If your company has constructed, purchased, expanded or remodeled real estate, we can share some ideas to increase your cash flow by accelerating depreciation deductions and deferring your federal and state income taxes.
The goal of a cost segregation study is to identify, segregate and reclassify project-related costs that are currently classified as real property to shorter depreciable tax lives for federal and state income tax purposes. Recent IRS rulings and procedures have allowed taxpayers to take advantage of these previously understated depreciation expenses (back to 1986), without the need to amend tax returns.
What Properties Are Eligible for Cost Segregation?
Just about any building or expansion project will qualify for opportunity, and on average, properties are misclassified by 40-75 percent. When you include incremental tax benefits from Section 179 deductions and bonus depreciation, the tax savings are material.
Legal Structures that allow for cost segregation include Pass Through Entities like partnerships, limited partnerships and LLPs, S Corporations, LLCs and some trusts, as well as C-Corporations and Real Estate Investment Trusts.
Projects that may qualify for cost segregation include new construction projects, existing property you have purchased, renovations or expansions of your existing property, “Look Back” property in service after 1986, real property stepped up through estate and leasehold improvements.
Why Should You Opt for Cost Segregation?
For example, if you have costs currently classified as subject to a 39-year depreciable life that you can reclassify to a 15-year or lower rate of depreciation, you can see considerable benefits. According to the Journal of Accountancy, every $100,000 in assets that are reclassified from a 39-year recovery rate to a five-year recovery rate renders about $16,000 in net present value savings.
It’s easy to see what a tremendous benefit this can be for your company. This is exactly what a cost segregation study can do for you: reclassifying each of your structures under the cost segregation study to the shortest amount of time legally possible. Depending upon the number of buildings classified and the level of reclassification, this can translate into tremendous savings in the form of reduced tax liability, deductions from previous years you can now claim, deferred taxes and, of course, increased cash flow.
Is Your Industry a Good Candidate for Cost Segregation?
You might wonder if the real estate in your particular business is a good candidate for cost segregation. If you happen to be in heavy manufacturing and/or processing or research and development, typically 30 percent to 60 percent of projects are eligible.
If your business involves car dealerships, the number is about 25 to 50 percent. Light manufacturing, MOBS/MABS, golf courses, restaurants and offices are 20 to 40 percent eligible; apartments are typically 20 to 35 percent eligible; retail stores, grocery stores, hotels and theaters typically see 20 to 30 percent eligibility for cost segregation reclassification. Other industries will sometimes be eligible, as well.
If you have not had this opportunity area reviewed, let us know.