Cost Segregation is an IRS endorsed tax strategy that is simple and easy to understand. The purpose in having a Cost Segregation Study performed is to allow owners to depreciate their commercial property in a manner that is different from the standard method of accounting, which is 39 years. Let’s face it, if the owner were a 60-year-old property owner, how much depreciation on the property would the owner realistically expect to enjoy? If you think about this cynically, the Government is betting that the life of the property, in terms of depreciation (39 years), is going to “outlive” most property owners! So, wouldn’t it be nice to dramatically accelerate the depreciation now so that the owner can take advantage of an immediate cash flow in the current tax year? Well, now it can be done legally.
The actual basis for this new accelerated depreciation method of accounting has a legal foundation dating back to 1997. The important thing to know is that in order for anybody to take advantage of this program, they must hire an independent 3rd party qualified engineering firm to perform the Cost Segregation Study, according to the IRS Chief Counsel.
When owners elect to have a Cost Segregation Study performed on their commercial building, it allows certain components of the building assets to be accelerated from the standard 39-year depreciation schedule into segments of 5,7, 15, and 27.5-year increments. Some elements of the structure will remain at 39 years. In cases where the amount of the identified accelerated depreciation exceeds the amount of paid in tax from the current tax year, the commercial property owner is even able to go back the two previous years in recouping monies that have already been paid. If needed, this program even allows for a carry-forward of the accelerated depreciation until it is used up.
So, what are the engineers actually doing? The role of the engineering company is to: 1) Properly classify each of the structural components of a commercial building, 2) Identify whether the structural components are either permanent in nature or decorative, 3) Determine whether each structural component is incidental to the operation and maintenance of the building, 4) Apply the sole justification test for personal property, and 6) Review applicable Legislative analysis and committee reports. In addition, the engineers are responsible to have the skill-set to comprehend and have knowledge of all the IRS and Court rulings on Cost Segregation Studies from 1997 to the present.
Once a commercial property owner has decided to move forward with a cost segregation study, the engineers will require some specific documentation, such as architectural plans, blueprints, depreciation schedule, etc. In addition, the owner or the owner’s CPA will be asked to provide the cost basis of the property to ensure that the study is based on the correct depreciation amount. When the study is complete and delivered, the results of the study are reviewed with the owner and the CPA. None of the owner’s internal staff is needed to perform the study and, with the exception of the site visit and digital survey, the study is done in an unobtrusive manner off-site. The Cost Segregation Study is a legally allowable depreciation method. The key is to find an Engineering firm that specializes in these studies and has staff members who are fluent as construction experts. The engineers performing the study need to know what is “in the walls” and must know how to apply the parameters of IRS approved industry standards and systems. The Engineering analysis needs to analyze construction drawings, standard cost systems, and construction analysis. An IRS memorandum even suggests an “engineering cost segregation study” as the proper application.
The Cost Segregation Study typically takes 4-6 weeks. It can reduce the owner’s year-end taxes or reduce the owner’s current quarterly estimated tax payments. Again, the Cost Segregation Study is available to any commercial building. The program does not displace an Accountant; but provides Accountants with a great way that they can endear themselves to their clients by suggesting this acceptable accounting practice that will maximize tax benefits for their clients.
Tom holds a BS degree in statistics and marketing from the University of Alabama and a Master’s degree in management (emphasis in organization structure and dynamics) from Auburn University. Tom’s career includes 33 years in the IT industry where he ended that work as the CIO of the Hechinger Company. In 2001, Tom began working for himself and focused his energies on the development and implementation of marketing programs for small and mid-size companies. In the Fall of 2004, Tom began to concentrate his marketing efforts on cost segregation.
Tom is the president of Cost Segregation Studies, Inc and can be contacted at email@example.com
, at 770-476-9694 or visit his website for more information at www.cost-segregation-studies.com