A cost segregation study won’t
save any money. This is true
only if the entity or pass thru entity
is losing money and has no ability to
either carry back or carry forward the
losses generated. Otherwise, the
savings generally range from 35% to 46%*
of the additional depreciation generated
from the study. For example, if a
cost segregation study results in
additional depreciation of $1,000,000,
then a taxpayer in the 46% tax bracket
would save $460,000 in federal and New
York state taxes over four years.
We don’t have any assets to
reclassify. Generally, 20-55%
of building costs can be reclassified to
shorter depreciable lives.
Our chances of being audited
will increase. Not according to
the IRS. You are filing an
automatic change in accounting method
which the IRS has pre-approved assuming
the form is filed correctly. In
addition, the IRS has issued a
publication to follow in order to
properly record the changes in
depreciable lives. Keep in mind
that you are going from an incorrect
method to a correct method and the
changes made are generally black and
white issues within the tax code.
There is no support if the IRS
does perform an audit. There
are over 75 IRS rulings, procedures and
court cases which allow for cost
segregation studies. The report we
provide details out every change with
applicable support and documentation.
Our firm's engineers and tax
professionals have spent over 1,000
hours on researching cost segregation
studies and performed thousands of such studies.
We will get the deduction in the
future anyway. Yes this is
true, but a cost segregation study in
effect gives you an interest free loan
from the government for the first 15
years which you will then repay interest
free over the remaining 25 years.
Who do you want holding your money?
There are also advantages to doing a
study if the building is going to be
sold or upon the death of a building
We are in an alternative minimum
tax (AMT) situation and/or the cost
segregation study will put us in one.
Congratulations! You are probably
flush with cash. If this does
occur, the savings will be at the 28%
federal tax rate and not the 35% to 39%
tax rate. Of course the amounts
are large enough so it shouldn’t matter.
In addition, the AMT taxes can be used
against regular taxes in future years.
My CPA has segregated
percentages of construction costs based
on invoices or contractors application
for payment, so our company is already
benefiting. Without the
contractor/engineer expertise coupled
with the tax law guidance, there will
likely be valuable tax benefits left on
the table. More importantly, this
methodology will not withstand IRS
A cost segregation study will
complicate estate planning. Yes
it might, but the rewards of performing
a study have great financial benefits if
the owner of the building dies before
the building is fully depreciated.
Due to the “step-up in basis” rules, it
is one of the rare times a taxpayer can
“have his cake and eat it too.” If
done properly, a cost segregation study
is an estate planning home run.
There is no negative impact to
not performing a cost segregation study.
This is an incorrect assumption.
IRS regulations require that a taxpayer
compute depreciation on what is allowed
or allowable. Therefore, if you
improperly depreciate a 7-year asset
over 39 years, the IRS could disallow
the depreciation on the asset beginning
in year 8. In addition, if the
building is sold the IRS could increase
the gain by reducing the basis in the
building by the depreciation that should
have been taken in prior years, but was
Again, consult your tax professional for
*Assumes federal tax rates between
28% and 39% (maximum marginal rate).