Cost Segregation Study

Service description

Accelerates the depreciation of buildings owned by the business (on balance sheet). Commercial buildings are most often depreciated evenly over a 39-year or 27.5 year period. With Cost Segregation, a portion of a building's depreciation from future years can be brought forward to the current year to increase cash flow.

Common industries

Applies to all real estate held for profit.

ROI

Varies widely. Median ranges from 10:1 to 100:1.

Benefit

Increased Federal tax deduction which increases cashflow or Net Operating Losses.

When you benefit

Benefit realized in the first year and often for the 5 - 10 subsequent years.

What it costs

See ROI.

When you pay

Provider dependent. Typical arrangements include (1) Full payment up front, (2) Progress payments, and (3) Full payment upon completion. Depending on the time of year, payments usually occur before benefit is realized.

Risks to know

Cost Segregation is a low-risk tax position with low audit rates. Risk exposure occurs when Cost Segregation positions are either (1) not supported by documentation or (2) the segregation of building costs is incorrect.

When risks arise

This tax deduction is not currently a red flag to the IRS. If an audit were to occur this would most likely happen, if at all, 2-3 years from the date filed.

The process

Business provides service provider with documentation, access to building for the site visit cost segregation report will then be delivered to the client who will give this report to their tax provider to include with the tax return when filed.

Your commitment

Business provides service provider with address of the building, specifications and drawings of the building, and the tax asset schedule from the most recent tax return or building costs for new constructions. Business also facilitates a site visit by the service provider.

Documents to gather

• Closing statement or purchase agreement for each property
• Depreciation schedule from your most recent tax return
• Construction or renovation cost detail, for built or renovated properties
• Site plan or appraisal showing building size and use

Helpful reading

• What is cost segregation?
• Bonus depreciation basics
• What records providers will ask for

Further research

• Internal Revenue Code §167
• IRS Publication 946
• IRS Cost Segregation Audit Techniques Guide
• Revenue Procedure (Rev. Proc.) 62-21, 1962-2 C.B. 418.