Cost segregation is an IRS-approved method of reclassifying components and improvements of a commercial building from real to personal property. This process allows the assets to be depreciated on a five-, seven-, or 15-year schedule instead of the traditional 27.5- or 39-year depreciation schedule of real property. Thus, your current taxable income will be greatly reduced, your cash flow will increase and even better, its retroactive back to 1986. Found cash that belongs to you!
Cost segregation is one of the IRS' cash-flow secrets that commercial building owners and those with significant tenant improvement should be utilizing to realize tax savings. Until recently, these studies were very costly and it was difficult to find experienced engineers to perform such studies. Thanks to industry leaders like Thomas Nelson with Cost Segregation Services Inc., it is now easy, affordable and makes smart business sense.
Cash flow from tax savings can be 10 percent to 15 percent of building costs within the first five years of ownership (e.g., $100,000-$150,000 in cash flow for each $1 million in building cost). All commercial buildings and tenant improvements placed in service after January 1986 are eligible for these savings.
One myth regarding cost segregation studies is "my tax adviser already did one." However, unless it was done subsequent to May 13, 1996, when the tax laws changed, then you are probably not taking full advantage of the allowable depreciation. Your tax professional may be familiar with these studies and know the benefits, but may not have brought this to your attention because they didn't have the engineering resources to cost effectively conduct the study. Originally, the Big 4 CPA firms were the only ones providing these studies, but because of the cost they only did cost segregation for their largest clients, and then only on their largest properties.
Cost segregation is an IRS-approved strategy, not a risky or an aggressive tax scheme. In 1997 the U.S. Tax Court ruled that the practice of segregating building cost for tax purposes was allowed. In 1999 the IRS issued a Legal Memorandum, which stated that reclassification of assets into shorter lives would not be contested by the IRS (ILM 199921045.TNT 104-65 Apr. 1, 1999). The memorandum advises IRS field agents to confirm that the classifications are based on a detailed cost segregation study performed by qualified experts with appropriate technical skills. In 2004, the IRS reaffirmed the use of cost segregation when it issued the Cost Segregation Audit Techniques Guide to assist its examiners in reviewing such studies. As a result, cost segregation has become an accepted, although underutilized tax-planning tool.
These studies can be performed on just about any property type, including office buildings, apartments, hotels, manufacturing facilities, warehouses, restaurants and automobile dealerships.
For more information regarding cost segregation studies, contact Thomas Nelson at (619) 294-8822.
Submitted by Cost Segregation Services Inc.