For commercial property owners, a cost segregation study is a powerful tool to minimize your tax burden — yet it is often overlooked and underutilized. At National Tax Group, it is one of our most lucrative tax savings techniques, allowing us to save our clients millions of dollars.
Business owners tend to miss out on the benefits of cost segregation studies because they don’t understand what they are, how they work, or if they should be performed before or after a reconstruction. Our tax experts will guide you through the basics of this powerhouse tax strategy so you have all the information you need to save more on your tax bill.
What is a Cost Segregation Study?
A cost segregation study is a tax planning strategy that maximizes federal income tax depreciation deductions. As property ages and loses value, property owners can claim a tax deduction (a decrease in taxable income) for the property’s depreciation expense. The higher the depreciation expense, the higher the tax deduction — so cost segregation studies aim to find all areas of your property that qualify for a higher depreciation.
Commercial real estate usually depreciates over 39 years, and residential properties depreciate over 27.5 years. But a property consists of more than just the building structure alone — it includes things like carpeting, outdoor fencing, and even the land itself.
The IRS categorizes property assets into four groups for depreciation:
- Land: This category includes only the land itself, not any improvements or structural additions to the land. It is the only category that does not depreciate.
- The Building: The building includes the structure and its components, such as the building’s roof. Commercial buildings depreciate over 39 years, and residential buildings depreciate over 27.5 years.
- Land Improvements: Land improvements refer to items outside of the building such as fences and parking lots. They depreciate over 15 years.
- Personal Property: Personal property includes items such as carpeting and fixtures. It depreciates over five to seven years.
Cost segregation studies use a combination of on-site auditing, service benchmarking, documentation, and other techniques to analyze property and determine which assets fall under which category. Property owners can use the results to claim higher depreciation deductions and reduce their tax burden.
Which Industries Benefit Most from Cost Segregation Studies?
The benefits of cost segregation studies are not limited to any industry — if your business owns property, you can claim tax depreciation deductions on your building’s assets. However, in our experience performing these studies, we’ve seen that restaurants, hotels, apartment buildings, and commercial property have had the largest returns.
If your business lies in any of these industries and you want to learn more, contact National Tax Group’s tax experts for a free assessment.
When Should You Perform a Cost Segregation Study?
While you can perform a cost segregation study at any time, the best time to do a cost segregation study is right before construction or remodeling. Performing the study before the project begins allows the IRS and the cost segregation study team to see the property’s starting point. After renovations, it will be more of a challenge for them to assess what the property previously looked like. Working with an experienced firm in cost segregation studies can help make the process easier to perform post-construction. As long as you have your renovation receipts, you have documentation of the changes made, and you can use them to apply deductions in the future.
To perform a cost segregation study after your project is constructed, you can perform a look-back study. Look-back studies allow property owners to catch up on missed depreciation deductions and they often result in substantial payouts. Additionally, studies can also be performed on buildings that have undergone renovations, even if they underwent a study during the buildings construction.
What to Expect from Your Cost Segregation Study
Cost segregation studies are an intensive, thorough process. National Tax Group’s analysts and accountants will evaluate the depreciation of your assets in detail, using techniques such as:
- On-site auditing
- Service benchmarking
- Documentation as per IRS guidelines
- Tax deduction strategies
- Appropriate allocation of all indirect costs
- Identifying substantial amounts of accelerated depreciation
- KPI measurement
- Legal compliance
- Final reports for easy-to-use data for tax planning
The study will take up to a month after the on-site audit to complete, so be sure to plan ahead and time the study around tax season.
How to Get Started
If you think a cost segregation study would be beneficial for your business, or if you want to speak with a tax expert before making your decision, National Tax Group is here to help. Our team of engineers, construction specialists, and accounting professionals are experts in cost segregation studies, as well as other areas of the tax code. Get in touch for a free tax deduction assessment — we look forward to helping you increase your savings.