Cost Segregation is the method by which assets are identified along with their costs, and grouping the assets for tax concerns. Specific costs which were earlier classified according to 39-year depreciable life are instead classified as personal property or land improvements, with a 5, 7, or 15-year rate of depreciation on accelerated method of written down value. After an “engineering-based” study is conducted, the building owner is allowed to depreciate an existing structure or a new one in the shortest amount of time as provided under current tax laws.
The advantages of a cost segregation study include:
- An immediate and significant boost to the cash flow
- A significant decrease in current tax liability
- Tax deferral of another period and retrospective taxes
- Even missed depreciation deductions up to a period of 20 years can be reclaimed
Study conducted by specialists
Neutral engineers need to conduct cost segregation studies for both new and existing properties. This is done so that optimum depreciation benefits can be realized. Property information, precise segregation, providing the CPAs with detailed supporting documents as per the guidelines of the IRS are some of the functions carried out by specialists for an ethically conducted auditing defense.
What Types of Items Are Identified?
A diverse range of installations and activities can be a part of the entire cost segregation process. Firstly, items like electricity connection changes, wire alterations, plumbing, hardware components and other material can be identified and reclassified into assets cycles with shorter lives. All these items cumulatively add up to significant savings for the client.
Cost segregation studies are one of the most important tax strategies which are of immense benefit to owners of commercial real estate today. This unique policy introduced by the government provides possibility to save significantly on the huge costs incurred on taxes every year by space owners. It offers facility owners the opportunity to defer and save on retrospective taxes, reduce their overall current tax burden, and enhance the chances of growing capital by improving their current cash flow. Cost segregation study stands to benefit virtually every taxpayer who owns, constructs, renovates, or acquires a commercial property structure in this increasingly hostile and expensive environment.