Cost Segregation Studies 101
A Cost Segregation Study is a strategic tax planning tool that allows businesses to accelerate depreciation deductions, thereby reducing taxable income and improving cash flow. The following is an outline of the steps typically involved in performing a Cost Segregation Study. Your team at Scarpello Consulting manages every step for you, so you don’t need to be the expert – we are.
1 | Initial Consultation and Scope Definition
Meet to understand your objectives, gather information about the property (including purchase details and intended use), and define the scope of the study, identifying the specific properties or assets to be analyzed, to determine the scope of the valuation process.
2 | Gather and Review Documentation
Collect and review all relevant documents, including purchase agreements, construction documents, architectural plans, engineering specifications, previous depreciation schedules, existing appraisals, and property tax assessments, to gather a comprehensive understanding of the property’s details and valuation history.
3 | Site Visit and Property Inspection
Conduct a thorough physical inspection of the property, taking photographs and making detailed notes to verify and document all relevant components and improvements, ensuring that our analysis is well-substantiated and supported for accurate segregation of assets for tax purposes.
4 | Classification of Assets
Identify, classify, and categorize building components into different asset classes, such as land improvements, personal property, and real property, and determine which components can be depreciated over shorter recovery periods based on the intended use of the property. Then, allocate the original purchase price or construction costs among the identified asset categories using IRS-approved, engineering-based methods to ensure accurate cost allocation to each asset class.
5 | Prepare the Cost Segregation Report
Compile a detailed report that includes the methodology, asset classification, cost allocations, and the resulting depreciation schedule values. This ensures the report is well-documented to withstand IRS scrutiny, if necessary.
6 | Review and Finalization
Review the findings with you to ensure accuracy and alignment with your tax planning objectives, and make any necessary adjustments based on your feedback to finalize the report, which will include preparing fixed asset depreciation schedules to assist with implementation into your accounting records. Then, prepare and file all required tax documentation and forms with the IRS, including Form 3115, to ensure tax compliance and complete the cost segregation process.
7 | Ongoing Support and Updates for Future Renovations or Improvements
Provide ongoing support, in the event you have any questions or issues, to keep you informed about changes in tax laws that may impact your depreciation strategies, ensuring long-term benefits and compliance.
Conclusion
By following these steps, a Cost Segregation Study will help maximize your organization’s tax deductions, reduce its overall tax bill, and improve cash flow. Paying less tax will shore up funds, ensuring your organization can spend money where it really counts – on your business.
