Guide to Cost Segregation
For taxpayers who own investment or owner-occupied commercial real estate, and are seeking to lower their income tax bill, cost segregation can be a great option. Read on to discover more about this key tax-savings strategy.
What is Cost Segregation?
The term “cost segregation” refers to a tax-planning practice used to defer federal and state income taxes. Via a detailed cost segregation study, a business identifies all property-related component values and allocates them into their most tax-efficient, useful, life-depreciation categories.
How Does Cost Segregation Work?
Consider the scenario where a business purchases a new building. Using a standard, straight-line schedule, a building structure generally depreciates over either 27 ½ or 39 years. However, there are many items included with the building that depreciate more quickly than the structure, such as tenant improvements, electrical and lighting, carpeting, parking lots, equipment, and fixtures, to name a few. Cost segregation separates out items that depreciate at a faster rate, allowing them to be expensed sooner.
In order to do this, a business must commission a cost segregation study. These studies require the expertise of a qualified engineer and/or architect, who inspect the property, estimate the value of each component, and then assign the proper tax classifications. Cost segregation studies can be performed at any point after a building is purchased.
What Are the Benefits of Cost Segregation?
By allowing business owners to claim more deductions sooner, cost segregation results in more cash available up front, which can be crucial to operations. On top of that, cost segregation studies provide a secondary benefit in the form of valuable information about business assets. For example, if a business were to replace its windows, it could consult a previous cost segregation report in order to obtain the details needed to write off the cost of the purchase.
Who Qualifies for Cost Segregation?
Anyone can have a cost segregation done, but in order to make it worthwhile, it only makes sense to consider doing it if you have spent $500,000 or more to construct, purchase, expand, or remodel.
WNDE Cost Segregation Services
Although we do not conduct the actual study, our highly-qualified team of tax professionals have worked with many clients to implement cost segregation strategies, resulting in hundreds of millions of dollars in tax benefits. Ready to get started? Contact your WNDE tax professional today for a free estimate of your tax benefits.