Unlocking Tax Savings with Cost Segregation Studies

Cost segregation studies can be a powerful tool for commercial property owners to reduce tax liability and improve cash flow. This technique involves a detailed analysis of a building's components to accelerate depreciation deductions. Here’s a breakdown of how cost segregation works, its benefits, and why it may be a smart move for your tax strategy.

Call Turner Business Solutions at (316) 285-0125 if you want additional information on cost segregation studies. You can also schedule a free consultation online.

What Is Cost Segregation?

In simple terms, cost segregation is the process of identifying and reclassifying personal property assets, land improvements, and building components to shorten the depreciation schedule. Typically, commercial buildings are depreciated over a period of 39 years (27.5 years for residential properties). However, some of the building’s components—like lighting, flooring, or HVAC systems—might qualify for a shorter depreciation period, such as 5, 7, or 15 years.

By accelerating depreciation, property owners can take larger tax deductions in the earlier years of owning a property, freeing up cash that can be reinvested into their business or used elsewhere.

The Process of a Cost Segregation Study

A cost segregation study involves a thorough analysis of the building’s construction costs or purchase price by specialists, typically engineers, accountants, or valuation professionals with expertise in tax law and building systems. Here's how the process usually works:

1. Property Evaluation: A team of experts evaluates the property to break down the costs associated with its various components.

   
   

2. Reclassification of Assets: The team then categorizes these components, determining which assets can be depreciated over shorter time frames (5, 7, or 15 years instead of the standard 39 or 27.5 years).

   
   

3. Tax Report Generation: A detailed report is prepared and delivered to the property owner, outlining how the building’s assets have been reclassified and providing the new depreciation schedules.

   
   

4. Filing with the IRS: The results of the study can be applied to the property owner’s tax return, allowing for immediate tax savings.

   
   

What Types of Property Qualify?

Cost segregation studies can be performed on a wide variety of property types, including:

• Commercial buildings

  
  

• Retail centers

  
  

• Manufacturing plants

  
  

• Office buildings

  
  

• Apartment complexes

  
  

• Hotels and resorts

  
  

Even if a property has been in use for several years, a retroactive cost segregation study can be conducted, allowing the property owner to “catch up” on depreciation deductions they missed out on in earlier years.

The Benefits of Cost Segregation

The primary benefit of a cost segregation study is increased cash flow. By front-loading depreciation, property owners can significantly reduce taxable income in the early years of ownership. Here are a few additional benefits:

• Tax deferral: Accelerating depreciation defers taxes to later years, which can be beneficial if you anticipate lower tax rates or income in the future.

  
  

• Increased ROI: With more cash on hand due to tax savings, owners can reinvest in their business or use the extra funds to pay down debt.

  
  

• Qualifying for bonus depreciation: Recent tax law changes, particularly the Tax Cuts and Jobs Act (TCJA) of 2017, allow property owners to take advantage of 100% bonus depreciation on qualifying assets. This means assets with a useful life of 20 years or less can be fully depreciated in the year they are placed in service.

  
  

When Should You Consider a Cost Segregation Study?

A cost segregation study makes sense if:

• You’ve recently constructed, purchased, or remodeled a commercial building.

  
  

• You have owned property for several years and haven’t performed a cost segregation study.

  
  

• You want to take advantage of accelerated depreciation and improve cash flow.

  
  

However, cost segregation may not be ideal for every taxpayer. The upfront cost of conducting a study can range from $5,000 to $15,000 or more, depending on the size and complexity of the property. It's important to weigh this against the potential tax savings to ensure it’s a sound investment for your situation.

Conclusion

Cost segregation studies can yield substantial tax savings for commercial property owners by accelerating depreciation. If you’re looking to optimize your tax strategy and improve cash flow, conducting a cost segregation study may be a wise financial move. As always, consulting with tax professionals experienced in this area is essential to ensure that the study is performed correctly and complies with IRS regulations.

By understanding and utilizing cost segregation, you can unlock valuable deductions and take better control of your property-related tax obligations.

Interested in exploring a cost segregation study? Call Turner Business Solutions at (316) 285-0125 or schedule a free consultation online.