Insights: Article

Cost Segregation: A Potential Permanent Tax Savings

February 07, 2017

With the recent administration change in Washington, D.C., tax reform is a growing topic of conversation. The effort required to accomplish tax reform is no simple task and could encompass a variety of new provisions, the effects of which are currently unknown. However, the most discussed change involves the lowering of business and individual tax rates.

Increasing the Value of Deductions
With the chance of a reduction in tax rates, tax deductions become even more valuable in tax years before the rates are lowered. Accelerating deductions into the 2016 tax year would lower tax liabilities when rates are high and shift income into future years when rates are anticipated to be lower, thereby, permanently reducing tax liabilities.   

Timing a Cost Segregation Study
If you own real estate, cost segregation could be a very beneficial tax planning tool. IRS rules allow taxpayers to apply a cost segregation study any time after the building is purchased, renovated, or constructed, which provides a unique opportunity to plan which tax year depreciation deductions are realized. Taxpayers who have opted not to perform a cost segregation study in the past should now reconsider, as the tax savings could be made permanent by the potential rate changes.

Example
ABC, Inc. owns a building that was purchased in 2014 for $1 million. ABC has a cost segregation study performed on their building and applies it to their 2016 tax return. The cost segregation study accelerates $100,000 of future depreciation deductions into the 2016 tax year where the top federal income tax rate is 39 percent, creating an immediate tax savings of $39,000. Assuming tax rates drop in 2017 and subsequent years to a top rate of 30 percent, the deductions that would have been taken by ABC had the cost segregation study not been done would have saved $30,000 in tax. By completing the cost segregation study and applying it to 2016, ABC realizes a $9,000 permanent tax savings. This is on top of the traditional benefits of accelerated cash flow generated by the $39,000 cost segregation study 2016 tax savings. 

Latest Insights

September 25, 2018
Article
As the largest tax reform legislation in the past 30 years becomes reality, it is important to stay up-to-date on planning opportunities and how reform may impact you and your business. Our Tax Reform: Practical Insights examples aim to break down…
September 24, 2018
Article
Since the Affordable Care Act became reality, businesses have been scrambling to figure out what compliance looks like and how best to comply.
September 24, 2018
Article
In auto dealerships, showrooms, car lots and implement dealerships, there is a constant flurry of activity. One area that can easily get overlooked is cybersecurity.
September 24, 2018
Article
The recent US Supreme Court decision that overturned Quill in the South Dakota v Wayfair case has many states making or considering law changes related to sales tax compliance for out-of-state sellers.
September 21, 2018
Article
In the wake of Hurricane Florence and its footprint, devastating results are being experienced by communities and businesses. As a result of these catastrophes, businesses will turn to insurance carriers for recovery of covered losses. Current…
September 20, 2018
Firm News
Eide Bailly LLP announced the winners of its 2018 Nonprofit Resourcefullness Awards, recognizing creative and sustainable revenue ideas from nonprofits in Arizona, Colorado, Minnesota, North Dakota and Utah.
September 19, 2018
Article
The IRS has started sending out Letter 5699 asking businesses to verify if they should have filed Forms 1094/1095-C. These forms are required for all ALEs.
September 19, 2018
Recorded Webinar
Are you considering doing business or having employees in Pennsylvania? Have you had issues with your state tax filing? Join our state and local tax team for some helpful insights into Pennsylvania tax filings.
September 19, 2018
Recorded Webinar
Are you considering doing business or having employees in Nevada? Have you had issues with your state tax filing? Join our state and local tax team for some helpful insights into North Dakota tax filings. This webinar will cover registration,…