A cost segregation study is a critical tool
for identifying property tax deductions.
The analysis can result in “found
money” by way of accelerated tax depreciation deductions that can infuse cash into
your business. Cash flow is especially important in tough economic times when credit is
not readily available.
Essentially, a cost segregation study is a
method of analyzing a property’s deductible
pieces and parts and segmenting accelerated
depreciation opportunities. Rather than classifying a property as a “building,” which typically means a 39-year depreciation period, a
cost segregation study separates every component of the structure: lighting, fixtures,
equipment, systems and land improvements.
“You can depreciate those items over shorter periods of time — five, seven or 15 years,”
says Robert Oulahan, director in the Tax
Strategies Group at Kreischer Miller.
By coupling these cost-segregated tax
advantages with deductions earned for
investments in energy efficiency, a business
can realize a substantial ROI. The key is to
involve an experienced accountant and
respectable engineering firm from the start.
“An engineer-based study pulls out the
extra nickels and dimes from a depreciation
standpoint,” he says.
Smart Business spoke to Oulahan about
the ins-and-outs of cost segregation studies.
Why is now a good time to perform a cost
segregation study, and what does the
process involve?
First, recent tax legislation related to ‘bonus
depreciation’ allows a taxpayer to get even
more depreciation benefits for property
reclassed into five- or seven-year property.
For example, a five-year asset eligible for
bonus depreciation would have 60 percent of
the assets cost-deducted in year one versus
20 percent without bonus depreciation.
Second, cost segregation studies have been
available for years, but recent energy-efficiency deductions can add more value to a
study. The good news: It’s not too late to
begin the process and realize benefits for the
2008 tax year. Most tax-planning strategies
must be implemented by Dec. 31, but not
cost segregation studies. They can be performed up until the extended due date for tax returns. The process involves a detailed property analysis performed by a reputable engineering firm. Your accountant and engineers
collaborate to identify depreciable assets
within the property. You receive a detailed,
itemized report that ultimately reclassifies
the building for tax-advantage purposes. The
key to an effective cost segregation study is
that it must dig deep. Engineers will often
begin with a property blueprint to carve out
every deduction opportunity.
At what point should a business enlist an
engineering firm to analyze a property?
The earlier the better. If you are constructing a new building, discuss the study with
your accountant during the design process.
When the architect, accountant and engineer
are involved in project planning, tax advantages can be built into the project. For
instance, an architect may recognize that by
specifying a certain building material a business can earn an energy tax deduction, or an
engineer may point out that a certain method
of lighting or heating the building could result
in more tax savings. When performing a cost
segregation study on an existing building —
one in service for seven years or less yields
the greatest benefits — this team can advise
on future building improvements while it analyzes current depreciation possibilities. If
the property is older and you are ‘catching
up’ on depreciation opportunities, your
accountant may amend tax returns or execute a change in method to accelerate depreciation benefits not realized in prior years.
What properties benefit then, and how much
can they expect to ‘earn’ via accelerated
depreciation?
There are a wide range of properties that
benefit from a study. New construction,
lease-hold improvements, existing property
placed into service in the last seven years
(approximation) and inherited properties all
qualify. Businesses that greatly benefit from
these studies range from auto dealerships
with multiple garages, large manufacturing
facilities, restaurants, office buildings, apartment buildings and even golf courses.
Generally speaking, the return on investment
for these studies is anywhere from 10-to-1 to
50-to-1 — that’s 50 times the dollar amount
spent on the study. Companies may spend
$10,000 for the study or upward of $70,000.
That all depends on the size and complexity
of the property. The benefit, of course, is the
immediate cash potential.
What tax deductions are available for businesses with energy-efficient properties?
This is where cost segregation studies really begin to add up in terms of deductions.
With today’s energy credits, companies can
basically layer their deductions — meaning a
business may claim up to a $1.80 per-square-feet tax deduction on an energy-efficient
property. Deductions depend on the property’s lighting, HVAC and building envelop.
Also, state and local tax deductions for energy efficiency can pay off for a conscious business — one that plans its building with a
team that understands cost segregation practices. Finally, segregating a building’s components into its depreciable parts puts time on
a business’s side, as far as depreciation goes.
There has never been a better time to enlist
in a study because there are a significant
number of deduction opportunities available
for businesses.
ROBERT OULAHAN is a director in the Tax Strategies Group at Kreischer Miller. Contact him at (215) 441-4600 or [email protected].
