What is Cost or Value Segregation Studies and why should I care?
By definition, a cost segregation study is identifying personal property assets that are grouped with real property assets, and separating out personal assets for tax reporting purposes.
A real world example: when you build a building and everything associated with that building is generally categorized under a vague description and bulked together to become one fixed asset entry with a class of Real Property and depreciating on a straight-line method with a 39 year life. However, after a true cost segregation study, most of the time (if properly executed) 20% to 60% can be reclassified into Personal Property and depreciated on a double declining balance with a much shorter recovery period – either 7 or 5 years! Way better than 39 hu?
So why should I care? Because silly, who wouldn’t want better control over their fixed asset line items and who wouldn’t want to recover more depreciation and uncover those assets that may qualify for additional bonus depreciation (Economic Stimulus Bill for an extra 50%)? Bottomline of why — generate more cash flow in these ‘trying’ times and clean up your fixed assets!
Why don’t more people take advantage of this study? Generally, they are too concerned about paying for such a service, but in the end, this service actually PAYS for itself right off the bat! Imagine if you will…. recognizing an overall 20% to 60% write-off on your fixed assets; still not convinced? It’s MONEY in your pocket!
For those that don’t want to take my word for it….
My friend Wiki states:
In addition to providing tax relief, cost segregation can benefit businesses in a number of ways:
- Maximizing tax savings by adjusting the timing of deductions. When an asset’s life is shortened, depreciation expense is accelerated and tax payments are decreased during the early stages of a property’s life. This, in turn, releases cash for investment opportunities or current operating needs.
- Creating an audit trail. Improper documentation of cost and asset classifications can lead to an unfavorable audit adjustment. A properly documented cost segregation helps resolve IRS inquiries at the earliest stages.
- Playing Catch-Up: Retroactivity. Since 1996, taxpayers can capture immediate retroactive savings on property added since 1987. Previous rules, which provided a four-year catch-up period for retroactive savings, have been amended to allow taxpayers to take the entire amount of the adjustment in the year the cost segregation is completed. This opportunity to recapture unrecognized depreciation in one year presents an opportunity to perform retroactive cost segregation analyses on older properties to increase cash flow in the current year.
- Additional tax benefits. Cost segregation can also reveal opportunities to reduce real estate tax liabilities and identify certain sales and use tax savings opportunities.
Under certain circumstances, segregated assets may qualify for a special 30% bonus depreciation allowed by the Job Creation and Worker Assistance Act of 2002 or a 50% bonus depreciation allowed under the Jobs and Growth Tax Relief Reconciliation Act of 2003.