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Cost Segregation Studies

A Powerful Tool for Building Owners to Accelerate Deductions and Enhance Cash Flow

BACKGROUND

The tax attributes of a building are poor. Unlike employee wages or utility bills, taxpayers do not get an immediate tax deduction for the purchase of a building. Residential rental property is depreciated over a lengthy 27.5 years whereas commercial real estate is depreciated even longer over 39 years. However, IRS rules allow non-building components such as personal property and land improvements to be segregated from the building and depreciated more rapidly, generally over 5, 7, and 15 years (click here to learn about depreciation periods and asset class lives). This type of analysis, called a Cost Segregation, drastically improves cash flow by accelerating tax depreciation deductions. Such a study generates benefits typically between 2.5 to 10 percent of the building’s cost.

Below are examples of non-building components often depreciated over 27.5 or 39 years but are eligible for shorter recovery periods:

Building Type

Examples of Segregated Components

Typical Reallocations

Apartment Buildings Kitchen countertops and cabinetry, shelving, window blinds, removable floorcoverings, parking lots and walkways, pools and tennis courts.

15-30%

Casinos Electrical systems associated with particular machinery and equipment located within casino area, security monitoring systems to surveil gaming activities, decorative finishes.

20-40%

Factories & Manufacturing Centers Process-related plumbing and electrical systems, additional ventilation, fire protection systems dedicated to specific business operations.

20-45%

Grocery Stores Electrical systems dedicated to refrigeration and point of sale equipment, signage, music systems.

20-40%

Hotels & Other Lodging Decorative lighting such as wall sconces and chandeliers, removable flooring, window treatments, kitchen equipment, decorative millwork.

20-40%

Office Buildings Network cabling, raised floors and HVAC systems dedicated to IT equipment, uninterruptable power supply systems.

10-25%

Restaurants Kitchen cabinetry, exhaust hoods and kitchen ventilation, decorative items, drive-through equipment, electrical for televisions, plumbing and electrical systems dedicated to food preparation.

20-40%

Retail Centers & Strip Malls Merchandise lighting, electrical for point of sale equipment, security cameras, removable floor coverings, monument signs.

20-40%

Warehouses Truck turnarounds, loading ramps, parking lots, in-rack fire protection systems, pylons.

10-20%

 

Using the same cost estimation software used by architects and contractors, ICS Tax can perform cost segregation studies, even without historical construction cost documents. Moreover, since bonus depreciation is applicable to new assets with tax lives of less than 20 years, there is an added incentive to have a cost segregation study performed on new construction or remodeling projects.

The benefits of a cost segregation study go beyond accelerating the timing of deductions. Under the new Tangible Property Regulations, taxpayers are allowed to write off and take a loss on disposed building components, which is called a partial disposition. A cost segregation carves out building components such that if a taxpayer where to replace the roof, upgrade the lights, or overhaul the HVAC system, the taxpayer can take a loss on the disposed components.

OUR SERVICE

ICS Tax provides free consultations and benefit estimates on all cost segregation studies. Our deliverables are consistent with the IRS Audit Techniques Guide and the high standards of the American Institute of Cost Segregation Professionals (ASCSP), a professional organization committed to establishing the technical and ethical standards for the cost segregation industry through education, testing and certification. We offer free audit support on all of our studies and if applicable, can draft Form 3115, Application for Change in Accounting Method. All cost segregation studies are reviewed and certified by Alex Bagne, a Certified Cost Segregation Professional and the President of the ASCSP.

SUCCESS STORIES

  • A manufacturer received a $450,000 benefit from a cost segregation of a factory building costing $2.5 million.
  • An apartment complex with depreciable assets totaling $9 million received a benefit from depreciation acceleration totaling $300,000.
  • The owner of an office building costing $10 million received a benefit of $400,000.