What is a Cost Segregation Study?
A Cost Segregation study (CSS) is the process of identifying real property costs, typically in new construction or acquisitions. The objective is to accelerate depreciation for tax purposes.
Is a Cost Segregation Study Beneficial?
A business that has recently remodeled, constructed or acquired real estate can benefit from a cost segregation study. This type of study allows you to reduce your taxable income for the next several years. A cost segregation study can have a dramatic impact on cash flow.
The current depreciation rules, Modified Accelerated Cost Recovery System (MACRS), require that a newly acquired or constructed building be depreciated over 39 years on a straight-line basis. Under certain circumstances, MACRS allows for the reallocation of a portion of the property into asset categories having shorter depreciable lives (e.g. 5, 7, and 15 years).
The objective in performing a cost segregation study is to shift property (and the associated dollars) from categories, which have long tax lives to categories, which have shorter tax lives. This allows for greater depreciation during the early years of the asset’s life, thereby lowering taxable income and thus lowering taxes. The result is improved cash flow.
How a Cost Segregation Study Works?
A cost segregation study identifies construction components that are necessary for the operation of the business rather than construction components that are required for the operation of the building. JAH can assist you on identifying the building components. The factors in the process include: 1) Is the property capable of being moved, and has it in fact been moved?; 2) Is the property designed or constructed to remain permanently in place?; 3) Are there circumstances which tend to show the expected or intended length of affixation, i.e., are there circumstances which show that the property may or will have to be moved?; 4) How substantial a job is removal of the property and how time-consuming is it? Is it "readily removable?"; 5) How much damage will the property sustain upon its removal?; and 6) What is the manner of affixation of the property to the land? HCA
The pure building components must be depreciated over 39 years (27 years for apartment type buildings). HOWEVER, the building’s construction components that are required for the operation of the business can be depreciated over a shorter period (usually 5, 7 or 15 years). The shorter asset lives increase depreciation in earlier years, and increased depreciation results in lower taxable income in these early years.
Cost segregation does not eliminate the taxes owed. Cost segregation defers the taxes owed to later years. This results in significant savings today! The after-tax savings can be well in excess of twenty times the cost of the study.
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