For commercial real estate investors and business owners, increased cash flow, reduced tax liability, a deferral of taxes and/or the ability to reclaim missed depreciation deductions are welcome ways to improve their bottom lines, open up more options to generate income and, of course, grow their business. At Tax Savings Professionals, we believe cost segregation can be used as a tax planning strategy to help achieve those goals.
What is cost segregation? Once utilized by only the largest real estate investors, it is a tax planning strategy now widely used by commercial property owners of all sizes to accelerate depreciation deductions, defer taxes and improve cash flow. How do they achieve that? By starting with a cost segregation study, which (according to the Internal Revenue Service) allocates or reallocates building costs to tangible personal property. Put another way, it assigns costs to the “parts” that make up a building in order to accelerate tax depreciation deductions to reduce taxable income.
How does cost segregation work? It essentially takes the real estate and breaks its components down into various categories with various depreciable lifespans. These categories may include personal property, such as furniture and carpeting, and land improvements, such as sidewalks and fences. After assigning a value to the personal property and land improvements, the remainder of the purchase price not associated with the land will be allocated to the building. Any cost allocated to land is not depreciable for tax purposes. Because the IRS is very particular about “cost segregation” and what qualifies, an engineering professional should be hired to conduct the study. At this point, you might be saying, “Is the effort worth it?”
Given the fact that a commercial real estate investor or business is setting him or herself up to take advantage of accelerated tax depreciation deductions (which would have otherwise occurred slowly over the years) and that current tax policy encourages companies to incur capital expenditures by providing them with a bonus” depreciation for certain assets added now through December 2019 – the short answer is “probably yes.”
The long answer – anyone considering cost segregation should consult with a financial and tax planning professional to gather all the details needed to make an informed decision. After all, each business is unique, and thoughtful consideration is key when considering any tax planning strategy. Also, keep in mind, a variety of advanced tax planning strategies, hand-picked to suit your business, is the best way to maximize your tax savings and financial success.
At Tax Savings Professionals, we are here to recommend missed, misunderstood, underutilized, and even unknown strategies. To learn more, please call us at (772)257-7888 or click on our contact form today.