Cost Segregation: The Right Asset Classification Produces Huge Tax Savings

February 2019 | Article

Taxpayers who spent at least $500,000 to purchase, build or renovate a building in the last 15 years may be sitting on a huge tax benefit. How do they find out? They do a cost segregation study.

A cost segregation study helps taxpayers accelerate depreciation deductions, which reduces taxes paid resulting in increased cash flow. This cash savings is achieved by cost segregation professionals examining the components classified as part of the building. After the components are examined, some are reclassified into the proper and most beneficial asset depreciable life category. (For example, an asset that is incorrectly classified as part of the building structure to be depreciated over 39 years is moved to a non-structural component that can be depreciated over 15 years.) While the total amount of depreciation available on the asset does not change, shortening the life results in the total depreciation available being taken over a shorter period of time, which produces current tax savings. But to realize that current tax savings, the owner of the building undergoing a cost segregation study should be paying current taxes.

The following examples demonstrate how businesses are putting cash in their pocket with a cost segregation study.

Business Purchase Examples
A business recently purchased a $7.1 million business park. As a result of a cost segregation study, the owner was able to generate almost $250,000 in tax savings in the first year. And, almost $500,000 in tax savings are estimated to occur in the first five years.

Another business owner had a similar result with an early 2018 purchase of several new buildings valued at just over $16 million. The completed cost segregation study, combined with the newly enacted 100 percent bonus depreciation provision, resulted in tax savings of $1.1 million.

Business Construction Example
When a business recently built a $15 million manufacturing facility, a cost segregation study, coupled with 100 percent bonus depreciation on qualified property, gave the owner a first-year tax deduction of $3 million.

Business Renovation Example
Renovating a building can also produce benefits when components of the renovation are properly classified for depreciation purposes. The $5 million developer investment in the renovation yielded a $2 million first year tax deduction after a cost segregation study was conducted.

These techniques will work for you, too. To learn more about the benefits to be achieved through a cost segregation study, or to request a free benefit assessment, contact your Eide Bailly professional or a member of our Fixed Asset Services team.

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