A Cost segregation study allows commercial property owners and those carrying out leasehold improvements to save on their tax expenditure and redirect the money meant to cover Federal or state tax obligations back into their business. A lot of companies are utilizing the facility to avail funds for their expansion, research and other pertinent needs. This tax strategy is perfectly legal and approved by the Internal Revenue Service. It is however important to ensure that you get the right professionals to help you with the study.
What Is Cost Segregation?
This is a scientific study that is aimed at identifying personal property assets that are included in the real estate asset category. This is then separated for the purposes of tax reporting. The aim of the exercise is to maximize the tax benefit now through accelerating the depreciation of said personal assets. It is a cash flow strategy that is widely practiced due to its immense benefits. There are rules to the way this depreciation can be done.
What Is Cost Segregation?
This is a scientific study that is aimed at identifying personal property assets that are included in the real estate asset category. This is then separated for the purposes of tax reporting. The aim of the exercise is to maximize the tax benefit now through accelerating the depreciation of said personal assets. It is a cash flow strategy that is widely practiced due to its immense benefits. There are rules to the way this depreciation can be done.
Personal property items that can be isolated when segregating and classifying a building’s components include non-structural items, namely carpeting, wall covering, parts of the electrical system, and lighting, among others. It also includes things like sidewalks and landscaping.
Who Qualifies?
• A study to segregate costs is beneficial to any owner of property who:
• Constructed or purchased a commercial facility or building any time after 1986
• Incurred an expense associated with facility or office leasehold improvements
• Remodeled, renovated, restored, or expanded an existing building or facility
• Acquired an apartment complex or building, or any other commercial residential property
Others who can benefit from the tax strategy include owners of storage facilities, hotels, hospitals, grocery stores, gas stations, fitness centers, casinos, car washes, medical facilities, restaurants, assisted living facilities, apartment complexes, and auto dealerships, among others.
How It Works
Instead of depreciating your building on a straight line basis according to tradition, a segregation of costs gifts you with a better alternative. The components of the building which are reclassified are moved from a depreciation period of 27.5, 31.5, and 39 years and moved to 5, 7, or 15 year depreciation periods. This brings several advantages which include an instant increase in your cash flow, a reduction in your existing tax liability, an ability to defer taxes and also claim missed depreciation deductions from previous tax year is without necessarily having to amend your tax returns.