Cost Segregation

Brief 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.

Benefit

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

ROI

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

Utilization Schedule

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

Fee

See ROI.

Fee Schedule

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.

Customer 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.

Risks

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.

Risk Timing

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.

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.

Common Industries

Applies to all real estate held for profit.

Authorities 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.

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