Cost Segregation
Why do you need a cost segregation study?
Do you have a newly constructed building? Have you recently purchased a building? Are you planning a major renovation or expansion?
If so, and if you can benefit from tax savings related to accelerated depreciation, then you may be the perfect candidate for a cost segregation study.
What it is
Cost segregation studies are performed to analyze building costs to identify the cost of tangible personal property, indirect costs and land improvements. These identified costs can be depreciated using an accelerated depreciation method, thereby providing enhanced cash flow.
Who benefits
Most clients can benefit from a cost segregation study. However, more specialized buildings are more likely to be eligible for accelerated depreciation. We have found the most benefit for the following types of buildings:
- Manufacturing facilities
- Hotels and casinos
- Restaurants
- Hospitals and medical offices
- Apartments
- Senior living facilities
- Grocery stores
- Office and retail facilities
- Car dealers
How it works
Performing a supportable cost segregation engagement is a highly technical process involving an in-depth understanding of the current tax law and relevant case history. The Internal Revenue Code permits the structural components of a building to be depreciated over a 39-year period. Nonstructural components of a building are really personal property and can be depreciated over five or seven years. Land improvements can be depreciated over 15 years. When costs of the building can be segregated from a structural component into a nonstructural component, substantial tax savings can be realized. The amount of the savings is dependent on the size of the building and the nature of its assets.
In Summary
Cost segregation studies can yield substantial tax benefits to building owners in a wide variety of industries. Whether for new construction, a newly acquired building, an addition or renovation, a building owner should investigate the possibilities of a thorough cost segregation study performed by competent, experienced experts.
We welcome your inquiries about our services and will gladly meet to discuss your specific needs without cost or obligation on your part.
Guidelines for Average Building Costs Eligible for Accelerated Depreciation:
| Building Type | Average Costs Eligible |
|---|---|
| Manufacturing facilities | 20%–60% |
| Hotels and casinos | 20%–50% |
| Restaurants | 25%–40% |
| Hospitals and medical offices | 15%–30% |
| Apartments | 15%–40% |
| Senior living facilities | 15%–35% |
| Grocery stores | 15%–30% |
| Office and retail facilities | 5%–30% |
| Car dealers | 15%–35% |
It is important to note that these are only general guidelines. The costs that can be segregated are determined by the specific assets within a building. Your results may be greater or less than those above, but in general, buildings that fall into one of these categories tend to result in accelerated depreciation within these ranges.
Tax Savings Case Study
Assume you built a 40,000 square-foot manufacturing facility with construction costs totaling $2 million; and 20% of the total construction costs can be segregated into 5-year property and 10% can be segregated into 15-year property. The net present value of federal tax savings based on current federal tax law, a 10% present value factor and a 34% corporate tax rate is as follows.
Depreciation:
| With Cost Segregation | Without Cost Segregation | |
|---|---|---|
| Year 1 | $337,308 | $25,640 |
Net Present Value of Tax Savings:
| Year 1 | $114,685 |
| First 6 Years | $149,327 |
| 40 Year Life | $125,600 |
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