What is a Cost Segregation Study?
Cost Segregation is a strategic tax planning tool that allows companies and individuals who have constructed, purchased or remodeled a commercial property to accelerate depreciation. By doing so, this helps to increase cash flow and defer federal and state income taxes. The goal is to identify assets and project related costs that can be reclassified into shorter life classes than they currently fall under. Typically these components fall under a life class of 39 years, meaning they are depreciated over 39 years using a straight line depreciation method. A Cost Segregation Study will in most cases segregate and reclassify 20% – 50% of the total costs of the project, placing the property into classes of 5, 7, and 15 year depreciation life. Not only does this accelerate depreciation, but it also can lead to other benefits such as a reduction in property taxes, decreased insurance premiums, future bank loan qualifications and just a better general understanding of the property life span and future replacement costs.
How Does Cost Segregation Work?
A Cost Segregation Study should be performed by an engineer with a background in property assessments, construction, as well as a vast knowledge of building component classifications allowable by the IRS. Blue Ray will first produce a preliminary Cost Segregation analysis to ensure that our Cost segregation services are beneficial to the client. Our Cost Seg engineers will gather documents such as construction plans, contractor invoices and depreciation schedules. We will then perform an in depth physical inspection of the property to compare what was actually built against the plans and take photographs that will document and back up the Cost Segregation Study analysis. Following the site visit and document review, our engineer will create a detailed breakdown of take-off costs and properly allocate them to the appropriate recovery period to which is allowable by the IRS. The results will then be aggregated and presented in a report along with calculation details, relevant case law data, definitions, and photo documentation known as a ” Cost Segregation Study “.
What Type of Properties are Right for Cost Segregation? Typically any type of commercial property placed in service after December 31, 1986 will qualify for a Cost Segregation Study. Restaurants, Professional Offices, Warehouse Facilities, Retail Facilities, Medical Clinics and Auto Dealerships are good examples. Be aware that properties purchased 10 & 15 years ago can receive huge year 1 benefits from a Cost Segregation Study. The IRS allows you to look-back and catch up on all of the depreciation that would have been available as if the Cost Segregation Study was produces in the initial purchase year. This is known as a look back cost segregation study and it is often over looked by CPAs and accountants.
How Much Money Will I Save After the Cost Segregation Study?
It is very common to generate several thousands or even hundreds of thousands of dollars in net present value savings. The average Cost Segregation Study will reallocate anywhere from 20 – 50% of the assets pertaining to the property. A typical NPV savings will be approximately $25,000 for every $100,000 of reallocated assets. A first year return of higher than 10 to 1 on your Cost Segregation Study investment is quite common. Blue Ray will gladly provide a free Cost Segregation Analysis to determine what kind of ROI is at hand for the commercial property owner.
Why has my CPA not mentioned Cost Segregation?
The reason is simple. Although most tax professionals have heard of cost segregation, only 1 out of 15 CPAs have an in depth knowledge of how a cost segregation study benefits their clients, therefore they very rarely use this method as an everyday tax strategy. Many times they will accelerate a few property components into an accelerated class life. But the fact remains, they work out of an office. When was the last time you saw a CPA doing a full in depth valuation on a property? CPA’s are not engineers! By having an engineer perform your study, you can be sure that the benefit will be far greater. The IRS is also more prone to audit a property reclassified by a CPA.
No matter what state the building is located in, we provide one low fixed price to complete the study.