Accelerate depreciation deductions with a cost segregation study
Is your business depreciating over a 30-year period the entire cost of constructing the building that houses your operation? If so, consider a cost segregation study. It may allow you to accelerate depreciation deductions on certain items, thereby reducing taxes and boosting cash flow. And under current law, the potential benefits of a cost segregation study are now even greater than they were a few years ago due to enhancements to certain depreciation-related tax breaks. But first, let’s look at the basics of depreciation, so you can start to think about how all of this applies to you and your business.
Business buildings generally have a 39-year depreciation period (27.5 years for
residential rental properties). Most times, you depreciate a building’s structural components, including walls, windows, HVAC systems, elevators, plumbing and wiring, along with the building. Personal property—such as equipment, machinery, furniture and fixtures—is eligible for accelerated depreciation, usually over five or seven years. And land improvements, such as fences, outdoor lighting, and parking lots, are depreciable over 15 years.
Often, businesses allocate all or most of their buildings’ acquisition or construction costs to real property, but by doing this, are you overlooking opportunities to allocate costs to shorter-lived personal property or land improvements? In some cases—computers or furniture, for example—the distinction between real and personal property is obvious. But the line between the two is often less clear. Items that appear to be “part of a building” may in fact be personal property, like removable wall and floor coverings, removable partitions, awnings and canopies, window treatments, signs, and decorative lighting. When you look around your own property, can you think of items that may fall into this category?
In addition, certain items that otherwise would be treated as real property may qualify as personal property if they serve more of a business function than a structural purpose. This includes reinforced flooring to support heavy manufacturing equipment, electrical or plumbing installations required to operate specialized equipment, or dedicated cooling systems for data processing rooms, to name a few. If any of these enhancements apply to you, keep reading. A cost segregation study might be beneficial.
Identifying and substantiating costs
A cost segregation study combines accounting and engineering techniques to identify building costs that are properly allocable to tangible personal property rather than real property. Although the relative costs and benefits of a cost segregation study depend on your particular facts and circumstances, it can be a valuable investment, and it is one you should consider if you’ve been reading through this blog thinking, “Yes, yes, yes, that applies to me!” If you’re not sure, Fiducial can go through this with you, and together we can decide if a cost segregation study is right for you.
Speedier depreciation tax breaks
The Tax Cuts and Jobs Act (TCJA) enhances certain depreciation-related tax breaks, which may also enhance the benefits of a cost segregation study. Among other things, the act permanently increased limits on Section 179 expensing, which allows you to immediately deduct the entire cost of qualifying equipment or other fixed assets up to specified thresholds.
The TCJA also expanded 15-year-property treatment to apply to qualified improvement property. Previously this break was limited to qualified leasehold-improvement, retail-improvement, and restaurant property. And it temporarily increased first-year bonus depreciation to 100% (from 50%). That’s a substantial change, and it’s a change of which you should take advantage, if you qualify. Fiducial can help you with this.
Making favorable depreciation changes with a cost segregation study
Fortunately, it isn’t too late to get the benefit of speedier depreciation for items that were incorrectly assumed to be part of your building for depreciation purposes. You don’t have to amend your past returns (or meet a deadline for claiming tax refunds) to claim the depreciation that you could have already claimed. Instead, you can claim that depreciation by following procedures, in connection with the next tax return that you file, that will result in “automatic” IRS consent to a change in your accounting for depreciation.
Cost segregation studies can yield substantial benefits, but they’re not right for every business. We must judge whether a study will result in overall tax savings greater than the costs of the study itself. To find out whether a cost segregation study would be worthwhile for you, contact Fiducial at 1-866-FIDUCIAL or make an appointment at one of our locations to speak with a tax professional. We look forward to helping you through your tax process and finding the most beneficial path forward for you and your business!