Frequently Asked Questions About Cost Segregation
What is cost segregation?
Cost Segregation is an engineering view to classifying assets within a building or property that can be shifted to another much shorter depreciation class. It is like sorting your property into different categories not used before. It is dividing the components of the property so that the usual 39 years of depreciation is much less so taxes are not paid on a long term basis. (27.5 years for apartment buildings only)
Why can’t my accountant perform the analysis?
The IRS requires that the Cost Segregation Study be performed by an expert: an engineer, an architect, an appraiser or a certified cost estimator, competent in design, auditing, finance, and construction. We have engineers with accounting backgrounds who perform our studies. They confer with our appraisers, licensed tax consultants, architectural engineers and property inspectors.
Will the IRS target me for using a cost segregation analysis?
The IRS continues to uphold and improve the U.S. Tax Court Decision of 1997 as well as enacting 2002 an 2003 Tax Acts that allow for a retroactive study. The IRS has also published Revenue Procedure 2004-11 which validates that the taxpayer does not need IRS approval or amended returns in a retroactive study. Check the IRS technique guides on The IRS Website.
How much can be saved?
Since each property is different, there is not a standard savings. The average retention of cash flow is $200,000 for every $1,000,000 of the long term depreciated property that is reclassified. The CSS specialist may reclassify from 10% to 40% of a property’s total costs to a short recovery time.We offer a free estimate.
Give me an example of using a cost-segregation study
A nursing home consists of the land, the building (materials) and equipment. There are many other factors such as curbs and sidewalks, specially constructed ramps, parking facilities and entry ways, flooring, medical cabinetry, and even kitchen and laundry facilities. While the building is subject to a more lengthy recovery period, the land improvements qualify for a 15-year period and items classified as personal property qualify for a 5-year recovery period. There may be 20-30% of total costs other than the building which can be reclassified also.
Are there specific rules for an apartment building? How much money could be realized?
Any apartment building constructed, purchased or improved since 1987 is eligible for a Cost Segregation Study. You save by lowering taxable income and some apartment building owners with a $200,000 property saved $100,000. (not the same for all applicants)
Is the study expensive?
In most cases, the savings will be at least ten times the cost of having the study completed. Remember that with a personal maximum federal tax rate at a marginal 41% and some state tax rates at 7%, the CSS is an extremely effective tool to lower taxable income without expending cash (less the study fee).
Is this too good to be true?
Cost-segregation is a legal tax procedure, just uncommonly known and utilized. After all, this is your money isn’t it? You are simply retaining the IRS monies for 15 years, interest free and repaying it over a longer period up to 39 years without interest.
Why haven't I heard of this before?
Cost Segregation Analysis is fairly new and most tax payers are not familiar with all legislation concerning business deductions? Tax legislation changes are frequent. Visit the IRS website at www.irs.gov and click on Cost Segregation for more information
Why didn't my CPA tell me this?
CPA’s are not engineers, architects, appraisers, or cost estimators and most large firms or one-person businesses do not employ an engineer or valuation specialist on staff. They may recommend other tax savings strategies since CSS is a fairly uncommon procedure. We work directly with your CPA or tax preparer to secure your benefits and avoid any difficulties.
Which of the property types hold the highest saving potential?
Partial Listing with average savings:
- Hotel and Motel: 20-30%
- Golf Courses: 20-50%
- Apartment Buildings: 20-35%
- Self-storage facility: 20-60%
- Computer Centers: 20-60%
- Light Manufacturing: 20-40%
- Heavy Manufacturing: 30-60%
- Auto Dealerships: 20-50%
- Medical Office: 20-50%
- Assisted Living: 15-30%
- Auto Dealership: 25-50%
- Bank: 15-35%
- Distribution Center: 10-15%
- Fitness Health Club: 20-30%
- Hospitals: 20-50%
- Office Building: 20-40%
- Parking/Garage: 10-15%
- Printing Facility: 15-30%
- Research Facility: 20-60%
- Restaurant: 20-40%
- Retail Store: 20-30%
- Strip Mall: 10-30%
- Supermarket: 20-35%
- Warehouse: 10-15%
Why we are "the no obligation, no risk, CSS specialists."
Our experienced staff consists of engineers with accounting backgrounds, plus valuation, construction and tax specialists on staff and not outsourced. We offer a general estimate by consulting with you. Our fees are determined before the study is completed.
What do I do to begin a Cost Segregation Study?
The Great Eight steps to savings!
- Contact us for a FREE assessment of your property through client information. We prepare a preliminary estimate that documents our findings and we consult with you on our fees.
- If the estimate fulfills your needs, we schedule a visit and gather all necessary documents.
- Your on-site inspection is completed by an engineer and other licensed specialists.
- We return to the office and analyze the data in-depth using several standardized programs and IRS approved methods.
- We provide a Preliminary Draft to discuss with you.
- We will meet with your CPA if necessary.
- We deliver the most comprehensive report in the industry at a reasonable fee. Our report contains all support materials, photographs and evidentiary charts and graphs.
- We assist in completing the IRS 3115 form.
Tax Benefits of Cost Segregation
In addition to providing tax savings, cost segregation offers many benefits:
- Maximizing tax savings by realigning the timing of deductions. When an asset's life is decreased, depreciation expense is accelerated and tax payments are decreased during the early stages of a property's life. This, in turn, releases cash for investment opportunities or current operating needs.
- Establishes an audit trail. Improper documentation of cost and asset classifications can lead to an unfavorable audit adjustment. An in-depth and documented cost segregation, completed by the appropriate specialists helps resolve IRS inquiries at the earliest stages.
- Retroactivity. Since 1996, taxpayers can capture immediate retroactive savings on property added since 1987. Previous rules, which provided a four-year catch-up period for retroactive savings, have been amended to allow taxpayers to take the entire amount of the adjustment in the year the cost segregation is completed. This opportunity to recapture unrecognized depreciation in one year offers an opportunity to perform retroactive cost segregation analyses on older properties to increase cash flow in the current year.
- Cost segregation can also reveal opportunities to reduce real estate tax liabilities and identify certain sales and use tax savings opportunities.
Contact us today to discuss how you can start saving money with our cost segregation services.
