What is Cost Segregation?
Whether you are constructing a new building, expanding an existing one, purchasing real estate, rehabilitating an old facility or relocating with leasehold improvements, your property can generate much bigger tax savings than you realize. Substantial tax and cash flow savings can be achieved by taxpayers who properly classify their construction or acquisition costs between real and personal property.
A cost segregation study ("CSS") is an engineering-based study of all costs associated with the acquisition or construction of a building. The purpose of this study is to classify these costs as either real or personal property, with the personal property additions being depreciated on an accelerated basis. Normally, these costs are assigned a 39-year depreciable life for tax purposes. However, through a cost segregation study, some of these costs may qualify for a 5, 7 or 15-year depreciable life, resulting in a savings of up to 22 cents on every dollar. Examples of assets that have qualified for accelerated depreciation include land improvements, parking lots, fencing, outdoor lighting, landscaping, wall and floor coverings, intercom and security systems, specialized heating, ventilation and cooling systems related to specific business requirements, storage and shelving, moveable wall partitions, and many others building assets.
Properties with the best savings potential include, but are not limited to:
- Manufacturing and Industrial Plants
- Office Buildings
- Retail Stores and Chains
- Hotels and Motels
- Shopping Centers
- Apartment Facilities
- Medical Facilities
- Restaurants
An effective, supportable cost segregation analysis requires engineering and valuation skills; a knowledge of construction methods, materials, and costs; and a knowledge of income tax regulations, court cases, revenue rulings, and procedures. Our detailed cost segregation studies pay for themselves many times over, starting with the first year the property is placed in service. By investing in a professionally prepared cost segregation from The Cost Segregation Group you will have the assurance that you have maximized your depreciation benefits and have fully documented support for your depreciation claims should you be audited by the IRS.
How Is The Study Performed?
The CSS process is in-depth but non-intrusive. Our cost segregation specialists use an engineering-based approach, as specified by the IRS. On newly constructed properties, our engineers examine the architectural/engineering drawings for potential asset reclassification. A physical inspection is performed. Cost data including the contractor's application for payments, change orders, owner incurred cost and disbursements are examined. Direct labor, material components and indirect costs are allocated based on analysis of drawings and specifications.
An existing property without the above documentation requires a different approach. The specialist must become familiar with the purpose and major functions of the property as well as the components of the building. A full analysis of the property is conducted, including inspection, measurements and photographic documentation. This allows the specialist to reconstruct the property on paper, which includes listing all the components. The components are then valued using standard construction cost guides such as R S Means Building Construction Cost Data. Replacement costs are adjusted to account for property condition and to adjust to actual cost basis.
A Windfall For Real Property Built or Acquired Previously
You now have a valuable opportunity, courtesy of the IRS, if you constructed or purchased real estate in a prior year but did not take advantage of a cost segregation study. This IRS gift horse allows you to retroactively deduct depreciation amounts that you were legally entitled to, but did not claim due to erroneous property classifications.
It is critical that professionals with the requisite knowledge of the tax laws and IRS guidelines conduct your CSS. Our on-staff team of CPAs and engineers have the expertise in construction and project design from both an engineering and tax perspective to perform a CSS on any commercial or residential property.
The Report
The report includes preparer information, certification, project background information, cost segregation methodology, limiting conditions, asset classifications, tax classifications and support, detailed take-off reports, and photographs.
