Cost Segregation Studies Improve Cash Flow
Finding Value in Your Building
Owners of real property used in a trade or business have a way to realize potentially significant savings on taxes and improve their cash flow. They can find value in the buildings they own with the help of a cost segregation study.
This is a good time to consider a cost segregation study as many businesses are transitioning to new ownership and some businesses are downsizing or reconfiguring their space to accommodate a changing workforce.
The most important benefit of a cost segregation study is improved cash flow – taking money that you would ordinarily pay in taxes and putting it back in your pocket to use for business improvements, debt reduction or other priorities.
How Cost Segregation Works
Buildings used in a trade or business are typically depreciable over 39 years. But there are parts of a building – for example, built-in cabinetry, flooring and even parking lots – that are classified as personal property for tax reporting purposes. A cost segregation study identifies these components, assigns a value to them, and enables the owner to depreciate those items over a shorter period of time, typically 15 years. When components can be depreciated over any period less than 20 years, they become eligible for 100% bonus depreciation, meaning the owner can immediately recoup their value in the form of tax deductions.
A cost segregation study separates assets into several categories, including:
- Personal Property
- Land Improvements
- Building Components
- Land
Who Should Consider Cost Segregation?
Owners of commercial property valued at $450,000 or more and residential real estate property valued at $125,000 or more are often candidates for cost segregation studies.
Business owners who have recently bought a new property or renovated an existing property can benefit from having a cost segregation study done in the first year the property is placed in service. However, even if you have owned a property for a few years, the study can help you realize an immediate deduction.
The tax savings to be realized from a cost segregation study can vary significantly depending on the type of property involved. An office building that is a simple shell of a building may yield about 15% in segregated costs. But a manufacturing facility, where there may be thickened floors to support heavy equipment and higher-load electrical service, may yield as much as 40% in segregated costs. Medical offices that have a sink and cabinetry in every exam room are another prime example of a cost segregation opportunity.
Cash Flow Benefits
Advantages of cost segregation include the value of front-loaded depreciation deductions (which improves cash flow when you need it most because you just built or made improvements), write-offs of building components that need replacement, and lower real estate taxes. A cost segregation study gives you the time value of your money.
The tax savings realized from a cost segregation study can help an owner make debt payments on a new building, whether it is new construction or an existing building. For manufacturers, the improved cash flow can help purchase new equipment to ramp up production or buy inventory. Most importantly, property owners should consider cost segregation to be a planning tool that’s available when doing an expansion, building new space, or purchasing a building for a business or investment.
If you would like to learn more about how a cost segregation study may benefit you, contact your Adams Brown advisor.