A cost segregation study takes a magnifying glass to commercial property owners’ property and more accurately classifies all its constituent parts in a process that can reduce their business taxes significantly. Depending upon your company’s situation, it can be well worth the cost of the study and pay dividends annually for years after the first study.
Imagine for a moment if the municipality in which you live based your property taxes on not just the value of your house but literally everything inside it too. The lighting, plumbing, furniture, appliances, HVAC system, artwork — everything. Consider how much larger your real estate tax bill would be.
It’s an imperfect analogy, but this is akin to what is happening with your business’s property. The building itself can be depreciated over 27.5 or 39 years, depending on its type. But the assets inside the building can be depreciated over five, seven or 15 years.
Faster depreciation means more cash flow for the business, which can be deployed to more productive purposes – like investing in more profit-making properties.
A cost segregation study examines each element of the property and classifies it more appropriately, allowing for accelerated depreciation for much of it. Let’s take a look at how that works.
A Cost Segregation Example
You buy a $10 million property and determine the building is worth $8 million and the land $2 million. Depreciating the building over 39 years would reduce taxable income by $205,000. At the top tax rate of 37%, that’s a $75,000 reduction in taxes paid. Sweet.
Suppose instead your business hired a tax specialist for a cost segregation study that determined the property included $500,000 of items that could be depreciated over five years, $500,000 that could be depreciated over seven years and $500,000 of land improvements that could be depreciated over 15 years. Now the total first year depreciation is over $520,000 and the savings more than $110,000, or $35,000 more than without the cost segregation study.
Moreover, bonus depreciation available under the federal tax code could push the total first-year depreciation much higher – to $900,000. That’s another $333,000 of tax reduction, every penny of which the result of cost segregation.
How to Choose a Cost Segregation Provider?
With $368,000 of reduced tax liability on the line, choosing the right company to prepare the cost segregation study is important. Its growing popularity has led to a spike in companies offering to perform studies, many of which lack the qualifications and/or experience to perform these complex analyses. Presenting incorrect information to the IRS puts your business in jeopardy of incurring an audit and serious penalties.
What should you look for? Start with licensed engineers and tax specialists on staff. Any vendor that that outsources either of these functions is not serious about cost segregation.
Confirm that the company will visit the property to provide the most accurate segregation study and that they have done numerous studies in the past. You don’t want to be the test case for a novice provider.
Finally, remember that not all properties are the same. Warehouses, mobile home parks and multi-family buildings all have unique profiles and require different expertise. Find a provider that has done multiple cost segregation studies on your specific kind of property.
National Tax Group has performed hundreds of studies on a variety of types of properties, producing 100% audit-defensible deduction claims, according to the IRS. Its in-house engineers and tax specialists maximize customers’ tax savings, reducing one customer’s tax bill by $1 million. No other tax specialty firm provides this level of detailed service.
The savings available from this legal and accepted tax-reduction strategy is so substantial that every property owner ought to at least consider a cost segregation study. Contact National Tax Group today to determine if cost segregation could work for your business.
Recent Posts
Categories
- 179D (19)
- 179D (29)
- 45L (3)
- Archive (9)
- Case Studies (46)
- Cost Segregation (15)
- Cost Segregation (5)
- CPACE (6)
- ERC (4)
- Event (9)
- News & Blog (82)
- R&D (22)
- R&D (23)
- SBA 504 (6)
- Tax News & Updates (16)