What is Cost Segregation?
Cost Segregation is a strategic tax savings tool that allows companies and individuals, who have constructed, purchased, expanded, or remodeled any kind of real estate to increase cash flow by accelerating depreciation deductions and deferring federal and state income taxes. In general, it is easy to identify furniture, fixtures, and equipment (FF&E) that are depreciated over 5 or 7 years for tax purposes. However, a Cost Segregation Study goes far beyond that by dissecting construction costs that are usually depreciated over 27.5 or 39 years.The primary goal of a Cost Segregation Study is to identify all construction-related costs that can be depreciated over 5, 7 and 15 years. A Cost Segregation study properly classifies personal property assets, allowing them to be written off or depreciated at a faster rate, reducing your current tax obligation.
What are the benefits of a Cost Segregation Study?
- Immediate increase in cash flow through accelerated depreciation deductions.
- Reduces income taxes.
- Opportunity to claim ‘catch up’ depreciation on previously misclassified assets.
- Independent third-party analysis that will withstand IRS review.
What is involved in a Cost Segregation Study?
A quality Cost Segregation Study evaluates all information including available records, inspections, and interviews, and presents the findings in a clear, well-documented format. Our process for conducting a detailed Cost Segregation Study includes:
- A review of all cost detail for the property including but not limited to: the general contractor’s application for payment, construction invoices, change orders, depreciation schedules, and appraisals.
- An inspection of the facility to fully understand its use and condition, as well as to gather information that further supports the classification of capitalized costs into their appropriate class lives.
- Photographs are taken of qualifying construction components and included in our report.
- A review of all blueprints (if available) and the performance of quantity take-offs and cost estimates for personal property not segregated in other cost information.
- A reconciliation of all construction costs and estimates of the actual amounts incurred by tax life. This step includes adjusting estimates to account for location, time, and physical condition. We also perform an allocation of soft costs to any direct cost in each category to maximize your total benefits.
- Preparation of a report: Our report goes above and beyond the IRS standards stipulated in the Audit Techniques Guide for Cost Segregation Studies.