When your business purchases, develops, or renovates a building, it can be useful to gauge the value of this investment by viewing it as a single expense. But when it comes to tax planning, treating your property as a single expense can be a costly mistake. If you depreciate your entire commercial building over the customary 39-year period, you could miss valuable opportunities to accelerate many depreciation deductions. Carrying out a cost segregation study can be a valuable way to increase your cash flow by taking advantage of more tax benefits now.
If you acquired or renovated a commercial building, a cost segregation study can help you identify which parts of the property have depreciation periods shorter than the standard 39 years. Unlike the structural elements of the building – such as walls, ceilings, and concrete floors – many building expenses, including “soft costs” like certain architectural or engineering services, can be depreciated in just 5, 7, or 10 years. By identifying expenses that depreciate faster, you can take advantage of more write-offs sooner. This increasingly common strategy has helped many businesses reap tens of thousands of dollars in immediate tax savings.
How It Works
A cost segregation study is a systematic analysis that details which parts of the building are “personal property” – or nonstructural elements of the building. A team will review financial documents and building plans and perform an on-site inspection. The study’s findings are then used to reclassify eligible expenses to accelerate their depreciation deductions. Expenses that can be depreciated faster include roofs, paving, HVAC, plumbing, and wiring.
Who Should Do It
Because of the time, complexity, and specialized engineering knowledge required, not all tax advisory teams have the resources for this effort. Fortunately, the increasing popularity of this strategy has made it fairly easy to find a specialty firm that can conduct a thorough study that stands up under IRS scrutiny. When looking for a qualified company, be sure to pick a team that charges a fixed fee or hourly rate, not a percentage of your tax savings – which presents a conflict of interest that could harm the integrity of the study.
Cost vs. Benefit
While cost segregation studies are valuable for many middle-market businesses, this approach isn’t right for every property. New software and best practices have helped make cost segregation studies more efficient, but a high-quality study can still run your business $10,000 or much more. To ensure your accelerated tax deductions justify the cost of the process, CPAs generally recommend this strategy for buildings or leasehold improvements with a cost basis of at least $750,000.