Most businesses in the current economic climate could use extra cash on hand. Cost segregation can provide this assistance through immediate tax savings. If you have purchased, constructed, remodeled, or otherwise acquired real estate (real property) after January 1, 1986, you qualify for this service. A cost segregation analysis enables the taxpayer to accelerate depreciation on components of the aforementioned real property from 39 or 27.5 years to 5, 7, or 15 years. This acceleration is what provides the taxpayer with increased depreciation deductions and immediate tax benefits.
A cost segregation is an engineered study that segregates property (real estate) into appropriate Federal Income Tax Depreciation classifications while maximizing accelerated depreciation benefits offered by the Internal Revenue Service. The following example is provided to illustrate the benefits that can be derived from cost segregation:
A newly constructed commercial building (not leasehold property) valued at $1,000,000 would normally be depreciable over 39 years without a cost segregation study. However, an engineered study would reallocate components of this real property into accelerated lives of 5, 7, or 15 years. Let’s assume in this example that 10% of the total cost ($1,000,000) was allocated to both 5 and 7 year property, 20% was allocated to 15 year property and the remaining 60% remained allocated to 39 year property.
Without the cost segregation, total allowable depreciation amounts to approximately $14,000 in year 1 (assuming June placed-in-service date) and $168,000 after 7 years. In contrast, the reallocation due to cost segregation generates total allowable depreciation of approximately $408,000 in year 1 (including Bonus Depreciation but excluding Section 179 expense) and $501,000 after 7 years.
The increased allowable depreciation produces significant tax savings and an immediate avenue for increased cash flow. In this example, gross tax savings for year 1 amounts to $408,000 (assuming a fixed 40% tax rate). Even after 7 years, the gap in allowable deductions remains considerable with $333,000 of increased accumulated depreciation that would have been otherwise deferred to later years.
Please note that the above example is for illustrative purposes only and does not reflect present value calculations or the results of state, local, and the alternative minimum tax.
William Vaughan Company offers cost segregation studies based upon guidance provided in the Internal Revenue Code, court cases, and construction cost manuals. Furthermore, the cost segregation analysis generated by William Vaughan Company’s professional team is tailored to fully comply with the IRS Cost Segregation Audit Techniques Guide. Please contact your William Vaughan Company representative for further information regarding this opportunity.
By Nathan Bernath, CPA