If you’re a business owner, chances are you’re always on the lookout for new ways to reduce expenses and to save money for your organization. With a cost segregation study, your business can save thousands of dollars in long-term tax and cash flow benefits. Research shows that a minority of businesses are taking advantage of this IRS-compliant strategy—are you?
Read on to learn about cost segregation studies, and how the results could impact your bottom line:
What is a cost segregation study?
A cost segregation study is an IRS-compliant approach to more exactly classify all building components for tax purposes to accelerate depreciation. This translates into immediate tax payment benefits and increases cash flow.
Any business can qualify for the benefits of cost segregation, so long as they are taxpayers and either own commercial property valued at least $1 million (built acquired or renovated since 1987), or with leasehold improvements of $750,000 or more. Some organizations that take advantage of cost segregation include:
• Golf courses and resorts
• Hotels and hospitality
What are the benefits of a cost segregation study?
Cost segregation has many benefits, including:
• Increased cash flow
• Reduction of current federal and state liabilities
• Identification of “catch up” accelerated depreciation benefits
• Full write-offs of long-term assets at the time they are replaced
• Correction of any misclassified assets
• Enhancement of new construction design process to lower the cost per square foot
• Lowering of other costs, including insurance and real estate taxes
• Improvement of bank loan qualifications
• Bridging the gap between engineering, construction and accounting systems
• Possible refunds on prior taxes paid
What are the cost segregation study methods?
Engineering-based methodology for both purchase price allocation and new construction examines costs on a contract-by-contract basis. Once all assets are broken down to the simplest form, they are assigned tax life classifications. This approach creates the best document trail to support the fair and balanced approach the IRS seeks. While time consuming, this methodology ultimately produces the most accurate study, typically leading to the lowest audit time and highest client value. This recommended methodology is the one AssuredPartners NL CORE Solutions employs.
Residual methodology is an abbreviated approach which typically only details short life assets and assigned costs. These assets’ total cost is deducted from the total project cost, with the remaining “residual” amount assigned to the building/other long lived assets. Good residual providers err on the side of caution in valuing shorter life assets, acknowledging that the IRS desires a fair and balanced study under audit. The residual method’s abridged approach trades time and cost for detail, in both short-lived and particularly long-lived assets. Often, this means reduced accuracy, less client value and greater audit time.
In this method, the provider questions the construction team about the cost of the respective assets. The survey approach may be in a residual or engineering format, depending on if the CPA wants to be able to retire assets or not. If a study using this method comes under audit and the valuation of assets is questioned, the owner is responsible to support the contractor and sub-contractor valuation documentation for the IRS. The survey method can be reasonably reliable, but is subject to a wide range of disparity and increased owner documentation responsibilities.
CPAs and owners use the rule-of-thumb methodology each time they review an invoice or purchase order and decide how to treat the expense. A decision is made via individual knowledge of the asset and how it should be treated from a depreciable asset life classification. If there is not enough information available, additional questions are asked to develop documentation to support the decision. Since this method is based more on “experience” and less on documentation, the IRS views this approach with caution.
The AssuredPartners NL CORE Solutions team can facilitate a cost segregation study for your property. To learn more, or to contact an agent, please visit: AssuredPartners NL CORE Solutions.Share This: