Cost Segregation Study
What is a cost segregation study?
Cost segregation is a tax planning tool which allows companies and individuals to increase their cash flow by accelerating depreciation deductions and deferring both federal and state income taxes. Some of the reasons to consider contacting Calvetti Ferguson for a cost segregation study are if you are involved in commercial real estate activities like:
- Constructing a building
- Purchasing real estate
- Remodeling or renovating a facility
Benefits of larger tax deductions from cost segregation:
Improving cash flow
Reducing upfront income tax costs
Maximizing annual depreciation
Lowering cost of capital
Increasing shareholder value
When a commercial real estate is purchased or constructed, a building asset is created, and the dollars are entered into a fixed-asset system as a 39- or 27.5-year property. Cost-segregation studies, which analyze the components that make up the building and assign these various components with MACRS Recovery Periods under the General Depreciation System, can provide property owners with accelerated depreciation.
The IRS states that “In order to calculate depreciation for income tax purposes, taxpayers must use the correct method and proper recovery period for each asset or property owned. Property, whether acquired or constructed, often consists of numerous asset types with different recovery periods. Property must be separated into individual components or asset groups having the same recovery periods and placed-in-service dates in order to properly compute depreciation”.1
A cost segregation study often yields a benefit of 5-10% of basis. For example, a cost segregation study on a $1,000,000 new building could yield a Net Present Value of $100,000. Any unused deductions will carry forward.
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1 U.S. Department of the Treasury. Internal Revenue Service. (2020). Cost Segregation Audit Techniques. Retrieved from https://www.irs.gov/businesses/cost-segregation-audit-techniques-guide-chapter-1-introduction.