As an owner of commercial real estate (or a counselor to those who own commercial real estate) managing costs in this economy is as important as finding and keeping tenants. From Bergen County to San Diego, no one is escaping this tight economic time and every option seems to be on the table.  For this reason, we think cost segregation is an excellent opportunity to recapture capital for certain operations.

While cost segregation is not new, this comprehensive tax/engineering analysis for accelerating depreciation is a regulatory “gift” that is still allowable under the current tax code and underutilized by many building owners.

At a time when cash is king and taxing authorities seek ways to generate revenue, the US tax code still provides for a few useful ways to recover capital.  All the more reason why building owners—particularly manufacturers and process or specialty businesses with equipment and custom-outfitted facilities—should investigate doing a cost segregation study on their property.  With the wave of green building construction and retrofit, state and local tax benefits now also exist for owners who commission a comprehensive cost segregation study.

Cost segregation is all about depreciation.  The concept is simple:  Strip out of a building certain components that can be depreciated faster than the standard 39 year schedule and take the tax advantage of that accelerated depreciation now rather than later.  Since certain components of a building are customized to a purpose or process, they are not considered permanent structure of a building.   Instead, these process-related costs can be treated differently for tax purposes.  Expenditures such as specialty lighting, process generators, raised flooring and refrigeration units are examples of items that can be reclassified to shorter lives.

Will Your Property Qualify?

A few important considerations should be examined before moving forward.  If you are the owner of the building, (sorry, leases don’t qualify) that was constructed or remodeled after 1987 with a minimum value of at least $1 million, and you do not have either a current net operating loss or a large net operating loss carry-forward, you may want to consider a cost segregation study.

- A preliminary review by an experienced tax accountant will determine if it makes sense to move forward.  Click here for a copy of Hunter’s Cost Segregation Analysis form.  

- If merit has been established, a fee estimate will be prepared and submitted to you. 

- Upon approval, a site visit will take place.

- Engineers will work with our tax expert, reviewing your building drawings and assembling the data to support the change in depreciation

- A comprehensive report is generated for your review, outlining the new depreciation schedules and anticipated savings to be attributed on the next Federal company tax filings.

With potential reclassification of from 15% to 35%, you could be seeing substantial recovery.  There is a more detailed reclassification chart on our website.

Qualifications

While you would think your tax accountant would be the best person to handle this analysis and reporting for you, cost segregation is a complex specialty that requires training and an affiliation with a qualified engineer who understands the tax code as much as the inner workings of a detailed building schematic.  A poorly documented cost segregation study could be challenged by the IRS.  If your data is lacking good documentation or the analysis does not substantiate the position, you may find yourself in a bind.  Reports must be very IRS friendly and provide a documented trail of tax positions with proper statutory and case support for all positions taken in completion of the study.  In our firm, we also provide IRS Audit support should your study be chosen (though remote) as part of our fee estimate.  

As you can see, for a multitude of reasons, it is smart to hire a firm with proper credentials and experience in cost segregation if you wish one performed.  Done well, cost segregation can unlock significant tax benefits for your business.  In this challenging business and regulatory climate, it’s an idea well worth investigating.

We welcome your thoughts and comments.

Scott Davis, JD
Hunter Group CPA LLC

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