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Cost Segregation Benefits

by James M. Taylor, CPA, CFP

Businesses with recent or planned building projects could benefit from “cost segregation” deductions, thanks to provisions in the recent economic stimulus plans.

Cost segregation is a tax strategy that separates building components into various asset classes and allows for the accelerated depreciation of some building components. The accelerated depreciation of the shorter-life asset classes may result in significant tax savings during the early years of a project and improve cash flow at an important time. Cost segregation can provide an even larger impact with bonus depreciation (50% first year write off) and the section 179 expensing election.
 
The Cost Segregation Process
Cost segregation may be beneficial if you recently purchased or constructed a commercial building or plan to in the future and the total property cost exceeds approximately $500,000. It is important to consider that cost segregation may be applied to a property placed in service in a prior year. The process of realizing the benefits of accelerated depreciation usually entails the following steps:
1.   Estimate of the present value effect of accelerated deductions
2.   Engineering study and site inspection
3.   Documentation to support property classification
4.   Reporting on annual tax return
 
Once the viability of a project is determined, it is important to use an engineering approach to the segregation of property components. This process, which involves review of the facility and blueprints, provides the background work and documentation to support the classification of assets based on the tax law. A more abbreviated approach that does not document the process may not provide the support necessary should the IRS question the position.
 
During the study, the commercial property will be categorized into four basis categories:
  • Personal Property
  • Land Improvements
  • Building
  • Land
The goal of the cost segregation study is to identify property that can be depreciated as personal property over five or seven years or land improvements which have a 15 year life. The accelerated depreciation of these short-life classes is far greater than if an asset were classified as part of the building resulting in the deduction being spread over 39 years. Typically, by conducting a study, 20%-40% of the property value can be reclassified as personal property from real property.
 
James M. Taylor, CPA, CFP joined Dennis, Gartland & Niergarth in 2006.  As a partner Jim focuses on planning and tax services for business and individual clients at DGN.  Prior to joining DGN, he earned additional experience in manufacturing management and individual financial planning as well as taxation.  For more information, contact (231) 946-1722 or dgn@dgncpa.com.         


James M. Taylor, CPA, CFP

James M. Taylor, CPA, CFP