What is cost segregation?
'Cost Seg' is an engineering-based tax planning tool that seeks to maximize the depreciation benefit of owning commercial real estate.
How will I benefit?
Cost segregation breaks 'building' assets into their constituent pieces, accelerating the depreciation of qualifying property into early years of facility ownership. This lowers taxes in those years, resulting in increased current cash flow. ‘Personal property’, (usually depreciable over 5-years or 7-years) and 'land improvement property' (usually depreciable over 15-years) are 'segregated' via engineering analysis from the 'real property' shell of a building (which is generally depreciable over 39-years). The bottom line is that depreciation deductions are increased in early years of ownership, resulting in sizable tax savings in those years. DC guarantees a minimum 3 to 1 Return on Investment ratio as compared to our post-tax professional fee, or we do not generally recommend proceeding with a project. (Some limitations apply, contact your DC rep).
What building-types qualify?
Cost segregation applies to almost any commercial property type 'held for the production of income' and 'placed in-service' any time after January 1, 1988. In other words, to just about any commercial facility you may have 'bought', 'built', 'renovated' or 'exchanged-into' since that date. Building age is not generally a factor, it is the ownership-transaction date that must post-date 1-1-1988.
Why is it important that a study be performed by building construction professionals?
Using a construction engineer to complete a study maximizes the amount of short-lived property identified (a great deal of which is ‘embedded’ in the building shell and adjacent ground). Moreover, the IRS has also stated that a construction-engineering approach is the preferred method for cost segregation, saying "...Preparation of cost segregation studies requires knowledge of both the construction process and the tax law involving property classification for depreciation purposes", and that "In general, a study by a construction engineer is more reliable than one conducted by someone with no engineering or construction background." (IRS Cost Segregation Audit Techniques Guide, with emphasis).
This is even more true in the case of building acquisitions, due to the typical lack of building construction-cost information. Using an engineer not only maximizes the overall tax benefit, but also increases the general defensibility of the resulting tax position to the government.
How do you work with my CPA?
Because most of the short-lived property recovered by a cost seg study is 'embedded' in the walls of buildings and the adjacent ground, it is not normally recoverable without construction engineering experience. However, your current CPA or tax-professional is an important part of that process! DC partners with your existing CPA firm, and provides an engineering tax report in compliance with IRS-recommended industry 'best practices' that is then used by your CPA to increase your write-offs and validate the overall tax position. Our goal is to become a reliable partner to the CPA firms we serve, and we are always looking for quality-oriented firms who share our values to join in our free national network of partner firms.
Does cost segregation increase my chance of audit?
No cost segregation provider or tax professional can provide an 'ironclad' guarantee that your tax return will not be selected for audit by the Internal Revenue Service. It is also true that in recent years the IRS has issued both taxpayer and auditor guidance regarding the subjects of tangible property classification, asset dispositions, and cost segregation, due primarily to wide variations in industry practices and overall quality. (Another reason to hire a thoroughly knowledgeable and vetted professional like DC). However, cost segregation is a long-accepted methodology by the IRS, and having a properlycompleted cost segregation study performed does not increase a taxpayer's chance of audit.
When does it make sense to do a study?
Pretty much 'any time' is a good one to do a cost seg study. New construction projects, building acquisitions, renovations or additions, interior tenant or leasehold improvements, and even existing real estate or improvements you may have placed in-service in prior years (as far back as 1988!!!) are all good candidates for cost segregation. In general, however, it is typically 'best' to involve us as early in your project as possible, i.e. during the negotiation phase of an acquisition, or during the design and budgetary phases of new-construction work.
What if I already filed this year's tax return? Do I need a current-year building 'in-service' to benefit?
You do not need a new construction project or current-year asset in-service date in order to benefit from cost seg. In fact, in cases where a project has been placed 'in-service' in a prior tax year, the current-year tax benefits may be even more sizable due to your ability to ‘catch-up’ on depreciation from prior tax years which you were entitled to but otherwise 'missed out on'… and without amending prior-year tax returns!
Is there a minimum project size?
As a rule of thumb, for a free-standing building, it often takes a minimum of about $300,000 to $500,000+- in real-property basis to make cost segregation study viable. However, especially under the 2014 Tangible Property Rules, this is not always the case, and special opportunities now exist for smaller properties and constructed leasehold improvements. Even more importantly, due also to other guidance recently issued by the IRS regarding the subject of asset disposition, it is now more important than ever to 'set up your books' properly in order to facilitate the potential future abandonment of assets, and maximize the applicability of available Qualified Improvement Property rules and 'Safe Harbors'. Since there's no charge to obtain a free estimate of potential savings, it's typically worth obtaining a benchmark analysis of your potential opportunity. DC prides itself that we will always be the first in line to tell you when cost segregation doesn't work.
What if I lease my building / space?
Generally, as long as you paid for the improvements, you are entitled to depreciate them, even if you received partial reimbursements from the property owner to meet tenant build-out allowances. (Specific criteria apply). Also, for properties placed in-service after October 2004, some additional special opportunities may be available to qualifying leaseholders depending on specific circumstance, and to taxpayers in certain specified industries (primarily those in restaurant, retail, and commercial leasing). And, most recently, the Tax Relief and Jobs Act of 2017 has created even more opportunity.
What documentation do I need to have a study completed?
Due to our proprietary engineering methodology, Depreciation Consulting LLC can complete a highly defensible cost segregation study on a facility for which minimal documentation is available. However, facility blueprints, site plans, building appraisals, contractor cost data and invoices, purchase agreement settlement sheets, rent rolls for multi-tenant situations, and other documents help us to maximize the benefit and overall defensibility of our work. For prior-year in-service facilities, current-year tax fixed asset schedules (i.e. a 'depreciation schedules') for the affected tax-filing entity)are a minimum requirement. For new construction projects, a detailed construction-cost summary is generally the minimum requirement.
How do I get started?
Simply contact Depreciation Consulting, LLC about about your potential project. Our engineers will be more than happy to provide you with additional information and a free no-obligation evaluation of your project!
frequently asked questions
1313 Hillcrest NW
Grand Rapids MI 49504
616.453.3447
D
tax savings for commerciAL PROPERTY OWNERS
Integrity. Expertise. Experience.
LLC
e p r e c i a t i o n
o n s u l t i n g
C