Cost Segregation

Cost Segregation Overview

When performed correctly Cost Segregation studies are another powerful financial tool to increase cash flow and reduce taxable liability for any entity that owns commercial property.

Cost Segregation is the method of reclassifying the components and improvements of a commercial building from a 39-year life, to a shorter depreciable life. This process allows the assets to be depreciated on a 5, 7 or 15-year schedule instead of the traditional 27.5 or 39-year depreciation schedule of real property.

Thus, current taxable income will be greatly reduced and cash flow could increase by between 5% to 8% of the building’s cost.

What is Cost Segregation?

As changes have occurred over the years, the effects of additions to the building, as well as asset “disposals” associated with the building have increased the opportunity for commercial property owners to realize a significant tax benefit.

Cost Segregation is a tax strategy approved by the IRS since the enactment of TRA 86, to reclassify specific 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-structural elements, exterior land improvements and indirect construction costs. The primary goal of a cost segregation study is to identify all construction-related costs that can be depreciated over a shorter tax life (typically 5, 7 and 15 years) than the building (39 years for non-residential real property).Personal property assets found in a cost segregation study generally include items that are affixed to the building but do not relate to the overall operation and maintenance of the building.

Due to improved treatment, portions of the electrical, plumbing, mechanical systems, and site improvements of a building along with hundreds of other components can be allocated into shorter lives translating into immediate cash flow.

Even if a Cost Segregation study has been done in the past, it is our experience, that things are not always correctly accounted for. This results in the Internal Revenue Service holding on to more dollars over a longer period of time.

Our Process:

- ABGi provides a complimentary analysis of the buildings and grounds, and identifies additional savings
- ABGi reviews the potential savings with the company and tax professional if desired
- Once a company elects to move forward, ABGi completes the study in 4-6 weeks
- All reporting includes necessary adjustments to the Depreciation Schedule, the 481(a) adjustment, and the required Engineering report
- Most clients see at least a 10:1 rate of return

Cost Segregation is a way for commercial property owners to accelerate their buildings’ depreciation, creating significant savings on federal taxes. Within the first five years of building ownership, a company could save up to $100,000 for every $1 million in building costs. Cost segregation has been recommended by the AICPA and many leading financial publications, including the Journal of Accountancy.

ABGi creates a cost segregation study by analyzing the building strictly within U.S. tax code guidelines. This engineering-based study provides an exact tax plan to accelerate property depreciation and write off more costs, including benefits from additions and disposals. This provides a time value of money benefit as well.

Our team of Attorneys and Engineers evaluates the property and its assets. ABGi creates a cost segregation study customized to each commercial property. If the property is depreciating on a conventional scale of 27.5 to 39.5 years, a cost segregation study can recategorize it to depreciate in 5, 7 or 15 years. By using this specific method, the study can provide information on exactly how much money could be saved on taxes.

Cost Segregation Benefits:

- Reduced Taxable Income – With accelerated depreciation, a commercial property owner will owe less each year on its federal taxes.
- Increased Cash Flow – With less taxable income, a company’s cash flow increases, year after year.
- Growth – Many of our clients use their tax savings to reinvest in the business, purchase property, or reduce their principle building payment.