Imagine taking cash flow that would ordinarily come out of the business and get sent to the government and instead investing it back into the business. With ordinary appreciation, that savings could generate profits eight-to-twenty times as large over 30 years.
(Here is the gory math: At 7% ROI, savings double roughly every 10 years, quadrupling every 20 and increasing eightfold after 30 years. At 10% ROI, it doubles roughly every seven years, and by 28 years has grown to 16 times as much. By 30 years it’s increased more than 19 times.)
This is the magic of cost segregation, a tax deferral strategy that frontloads depreciation of real estate properties into the early years of ownership, rather than over the standard 27.5 years for residential assets and 39 years for commercial properties.
How Does Cost Segregation Work?
A cost segregation study reallocates the components of each building, like electrical and plumbing, into more appropriate assets classifications for income tax accounting. The study becomes the foundation for reclassifying assets and depreciating them more quickly so that revenue is retained by the business instead of being paid to state and federal taxing authorities. Those funds can be invested into business operations to produce more revenue and profit to be put to productive use, like purchasing needed inventory and equipment, and creating jobs.
Is your business a candidate for a cost segregation study? That depends. Before hiring a tax specialty company to embark on one, a tax professional should conduct a baseline analysis to determine if there are sufficient assets to warrant the expense of cost segregation. At National Tax Group, for example, this feasibility study is conducted for free and usually involves some basic information gathering to estimate the benefit of moving forward.
The best candidates for cost segregation studies are real estate owners that have newly constructed or purchased properties valued over $1 million, or renovations worth more than $300,000. A cost segregation study may be initiated as early as during the construction process, though the study can’t be completed until final costs are determined. In any case, the study must be completed prior to submission of a tax return for that tax year.
What Does a Cost Segregation Study Entail?
A cost segregation study requires a significant amount of documentation and property review. This includes an appraisal, a property condition report, and an analysis of revenues and costs related to the property. At the conclusion of the cost segregation study, a report is generated justifying by tax law all asset reclassification it recommends.
Generally, between 10% and half of the property assets can be reclassified to a shorter depreciation window, often resulting in hundreds of thousands of dollars in accelerated depreciation. The more assets inside a property, the higher that percentage: an empty warehouse typically includes fewer assets that can be reclassified than a residential building.
The reclassified assets may fall into a range of depreciation categories that typically can be depreciated in five-, seven-, or 15-years, as opposed to 27.5 and 39 for residential and non-residential investment properties.
National Tax Group has helped businesses across a multitude of industries, including commercial and residential property owners, restaurants and hotels, save millions of dollars in taxes. Employing engineers, construction specialists and accounting professionals, NTG has produced both simple and complex, time-sensitive cost segregation studies, always with the ain of achieving maximum tax savings and improved cash flow.
The Unexpected Benefits of Cost Segregation Studies
Cost segregation studies take a month or two to complete once all the relevant information is provided. Businesses can expedite the timeline by submitting all the relevant information to the tax professional conducting the study in a timely manner. The cost of the study depends upon the scope and complexity of the work, but is generally around $5,000 – $15,000, usually a small fraction of the cash flow repatriated into the business.
Because they involve a comprehensive evaluation of a business’s tangible and intangible assets and liabilities, cost segregation studies often unlock other tax advantages and opportunities for savings. This alone is not sufficient justification for a cost segregation study, but it often serves as an unanticipated benefit.
For example, a cost segregation study has a retroactive component that allows the tax professional to examine for assets placed into service in prior years. This requires a form to change accounting methods for those assets to make good on expedited depreciation.
Contact us at NTG for a one-time zero-cost expert consultation to determine if a cost segregation study is right for you. If it’s not, you saved yourself some work, and if it is, your business could be on its way to significant savings.
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