timing of deductions. By shortening the life of the asset, depreciation expense is accelerated, thereby decreasing tax liability in the early stages of the property’s life. This increases cash flow allowing the company to use it for investment opportunities or current operating needs.
- Creating an audit trail. A properly documented cost segregation helps resolve IRS inquiries at the earliest stages. This is important as incorrect documentation of cost and asset classifications can result in an unfavorable audit adjustment.
- Playing catch-up: As of 1996, taxpayers have been allowed to capture immediate retroactive savings on property added since 1987. Previous rules have been amended to allow taxpayers to take the entire amount of the adjustment in the year the cost segregation is completed, which again, can increase cash flows.
If you believe your company can benefit from a cost segregation study, contact Sobel EAC Valuations. Our experts will work with you and your financial advisors to determine if a cost segregation is the right tax saving tool for your company.