Cost Segregation is a widely used strategy that allows building owners to unleash money hidden within their walls through use of a common accounting principle. When companies or individuals buy commercial property, costs are normally depreciated using a straight-line method over a 39-year period (27.5 years for commercial residential). Under this approach, building owners take a small depreciation expense each year until the building is fully depreciated.
The Tax Code’s Cost Segregation rules allow taxpayers to accelerate the depreciation schedules of various building components. Regulations specify components that can be moved from 39-year or 27.5-year life to 5-, 7-, or 15-year life. This allows taxpayers to increase their depreciation expenses in the near term, which results in lower pre-tax income and a lower tax bill.
There are numerous scenarios in which a taxpayer may benefit from cost segregation, including:
- Building owners with considerable depreciation life left within their asset
- Building owners that make major improvements or modifications to their asset
- Tenants that make major lease-holder improvements
- Owners of older buildings can use a change of accounting method to perform retroactive cost segregation
Recent tax legislation has bolstered the tax saving potential from a cost segregation analysis. The Tax Cuts and Jobs Act (TCJA) of 2017 allows taxpayers to claim 100% bonus depreciation in the first year for all property placed in service after September 27, 2017, with less than a 20-year life. This means all building components accelerated to 5-, 7-, or 15-year life could be fully deducted in the first year!
CARES Act Benefits
The Coronavirus Aid, Relief, and Economic Security (CARES) Act passed in 2020 opened even more doors for building owners. This act allows business owners to carry back net operating losses for five years. This means that cost segregation and bonus depreciation can now be used to create a loss in 2018, 2019, or 2020 that can be carried back to profitable years and generate Treasury refund checks.
Cost Segregation Services
Cost Segregation is implemented by breaking down a building into individual components and assigning a value to each component. These values must be applied through IRS-approved methods. To implement this strategy, a professional is needed to analyze a building and build a new depreciation schedule based on each component’s value and the rules surrounding its useful life. The professionals at Alternate Tax Solutions have been performing Cost Segregation studies for fifteen years. We will perform a free analysis for any property to determine if the taxpayer can benefit from accelerated depreciation. We then work to document all components of the building, provide a new depreciation schedule, and help the tax preparer apply all benefits. For a free analysis on your building, please contact our team today.