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Cost segregation is not new; on the contrary, it has been in existence since 1954 when the IRS allowed for certain personal assets to be accelerated into a shorter life class. However, it wasn’t until Hospital Corporation of America sued the IRS in 1997 and won that the IRS revisited the issue of accelerated depreciation. Subsequently, after the Tax Act of 2004, the IRS’ chief counsel issued a memo stating that “…cost segregation, for it to be properly applied, had to involve those with competencies in architecture, engineering or construction and/or construction techniques, in order for personal property assets to be accurately identified and segregated.” Therefore, a typical study is one where the building owner can increase the amount of depreciation taken on their commercial property…more specifically, the “personal” property assets which are those non-structural in nature. Consequently, cost segregation is the process to identify personal property assets that often get buried or lumped together within the real property asset. Our engineers reclassify those assets to the shortest possible depreciable life to enable the real estate owner to maximize their tax depreciation deduction, thereby reducing current income tax obligations. If you, as a business owner, are undertaking construction, renovation or the purchase of a building, you quite probably are eligible for substantial federal and state tax savings.
Certain assets related to the project may qualify for accelerated depreciation, meaning you can take larger tax deductions over a shorter period. The beneﬁts of larger tax deductions include increased cash ﬂow, a reduction in real estate taxes, reduction in insurance costs, and lower cost of capital in the ﬁrst few years following a project or purchase. A cost segregation study, conducted by our qualiﬁed professionals at Segregation Holding Limited, can help you identify opportunities to claim accelerated depreciation.
Substantial tax savings for your business may lie in the floor beneath your feet, within the walls around you or even in the shrubs outside your building...but only a cost segregation study, performed by a qualified engineer, can tell you for sure.
WHAT IS IT FOR?A cost segregation study is a highly detailed and strategic analysis that allows companies that have constructed, bought, expanded or remodeled real estate to increase their cash flows by accelerating deductions on short-life assets. To do so, the study identified, segregates and reclassifies property costs currently being depreciated over the typical 39-year depreciable period to shorter depreciable periods of 15, 7, or even 5 years.
This means you can enjoy tax deductions right now that you’d otherwise have to wait years to receive. So, not only do you increase the net present value of current tax savings, but also boost cash flow as well.
The truth is, the IRS actually requires property assets to be categorized appropriately according to it’s asset life class which is why they recommend using those with competencies in engineering or architecture. While the IRS does not widely enforce this provision, it is nevertheless mandated. Of course, for those business owners who do apply it properly, there are many rewards…and more and more, the small business person especially is becoming aware of this seldom-used opportunity.
WHO IS INVOLVED?A cost segregation study is not a mere depreciation analysis. It calls for far more than just classifying line items from construction invoices. The process requires a team of experts well-versed in accounting regulations and tax laws, as well as engineering and construction principles. Our engineer plays a starring role by quantifying building components and estimating the costs of those components utilizing IRS guidelines. The team may also include a CPA, contractor, construction estimator and/or architect.
Together, they’ll analyze detailed working drawings, mechanical and electrical plans, and blueprints to segregate the structural, electrical and mechanical components from those linked to personal property. The study will also allocate “soft costs,” such as architect and engineering fees, utility/easement fees, surveyor’s fees, and permit costs to all components.
HOW MUCH CAN YOU SAVE?Property owners often view building components as parts of the entire structure and depreciate everything over 39 years. However, many expenditures fall into categories with much shorter depreciable lives.
For instance, assets such as the parking lot, landscaping, fencing, tire stops, and signage can typically be reclassified as 15-year property. Carpeting, decorative trim, certain lighting and fixtures, sprinkler heads, and much more can be accelerated into a 5- or 7-year life class.
Also, the current Section 179 expensing rules still apply for depreciation if you operate your business as a limited liability company and hold your building in that entity. And perhaps best of all, the fee for the cost segregation study that brings about these savings is generally only 10% to 20% of the resulting cash flow increase and often is even less.
So, how much can you save? Typically, 25% or more of your property’s tax-basis qualifies for accelerated benefits. If you own a million dollar property, you would potentially see an additional $250,000 in accelerated depreciation, and, of course, your tax bracket would dictate your actual after-tax cash benefit. Speak with your tax professional to know for sure.
WHO BENEFITS?Any property owner who is profitable and whose property’s tax-basis is at least $100,000 or your tenant/leasehold improvements are $80,000 or more. Typical property types that qualify, though not limited to this list, are:
Our dedicated team of cost segregation engineersd and architects have now completed over 8,000 cost segregation studies for clients throughout the United States ranging in size from $75,000 to over $600,000,000 in property value. Tax enactments by President Bush still in affect today have amplified the need for cost segregation with the right team of qualified engineers, appraisers/estimators and CPAs. As laws become more complicated and seemingly more anti-business, especially under the Obama administration, it now becomes imperative to have your real estate portfolio reviewed to determine those assets qualifying for shorter life classes once hidden in your property.
A cost segregation study is the process of identifying personal property assets that most often get buried or lumped together within the real property asset. Our engineers reclassify those assets based on IRS guidelines to the shortest possible depreciable life to help the real estate owner to maximize their tax depreciation, thus reducing current income tax obligations. Approximately 95% of all commercial real estate is depreciated over 39 years. A cost segregation study identifies 10-50% or more (depending on the industry) of assets that may qualify and be depreciated over a 5-, 7-, or 15-year life. The result is an increase in depreciation expense which reduces taxable income which increases cash flow.
IRS Cost Segregation Audit Technique Guidelines. Click.
American Institute of Certified Public Accountants. Click.
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