CSS = Acceleration of Depreciation + Bonus Depreciation!
Cost Segregation is a tax strategy approved by the IRS. A Cost Segregation Study allows companies and/or individuals, who have purchased, constructed, expanded, and/or remodeled any type of commercial real estate (owners of investment houses can also take advantage of CSS), to identify and reclassify specific real property assets to shorten the depreciable tax lives of those assets for taxation purposes, which reduces current income tax obligations.
In other words by accelerating depreciation, a cost segregation study provides a significant tax benefit for the taxpayer! Most commercial properties in the United States are depreciated over 39 years, the exception is 27.5 years for commercial residential properties such as apartment complexes and retirement communities.
Personal Property is Segregated from Real Property
Cost segregation results in non-structural components being reclassified as 5-, 7- or 15-year “personal property” for purposes of depreciation. Portions of the electrical, plumbing, mechanical systems, and site improvements of a building along with hundreds of other components can be allocated into shorter tax lives translating into immediate cash flow!
Time Value of Money & Bonus Depreciation!
Using this tax strategy effectively increases taxpayers’ depreciation expense in today’s dollars. By recovering up to 40% of the building cost over the first 5 years as opposed to depreciating it over 39 years (or again 27.5 years for commercial residential), translates into significant tax savings and taps into the “time value of money” concept, i.e. a dollar today is worth much more than 5, 10, 25 years down the road, plus by investing these monies – instead of allowing the government to hold it for you – the value will exponentially increase.
A cost segregation study is ideally suited for newer properties, but can also expose tax deductions on older buildings which can generate significant benefits due to “catch-up” depreciation. Also the IRS allows (part of the Protecting Americans from Tax Hikes Act of 2015) a 50% bonus depreciation of the cost of any qualified property in the year placed in service. Bonus depreciation has been extended through 2019, however as it is being phased down to 40% in 2018 and 30% in 2019 it’s best to act NOW!
Tax benefits of Cost Segregation Study
• Cash flow as aforementioned! CSS maximizes tax savings by adjusting the timing of deductions. When an asset’s life is shortened the depreciation is accelerated and tax obligations are decreased during the early stages of a property’s life. Thus cost segregation provides a release of cash for investment opportunities or current operating needs.
• CSS creates an audit trail. A properly documented cost segregation study helps resolve IRS inquiries at the earliest stages and will reduce improper documentation of cost and asset classifications.
• Catch-Up Opportunity! Since 1996, taxpayers can capture immediate retroactive savings on property they have acquired or built. Previous rules, which provided a four-year catch-up period for retroactive savings, have been amended to allow taxpayers to take the entire amount of the adjustment in the year the cost segregation study is completed!
How much cash are we talking about?
On average our cost segregation study offers approximately $100,000 in additional depreciation per $1 million dollars in purchase or construction costs over the normal 39-year straight-line method but some properties will see more. Also if we are allowed to scrub your depreciation schedule there is a high chance of finding additional tax savings.
History of Cost Segregation
Over 300 rulings, letters, and IRS memoranda have provided documentation and significant case law for the support of Cost Segregation Studies: Hospital Corporation of America v. Commissioner, 109 T.C. 21 (1997) (“HCA”) is the landmark decision which gave support to the way we review and analyze your property/properties to determine the tangible personal property (non-structural components) within your building(s). Even if you are presently depreciating certain property in an accelerated schedule there may still be cost recovery left on the table. Only if you have secured specialized experts will all allowable property be depreciated on an accelerated basis.
We will provide a no-cost, upfront feasibility report to determine the cash flow and net present value (NPV) benefits.
Initial consultation to make sure a study will be beneficial
Certainly, the initial benefits of a Cost Segregation Study may be impacted by corporate structures, individual tax situations, subsequent disposition of a property, a 1031 exchange, recapture implications, passive activity limitations, REITs and other subsequent events that a real estate investor may encounter post Cost Segregation Study.
Who You Hire Makes All The Difference
• Frequently Cost Segregation competitors “estimate” or just “assume” a percentage of the basis to reclassify. This as a practice is all too often employed by providers – unfortunately at the expense of the taxpayer/owner. This approach not only leaves many thousands (often hundreds of thousands of dollars) unavailable to the owner/taxpayer – but more importantly this practice puts the client at risk. This approach often has a modest fee attached – the provider assuming that the owner/taxpayer is unsophisticated and will compromise on benefits as well as assume the risk with the IRS in case of an audit. All of our work will withstand IRS scrutiny and is backed by our Unlimited Audit Defense at no cost!
• We understand that Cost Segregation Reports are a serious tax matter that involves IRS scrutiny. We will not take the approach of short-term gain to risk long-term reputation and have gone to great lengths to use the latest tools, methods and procedures to deliver the most detailed and comprehensive reports in the industry, according to strict IRS rulings and requirements.
• We are one of the few firms in the country to perform the RS Means Tolerance Test. This is a comparison of the constructed cost of the building compared to the national average in terms of square foot, cost and percentage of assets within the total cost of electrical, mechanical and personal property elements. If we find significant differences such as 15% electrical versus the national average of 10% for like kind building we will then document the difference to the IRS. Most firms simply guess. Although this takes us a considerable amount of time, we can be much more accurate which leads to greater audit defense and a lot of the time, a larger cash benefit to the client.
• Provide a no-cost feasibility report to determine the cash flow benefits.
• Evaluation of current tax status and future business plans with CPA to determine if a study will be a benefit.
• Review of the project’s/facility’s construction cost by component or systems.
• On site visit of the facility/project to document the systems and components to determine how they’re utilized. Site photos are always taken.
• A detailed engineering review of assets including special purpose mechanical, electrical and plumbing, decorative finishes, site improvements and special purpose construction. As well as blueprints, AIA documents, and change orders.
• Classification of each building component into the appropriate tax life as prescribed by the IRS guidelines and relative case law.
• Finally, we deliver a 50+-page written report with an executive summary, asset detail supporting the reclassified cost, specific case law and revenue rulings, depreciation schedules and all of the necessary tax forms.
We charge a very competitive fixed fee based on size and scope of each project.
Click onto CSS FAQs for Frequently Asked Questions related to Cost Segregation.
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