What is Cost Segregation?
Cost Segregation is an engineering-based, tax savings tool to help companies reduce current income tax liabilities by accelerating depreciation deductions for qualifying components.
This is a tax strategy that should be considered by nearly every taxpayer who owns, is constructing, renovating or acquiring real estate. By using an engineering- based approach to identify assets within a building that can be reclassified into much shorter depreciation recovery periods than the building itself, significant tax savings can be achieved.
Generally, an entire building would be classified with a straight-line depreciation cycle of either 39 years for commercial and industrial property or 27.5 years for residential-rental property. By applying a Cost Segregation study, you can maximize your inherent tax benefits by identifying, classifying, and segregating the personal property components of the building. This results in accelerated depreciable lives of 5, 7 and 15 years thus saving thousands of tax dollars.
1. Identify Improvements
Improvements are identified through careful review of building plans and site tours.
2. Quantify the Property
A detailed level of cost information available is used to quantify real and personal property.
3. Provide Clear Documentation
Everything is clearly documented to leave a thorough and supportable audit trail.
4. Describe Methods Used
The costing methods used are detailed within our final report.
Who Can Benefit
Cost Segregation studies have become an increasingly valuable tax strategy that should be considered by virtually every taxpayer who owns, is constructing, renovating or acquiring real estate.
Clients are surprised to learn that most properties that have been constructed, purchased or renovated since 1987 qualify for this tax benefit. From apartment buildings, assisted living/nursing homes, auto dealerships, office buildings, restaurants, hotels, medical buildings to retail spaces, Scarpello Consulting works with a wide range of building types and ownership structures.
An additional benefit of a Cost Segregation study is the proper identification of Units of Property (UoP) in accordance with the IRS Repairs and Maintenance Regulations allowing for future disposals of structural components.
To determine if your building or project is a candidate for a Cost Segregation study, ask yourself the following:
Is the purchase price of the building at least $750,000?
Have we purchased, constructed or renovated any property since 1987?
Do we plan on keeping our property for the next few years?
Do we have taxable net income?
When Should We Consider a Cost Segregation Study?
A Cost Segregation study can be conducted at the time a property is purchased, renovated or constructed. If you placed properties in service in previous years, a Cost Segregation study can still be performed in accordance with Revenue Procedure 2015-13 without amending returns. Any missed depreciation from previous years can be taken in the current year through the filing of IRS Form 3115. Scarpello Consulting also assists clients that are in the feasibility phase of a construction project to identify potential tax savings.
LET'S GET STARTED
Whether you are a CPA firm working on behalf of a client or the building’s owner, we can help. Simply give us a call to start the process.