Cost Segregation: Hidden Treasure

Neil Keller, Shareholder - Tax   email | bio
October 2009

 

If someone were to tell you there were thousands of dollars hidden somewhere in your building, would you look for it? Thanks to numerous IRS rulings, procedures and court cases, a cost segregation study can be the right tool to help you find it.

A cost segregation study breaks out the components of the building, identifying the personal property, indirect costs and land improvements which can be depreciated over a shorter period of time. The main benefit of a cost segregation study is the increase in cash flow due to the additional depreciation expense realized in the first five to 15 years. The reduction in income taxes caused by the additional depreciation expense in the early years results in actual cash savings. Cost segregation defers taxes, it doesn’t eliminate them, but most business owners would rather take a deduction today versus 20, 30 or 40 years from now.

There are three prime candidates for a cost segregation study.

• The first and most apparent fit for a study is a newly constructed property.
• Equally as good, but not as obvious is an already existing, but recently purchased building. A building does not have to be new to be eligible to take advantage of a cost segregation, but it does have to be new to you.
• The final prime candidate is a building that has undergone a major renovation or improvement.

The other important consideration in determining if you are a good candidate is the cost of the building or improvement. We have found through our experience that around one million dollars of cost for the building or improvements is necessary to make a cost segregation study worthwhile. The cost point could be less if the building is highly specialized.

The best thing to do if you are unsure if your building is a good candidate is ask. Generally a quick visit to the facility is all a cost segregation specialist would need to help you decide if a study would be beneficial.