Frequently Asked Questions
What is a Cost Segregation Study?
Under United States tax laws and accounting rules, cost segregation is the process of identifying personal property assets that are grouped with real property assets, and separating out personal assets for tax reporting purposes. A cost segregation study identifies and reclassifies personal property assets to shorten the depreciation time for taxation purposes, which reduces current income tax obligations. Personal property assets include a building’s non-structional elements, exterior land improvements and indirect construction costs. Cost Segregation is a strategic tax savings tool that allows companies and individuals who have constructed, purchased, expanded, or remodeled any kind of real estate to increase cash flow by accelerating depreciation deductions and deferring federal and state income taxes.
In general, it is easy to identify furniture, fixtures, and equipment (FF&E) that are depreciated over 5 or 7 years for tax purposes. However, a Cost Segregation Study goes far beyond that by dissecting construction costs that are usually depreciated over 27 ½ or 39 years. The primary goal of a Cost Segregation Study is to identify all construction-related costs that can be depreciated over 5, 7 and 15 years. For example, 30% to 90% of the total electrical costs in most buildings can qualify as personal property (depreciated over 5 or 7 years). Reducing tax lives results in accelerated depreciation deductions, a reduced tax liability, and increased cash flow.
What is the origin of Cost Segregation Studies?
Cost segregation is not new; on the contrary, it has been in existence since 1954 when the IRS allowed for certain personal assets to be accelerated into a shorter life class. However, it wasn’t until Hospital Corporation of America sued the IRS in 1997, and won, that the IRS revisited the issue of accelerated depreciation. Subsequently, after the Tax Act of 2004, the IRS’ chief counsel issued a memo stating that “…cost segregation, for it to be properly applied, had to involve those with competencies in architecture, engineering or construction and/or construction techniques, in order for personal property assets to be accurately identified and segregated.” Cost Segregation, as we know it today, was thus born.
Who is eligible for a Cost Segregation Study?
Real property eligible for cost segregation includes buildings that have been
purchased, constructed, expanded or remodeled since 1987. A study is typically
cost-effective for buildings purchased or remodeled at a cost greater than
$300,000. A cost segregation study is most efficient for new buildings under
construction, but it can also uncover retroactive tax deductions for older
buildings. Building types studied include Apartment complexes, Automobile
dealerships, Distribution centers, Fast food restaurants, Food processing
facilities, Hotels/motels, Manufacturing plants, Medical centers, Nursing homes,
Office buildings, Retail chains/franchises, Shopping malls, Sports stadiums,
Amusement parks, Supermarkets, and Casinos, just to name a few.
What is the Cost Segregation Process?
In addition to providing tax relief, cost segregation can benefit businesses in a number of ways:
1. 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.
2. Creating an audit trail. Improper documentation of cost and asset classifications can lead to an unfavorable audit adjustment. A properly documented cost segregation
study helps resolve IRS inquiries at the earliest stages.
3. 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 alone is huge. 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.
4. 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.
Will A Cost Segregation Study Save Me Any Money?
A Cost Segregation Study usually generates additional depreciation of approximately 35% to 47%...these
numbers will vary depending upon many factors such as type of property, client’s
tax bracket, use of the facility, and more.
What Does A Cost Segregation Study Cost?
On the average, our experience has been that the total fee will generally fall between 10% and 20% of the estimated NPV tax savings. This can be impacted by how large or small the real estate project is. In addition, the location, accessibility, and quality of the records and documents impact the ultimate cost.
What Is Net Present Value (NPV)?
Net Present Value is the calculation of the present value of tax savings achieved over the 39-year depreciation period (life of the asset).
How Long Does A Cost Segregation Study Take?
A Cost Segregation Study normally takes about 4 to 6 weeks from the time we receive all of the appropriate
Won't We Get The Deduction In The
True. However, 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. Wouldn't you rather hold 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 owner. The present or future value of the money you can save by having a Cost Segregation Study is usually quite substantial. Have the cash now to reinvest it!
How Much Can Be Accelerated?
Certain types of commercial property can be grouped together to give us an idea
of the percentage of those types of buildings that have been eligible for
accelerated depreciation. Your results may be greater, or they may be less than
those quoted here, but in general, property that falls into one of these
categories is most likely to result in accelerated depreciation within these
5 - 10% - Office Buildings
10 - 20% - Light Manufacturing
20 - 40% - Heavy Manufacturing
30 - 60% - R&D Facilities
30 - 60% - Senior Living Facilities
15 - 25% - Health Care
15 - 30% - Apartment Buildings
15 - 25%
My Current CPA Can Probably Do A Cost Segregation Study For Me.
Not all CPAs have experience in Cost Segregation Studies. If your CPA firm is not experienced in this area, we will gladly work with them on a consulting basis to complete the work for you.
Remember; the IRS Chief Counsel issued a memo that is clear on what constitutes
proper “methodology” in applying cost segregation: “…cost segregation, for it to
be properly applied, had to involve those with competencies in architecture,
engineering or construction and/or construction techniques, in order for
personal property assets to be accurately identified and segregated.”
What Will Be Needed To Complete A Cost Segregation Study?
A complete set of construction plans, current tax depreciation records, building cost budget information, final AIA application and a document of certification for payment or other cost information, change orders, direct or indirect costs paid by the owner that are not included in other documents, and any other information depending upon the project.
If I Don’t Have the Necessary Materials, Can A Cost Segregation Study Still Be Performed?
Yes, our construction, engineering and other specialists can do an extensive site visit. They will measure and estimate using currently accepted costing techniques and pricing guides to determine the costs that qualify for shorter recovery life periods.
I Have My Own Engineers and Architects. May I Use Them?
It is most cost efficient and beneficial for us to use engineers and architects who are familiar with and specialize in Cost Segregation Studies. They know the components that qualify and are experts in how to document and substantiate their work. Consequently, their work also better withstands IRS scrutiny and they are able to assist with any IRS challenges.
How Much Does A Benchmark
The Benchmark Analysis is free and provides a close estimate to the potential
accelerated benefits as well as the fee proposed for the final study.
I'm Afraid My Chances Of Being Audited Will Increase After A Cost Segregation Study Is Completed On My Property.
The chance of being audited does not substantially increase after a Cost
Segregation Study. A CSS Study strictly adheres to the IRS Cost Segregation Audit Technique Guidelines.
Will Cost Segregation Study Assist Me In The Event Of An Audit?
Yes. We, and our specialists, can assist you in the event of an audit. Our focus in doing the Cost Segregation Study is to create documentation and support for our conclusions so that they are easily communicated and resolved with the IRS.
How Much Can I Save?
5-10% of the cost of the building is a general rule for the benefit. Contact us today and we will be happy to discuss your information so we can give you that answer.
Why should I choose Cost
Segregation Study, LLC.?
Our engineers have the expertise in tax laws, cases, and ruling on cost segregation, along with real estate development and construction experience to maximize your tax savings. Only exceptionally large accounting firms have in-house engineers who can perform a cost segregation study,
but typically with substantial fees. Our company will work with your advisors to
help you take advantage of this extremely viable tax savings solution at an
Can a CSS Study apply to buildings not yet constructed?
Yes, a cost segregation study can begin with the construction drawings and be completed when the building is finished and the final tax-basis is determined by your CPA. Doing so will normally reduce your real estate taxes as well as insurance costs.
Please consult your tax professional for further information.
Who Do I Call For More Information?
For more information on Cost Segregation Studies or any of our other services,
contact us at Phone: 843-991-0700.