Building owners, SLASH taxes with a Cost Segregation Study!

Should I consider a Cost Segregation Study?

For owners of commercial property, the likely answer is yes.  But let’s explore!

What is a Cost Segregation Study?

A cost segregation study is an engineering-based analysis that breaks down and reclassifies the individual cost components of a commercial property into proper class lives, shifting property that would otherwise be depreciated over 27.5 or 39 years into proper class lives of 5, 7, or 15 years.

What is the benefit of doing a Cost Segregation Study?

Cost segregation studies are an effective income tax strategy. With an engineering-based analysis, owners of commercial property can accelerate depreciation deductions. Why is this important?

• Increased cash flow: Accelerated depreciation generates larger income tax deductions in the early years, resulting in increased cash flow from a lesser tax burden. Think time value of money!
• Reduction of tax liability: The larger deductions can significantly reduce your overall income tax liability.
• Reinvestment potential:       The extra cash flow can be reinvested into your business for expansion, upgrades, or other strategic initiatives.

Will this subject us to an audit by the Internal Revenue Service?

A Cost Segregation Study, in and of itself, will not cause an audit, however…

The IRS has specific guidelines and requirements for the Cost Segregation Study to be respected. These guidelines and requirements are well established in terms of applicable IRS Tax Code and Regulations, Revenue Rulings and Procedures, and relevant case law. With that, the study needs to an independent, engineering-based study, requiring review of:

• Construction documents, including blueprints, architectural drawings, and engineering plans.
• Historical records, such as property appraisals, purchase agreements, invoices, and construction contracts
• Documentation of the property’s condition and components obtained from on-site visits and photographs.

Adherence to these guidelines and requirements will quickly address and resolve any inquiry under audit.

Can my CPA prepare a Cost Segregation Study for us?

Well, yes…if your CPA is uniquely qualified, which is unlikely.

You really need to engage a qualified professional, meaning an engineer or architect. Remember, a legitimate cost segregation study needs to be engineering-based.

A CPA understands the tax laws, how to reflect the impact of the study on the income tax return, and the economics of the accelerated depreciation. However, very few CPAs are qualified to conduct a cost segregation study that would be respected and withstand IRS scrutiny.

How should I choose a firm to conduct our Cost Segregation Study?

Engage qualified professionals to conduct the study. Don’t be afraid to ask for references and credentials. Expect the firm to ask for a lot of documentation supporting the construction and how it has been recorded for tax purposes. Be suspect if the firm does not request a site visit to physically see and photograph the property.

The study should be just that, a study, referencing IRS code sections, rulings, and court cases. A detailed analysis should be provided regarding the specifics of the property and the components’ class lives and valuation methods. The study is meaningless without sufficient documentation, such as photographs, engineering reports, related costs, and analysis supporting the accelerated deductions. Don’t be afraid to ask to see a sample of their work product.

Cost segregation studies are a well-established, IRS-respected, method of properly classifying and depreciating components of a commercial building. In most cases, the owner of commercial buildings will benefit substantially by having a cost segregation study prepared.

Bottom line, experience matters. That is where MPowered Incentives Group delivers!