What is Cost Segregation?
Cost Segregation is a highly beneficial and widely accepted tax planning strategy by commercial real estate property owners and tenants to accelerate depreciation deductions, defer tax, and improve cash flow. The primary goal of a cost segregation study is to increase cash flow from purchased properties, constructed buildings and renovations by accelerating depreciation expense deductions. Through this detailed analysis, the components of a building are reclassified into proper class “lives” according to government legislation, case law, and IRS revenue rulings and procedures.
Why have I not heard about Cost Segregation before?
Cost segregation has been around in its current form since 1987, and was once only used by the Big 4 accounting firms and the nation’s largest real estate owners. Within the last few years the cost segregation practice has become routine for commercial property owners and more affordable to smaller companies and individual property owners of almost every size.
Is the practice of Cost Segregation legal?
Absolutely. Over 1,000 IRS revenue rulings and court cases provide the necessary guidelines to properly conduct a cost segregation study. The IRS also issued an Audit Techniques Guide that defines a quality cost segregation study.
What are the benefits I might expect from a Cost Segregation study?
There are a number of benefits associated with cost segregation:
- Generates an immediate increase in cash flow by accelerating depreciation deductions and deferring federal and state income taxes. The average retention of cash flow is $200,000 for every $1M of long term property reclassified.
- Allows for taxpayers to claim ‘catch up’ depreciation on previously misclassified assets.
- Excellent asset management tool! When prepared correctly, a cost segregation study will establish the required unit of property values for your building’s assets to take full advantage of the tax law.
- Other benefits include, property tax benefits, transfer of tax savings and independent third-party analysis for tax accounting and IRS review support.
What types of real estate qualifies?
Nearly all commercial property structures used for business or as residential rental property, can be eligible for the benefits of cost segregation. This will include Auto Dealerships, Offices, Retail, Offices, Apartments, Hotels, Restaurants, Medical Facilities, Manufacturing Facilities, Grocery Stores, Banks, Airports, Warehouses, Sports Facilities, Resorts, Industrial Buildings, and more.
In addition, leasehold improvements are typically great candidates for cost segregation as they typically include a high proportion of qualifying property and generate significant tax benefits.
What are the steps involved in a typical Warner Robinson study?
Warner Robinson Tax consultants gather documentation, such as construction plans, contractor invoices, depreciation schedules, closing statements, etc. From these documents, we identify the qualifying items and associated costs to be reclassified into shorter-life categories. We conduct a site visit to compare what was actually built against the plans, and photograph the property. Results are reconciled and presented in a report that meets the IRS’ “13 Principle Elements of a Quality Cost Segregation Study”, along with relevant case law data, definitions, photo documentation, and supporting calculation details. All WR studies include audit support.
How long does it take to perform a cost segregation study?
For small to medium size projects, typically the final deliverable is issued within 30 to 45 days from the point that all information is received. The time of year is also a determining factor since consultant workload is much heavier in the periods just before tax filing deadlines. Upon receipt of an engagement letter, a specific schedule for completion is assigned to each project based upon client needs, time of year and IRS deadlines.
When is the best time to conduct a Cost Segregation Study?
The optimal time to perform a study is when the property is first placed in service. However, current tax law provides for an easy method to go back in time on prior year’s acquired assets without the need for amending returns.
So, if you have constructed, renovated, or purchased a property, even in the last 15 year, a cost segregation study is something to consider for your property and in optimizing your tax plan.
Can I use my own architects/engineers?
This is generally not a good idea for several reasons.
- Warner Robinson tax professionals, engineers, and attorneys are specialists in this field with decades of cost segregation experience. We understand the construction side as well as the accounting side. Architects and engineers alone are typically not as familiar with the many subtleties involved in a comprehensive study.
- Our combination of construction industry professionals and tax professionals will work together with clients and their accountants to recommend the best value and tax planning solutions for their bottom line. In addition, we will provide you with assurance that your study will be fully compliant with the latest changes in the tax law and court cases.
- The Warner Robinson team is experienced in defending our work in the event of an audit. All WR studies include audit support.
I am interested in learning more about Cost Segregation. Do you charge for estimates?
No, we do not charge for estimates. Let’s discuss your property and tax situation and ways we can help maximize your tax savings.