A cost segregation study is a federal income tax tool that helps owners of business real estate assets increase cash flow by identifying and reallocating property assets into the appropriate tax depreciation categories, thus reducing taxable income and maximizing return on investments. The process involves separating personal property assets from real property assets to shorten depreciable tax life and to accelerate depreciation methods.
COST SEGREGATION 3 WAYS
Cost Segregation (CS)
When there is new construction including renovation, remodeling, expansion, and leasehold improvements.
- Methodology : Actual Cost Data, Engineering Analysis
- Documents needed : Contractor Applications, Project Summary
Purchase Price Allocation (PPA)
When there is an acquisition of investments in real estate property.
- Methodology : Full Engineering Analysis (Cost Approach), “RCNLD”, Cost Allocation
- Documents needed : Purchase Agreement, Closing Statement, Land Values needed
Fixed Asset Review (FAA, Historical Look-Back Study)
When there is building and/or facilities that has more than 1 year holding period.
- Methodology : Revenue Procedure 2015-14, Filing 3115s with the IRS, Code Section 481(a)
- Documents needed : Copy of schedule 4562 for last five years from tax return, M-1 adjustments-manual, Access to TAX depreciation via hard copy or electronic, Explanation of all code descriptions on Tax Books, Example-location codes and square footage of major buildings
Opportunities exist for newly constructed buildings, newly acquired buildings, buildings constructed or acquired in prior years, and significant remodel, renovation, or expansion activities. In addition, tax credits and deductions related to green and alternative energy improvements may be available.
THE VALUE OF COST SEGREGATION
- For every dollar of cost shifted from 39-year property to 5-year property, the present value tax benefit is approximately 20 cents
- For every dollar of cost shifted from 39-year property to 7-year property, the present value tax benefit is approximately 18 cents
- For every dollar of cost shifted from 39-year property to 15-year property, the present value tax benefit is approximately 11 cents
Examples of Benefits
Construction Costs – $30M
1245 Property – $4.5M
1250 Property – $2M
Benefit to Taxpayer – $1M
Construction Costs – $35M
1245 Property – $10.5M
1250 Property – $2M
Benefit to Taxpayer – $2.1M