Cost Segregation Study: Is it Worth the Effort?

Cost Segregation studies offer a powerful way for commercial building owners to unlock depreciation deductions, reduce their tax burdens and boost cash flow by reclassifying certain real property assets as personal property.

Cost segregation is a conservative and IRS-defined approach for depreciating commercial properties. It is the most accurate depreciation methodology for assets acquired after September 27, 2017.

In order to determine if a cost segregation study is appropriate for you, consult with your CPA at the beginning of the process. This will make you feel confident that an appropriate and cost effective study is conducted, by bringing your accounting professionals together, when you acquire or develop a property.

Advantages of a Cost Segregation Study

  • The main advantage of obtaining a Cost Segregation study is that it can shorten the useful lives of assets under accelerated depreciation methods. 
  • A taxpayer can reduce the current federal taxable income by taking the minimum deduction permissible under the tax code, by implementing a cost segregation strategy. 
  • A Cost Segregation study can be prepared by an experienced individual who issues a report to support the assumptions used in the classification of assets.     

Calculations and Processes in a Cost Segregation Study

The general method of depreciation would be over 39.5 years utilizing the straight line method, when a commercial property is placed into service.  However, there are other options.

Cost Segregation is a process of breaking down the individual components of the building into four categories that includes:  

  • personal property
  • land improvements 
  • building and 
  • land   

A cost segregation study lowers the tax rate because the assets can be written off at an accelerated rate over a 5, 7, or 15 year period.

It is important, because the determination of what qualifies as tangible personal property and what are the structural components of the building have been challenged under audit and have led to numerous tax court cases over the years, along with the issuance of private letter rulings.  

Conclusion: It is Worth the Effort!

For most of the property owners, Cost segregation is one of the most advantageous tax saving tools. Accelerating depreciation deductions leads to a lowering of taxable income. As a result, to continue the business, the owner increases cash flow into the business and reinvest the savings. 
Have you spent a bit of time calculating your federal income tax savings? Get ready to remove all your risks. Plug a few simple numbers about your property into the savings calculator and find yours today.


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