A cost segregation study allows a business property owner to accelerate depreciation deductions. That, in turn, enables the owner to reduce current taxable income and increase cash flow.
A cost segregation study combines accounting and engineering techniques to identify building costs that are properly allocable to tangible personal property rather than real property. It then allows the personal property to be reclassified for tax purposes and deducted over a much shorter depreciation period. This strategy has been consistently upheld in the courts.
Fundamentals of Depreciation
Business buildings generally have a 39-year depreciation period. Typically, companies depreciate a building’s structural components (such as walls, windows, HVAC systems, plumbing, and wiring) along with the building. Personal property (such as equipment, machinery, furniture, and fixtures) is eligible for accelerated depreciation, usually over five or seven years.
Often, businesses allocate all or most of their buildings’ acquisition or construction costs to real property, overlooking opportunities to allocate costs to shorter-lived personal property or land improvements. Items that appear to be “part of a building” may, in fact, be personal property. Examples include removable wall and floor coverings, removable partitions, awnings, canopies, window treatments, and signs.
Shine a Light on Outdoor Savings
Rules for outdoor lighting, parking lots, landscaping and fencing are tricky but can still lead to current tax deductions in certain situations. These expenditures are generally treated as capital improvements, subject to the 15-year depreciation rule. For instance, if you replace your business lighting to upgrade it or provide greater security at night, it qualifies as a deductible capital improvement. Similarly, landscaping projects designed to boost your curb appeal or provide environmental benefits are considered capital improvements.
On the other hand, routine maintenance (such as the costs of mowing and watering the lawn surrounding your business building) typically fall into the category of deductible business expenses, just like minor repairs.
Worth Checking Out
Although the relative costs and benefits of a cost segregation study will depend on your particular facts and circumstances, it can be a valuable investment.
And, under the Tax Cuts and Jobs Act, the potential benefits of a cost segregation study may be even greater than they were years ago because of enhancements to certain depreciation-related tax breaks.
Contact our office for further details.