Savings with Cost Segregation

depreciation deduction in early years of ownership.

Who Benefits from Cost Segregation Studies?

Cost Segregation Studies benefit almost everyone who owns Income-Producing Property: facilities such as manufacturing plants, industrial parks, research labs, financial institutions, office buildings, hotels & restaurants, retail stores, apartment complexes, shopping centers and even agricultural property.

Cost Segregation analyzes property costs to segregate allowable short life assets from longer life Real Property costs. It’s an IRS-approved method of reclassifying certain 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.

Examples of Savings Provided through Cost Segregation Studies*

*Savings vary by industry

Cost Segregation Study graph

Challenge

A family-owned business in central Ohio had placed a six million dollar office building into service in 1994.

Several years after the building had been placed into service, cost segregation, a method of reclassifying building assets that significantly reduced the tax burden of owners of commercial property, became accepted by the IRS. the study determined that the business could reap significant tax benefits by employing this technique.

Solution

  • By conducting a cost segregation study, we were able to reclassify various components of the building.
  • Following the cost segregation study, it was determined that one million dollars of the original construction cost was determined to be “personal property” as opposed to “real property.”
  • Personal property can be depreciated over a much shorter life span (five, seven or 15 years) which significantly reduces a company’s tax burden.

Results

  • On the business’s 2005 tax return, We were able to claim the depreciation from the time that the building had been put into service (1994-2005).
  • The business was able to claim $650,000 in depreciation which resulted in a $240,000 tax savings for 2005.
  • The owners were concerned, however, that by claiming the depreciation in 2005, the business would not be able to claim those depreciation expenses on its future tax returns, thereby leaving an additional tax burden on family members who would one day run the company.
  • Skoda Minotti determined that by placing a portion of the tax savings into an interest-bearing account, the business could withdraw funds to cover the additional tax expenses and have the remaining $160,000 available for distribution as a result of the cost segregation study.
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