Cost segregation can be described as accelerating the depreciation of certain types of property to achieve maximum operational cash flow.
For property owners, cost segregation is not a do-it-yourself project. Often the expertise of cost segregation services firms is employed to ensure accordance with the IRS guidelines in the assignment of property asset classes and ensuring correct methodology. A well-designed engineering approach in cost segregation services coupled with tax accounting experience is highly recommended when looking for consulting firms.
Specialized cost segregation services firms that are capable to provide grounded analyses that are up to the IRS’s standards exist in abundance. Fees may vary depending on the services employed but consultancy typically offers savings that pay for the cost segregation study in folds.
A cost segregation service and analysis involve the identification and reclassification of components and assets of the facility in issue to have the fullest possible advantage afforded by the MACRS or Modified Accelerated Cost Recovery System to lessen current income tax loads.
For example, a building is depreciated for 30 plus years, yet specific parts of that building as in its roof for example are not expected to last as long as the building per se. Other components attached to the property such as fencing and side ramps have a shorter life and can be depreciated much shorter say 5 – 15 years.
Specialized components built into a building like weight support of heavy equipment, specialized wirings to power, or climate controls system enhancement necessary to cool that equipment may also pass for a recovery period that is shorter than that of the building.
It is a considered a matter of practicality and easier too to document proper segregation during the new construction phase. In 1996 further modifications to the rule states existing property owned or leased may also qualify.
A procurer may now backtrack as far as 1987 to right the tax lives of assets that MACRS could have been taken advantage of. Requests from taxpayers to modify the depreciating accounting method are automatically approved by the IRS. Due to this fact, taxpayers can grab the advantages of cost segregation by cost segregation services consulting firms. The inherent difference from previous years may be paid as a lump sum during the present year, without going back and adjusting returns. There are ample opportunities to track back and take advantage of savings right after selling off property.
Cost Segregation Services – Not for Everyone
Cost segregation services and studies must be given serious considerations when planning involves fro-ground-up construction projects. Taxpayers may still benefit when leasing properties where improvements will be made. Consulting CPA tax specialists or employing cost segregation services firm who can provide an in-depth break-even study, looking at several factors to determine how to fit cost segregation may be to a situation at hand.
Experts say that unless a project costs several millions of dollars, the expense of a cost segregation study may outweigh the benefits. Timing also makes a big difference. A large operating loss may be accumulated in one year if revenue streams are out of sync. They do not recommend doing cost segregation services to reduce tax unless there is more taxable income. Size does matter in cost segregation.
When deciding to pursue strategies for cost segregation, find help in selecting a consulting firm that specializes in cost segregation, capable of analyzing component property assets, and will provide proper documentation to take advantage of tax savings.
Help Cost Segregation Services Bring About
- Depreciation deduction timing adjusted to maximize tax savings
Cost segregation services and studies will help classify assets to be eligible for the shortest appropriate depreciable time. Basing on the IRS prescribed methodologies, cost segregation services can value specific assets and quantify specific components.
Performing a cost segregation study and employing help from cost segregation services firms even if the property has been held on for several years can still take advantage of previously missed deductions.
- Lead to cash flow increase
Reduced taxable income, lessened taxes, and more cash flow sooner can result when assets in the early years are depreciated as opposed to the period of up to 39 years. Cash obtained from the depreciation of assets is now available to the taxpayer to invest in some other income-generating projects.
- Save taxes on property sale
Depreciation can be up to 35% even when it is an ordinary deduction from taxable income at marginal rates. Personal property units that offer little to no taxable gain over time are often sold or disposed of. Most of the profit on sales of properties is to be taxed at a 15 or 25% federal rate. After cost segregation services studies, this resulted in the taxpayer’s permanent saving at a significant deduction of 35% at the same time a recognized income due to the sale at a 15 or 25% tax rate.
Main Components of Cost Segregation Services Reports
A surefire way of receiving tax depreciation of property and assets is to consult with firms that specialize in cost segregation services. They can conduct cost segregation studies and reports that must include the following quality elements:
- Executive Summary or Summary Letter: This part contains the name of the preparer, the date of the cost segregation study, the client or taxpayer, the property is subject, and the classified property units which can be classified as land, building, land improvements, or personal property.
- Narrative Report: In this section, theories, definitions of terms, and the rationale behind the study are narrated. It also includes a more specific description of the property. Also, the narrative section provides a comprehensive discussion of the rules, regulations, and exiting court cases that can support asset classification as Section 1245 property.
- Assets Schedule: This schedule ties directly to the client’s depreciation records.
- Direct and Indirect Costs Schedule: The reports given by cost segregation services must also identify and explain indirect costs allocated to Section 1245. Costs are also addressed subject to IRC Section 263A.
- Property Units and Costs Schedule: This part provides a detailed schedule of property assets with corresponding costs and is segregated either into the land, Section 1245, or Section 1250 property.
- Cost of Engineering Procedures: A quality report details the engineering methodologies and procedures for determining each property unit cost. Reviewed and discussed taxpayer records are also identified here. Records of inspections and interviews if any are included here as well.
- Statement of Assumptions and Restrictive Conditions: The report given by cost segregation services firms must also state the overall understanding and limiting conditions applicable.
- Certifications: This part certifies that the preparer – the person who signs at the end – of the report came up with the analysis, views, and conclusions of the report. Credentials and level of experience of the preparer may also be indicated.
- Exhibits: These exhibits show the accounting records that the preparer relied on in coming up with totals costs. Photographs and videos if any may also be considered as exhibits to assist the identification and understanding of the study of assets.
The quality of a cost segregation report or study conducted by preparers of cost segregation services consultancy firm largely relies on the degree to which it adheres to the above elements. Thus, also maximizing the help that taxpayers can acquire from them.