According to the IRS Audit Technique Guide, a quality cost segregation study:
Identifies and classifies a company’s assets into property classes (furniture, land, equipment, office building, etc.) and categories (short-lived and long-lived property)
Explains the rationale for classifying assets (personal or real property)
Substantiates the cost basis of each asset
Reconciles total allocated costs to total costs
Improve your company’s short-term cash flow
Identify costs that you can expense
Create a sound record for IRS defense
Cost segregation operates on this same principle of the time value of money – by decreasing current income, you defer tax payment, creating a financial gain today.
You should consider a segregation study if you are:
Building a new facility
Purchasing an existing building
Renovating an existing facility
Please note that properties such as shopping centers, office parks, power centers, manufacturing facilities, industrial buildings and office buildings that have been in service since 1986 may also qualify for cost segregation studies.
Consider the following example based on an actual cost segregation engineering report. Suppose a taxpayer purchases a nonresidential building for $12,135,000 (assume the land is owned by an independent third party). If the taxpayer does not use cost segregation, it must use straight-line depreciation over 39 years.
In contrast, suppose the accounting professional advises his or her client or employer to retain an engineering consultant to prepare a cost segregation study. The engineer’s report shows that of the total purchase price, $11,285,000 should be allocated to the building, $50,000 to 15-year property and $800,000 to 5-year property. Allocating part of the purchase price to these two additional property categories results in tremendous tax savings. Assuming a 35% tax rate and a 5% discount rate, the cost segregation study produces $133,563 of tax savings.
Did you know that a cost segregation study can help you save money on your taxes? At FullerCSS, we offer comprehensive cost segregation services to minimize your tax liability and increase the cash flow on your current, future or past real estate investments. We keep up with the ever-changing IRS provisions regarding depreciating property and combine innovative thinking with technical expertise to ensure you receive the full benefits of the study.
A cost segregation study represents a valuable opportunity. You may deduct depreciation amounts that you were legally entitled to but did not claim entirely in the tax year in which you complete the study. This cash flow windfall is available to you even though the statute of limitations previously closed on the property construction or acquisition year. Our team of professionals will identify the overlooked shorter-life assets and file the necessary IRS documents to recover your tax deductions.
Our process does not intrude on our client’s day-to-day operations. Our step-by-step process is as follows:
1. Physically inspect the property.
2. Examine architectural/engineering drawings and specifications for potential asset reclassification.
3. Analyze cost data, including the contractor’s application of payments, change orders, owner incurred costs and indirect disbursements.
4. Prepare an itemized list of property units qualifying for shorter-life classification based on relevant income tax authorities.
5. Apportion direct labor, material components and indirect costs based on engineering drawings and specifications.
6. Reconcile total costs per the engineering analysis to capitalized project costs.
7. Deliver report with findings and analysis that will support your company’s tax position.