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Cost
Segregation Increases Tax Depreciation Rate
Improve Cash Flow
With a
Cost Segregation
Study | |
If you own commercial
property, you’re probably depreciating it over 39 years. That means
that every year, you deduct 1/39th of the property’s value
(excluding land) from your taxes. Depending on the value of your
property, you could generate a million dollars or more in
depreciation deductions over the 39 years
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The Savings Can Be Significant
In one case,
a fast-food chain built 10 new restaurants from 1992 to 1994.
The average cost per store was $600,000, excluding the
equipment. A cost segregation study was conducted. The
results:
 Without the
study. The chain must
generally depreciate 100 percent of the building cost over 39
years.
With the study. The chain can depreciate 20 percent of the
building cost over 15 years and 25 percent over five years.
For all 10 buildings, the total taxes deferred over a
cumulative five-year period exceed $700,000. That means the
owners have $700,000 they can use now to run the business, pay
off debt, or invest as they see fit. It's almost like getting
an interest-free loan from the
government. | .
Wouldn't you like to get your hands on some of the money
sooner?
By conducting a "cost segregation study," you can
dramatically speed up the depreciation process
so you get your deductions
faster. Depending on the building type, a cost segregation study
takes 15 to 60 percent of the building cost out of 39-year
depreciation and puts it into five, seven or 15-year depreciation
recovery periods.
Items that may qualify for faster depreciation include electrical
wiring, kitchen or laboratory plumbing, landscaping, parking lot
improvements, site lighting, underground utilities, decorative
millwork, built-in audio visual projectors and screens. In general,
any property used to operate your business might be eligible for a
faster write-off.
And there’s more. The depreciation on indirect construction
costs, such as construction interest and architecture and
engineering fees can also be accelerated.
By maximizing your depreciation in the early years of ownership,
you increase your cash flow since you pay less income
tax.
Caution: The IRS has
made it clear that experienced professionals should conduct cost
segregation studies. Property owners, or professionals without the
proper experience who try to do this themselves, are likely to have
trouble withstanding IRS scrutiny
To learn more about the specifics of your situation, talk to your
tax adviser.
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