Guest Blog: By Robert J. Bauer, CPA, Principal, Tronconi Segarra & Associates LLP
It’s not often that a company can use real property to significantly decrease its tax obligation and increase its cash flow. However, businesses that have recently or plan to construct, renovate or acquire a facility do have an opportunity to maximize the tax benefit of these capital costs, and potentially increase their cash flow.
This opportunity comes in the form of a Cost Segregation Study, a formal accounting-engineering process designed to accelerate depreciation deductions on the component parts of real property. As a result of having a Cost Segregation Study performed, a business can reduce its tax liabilities for the current and future tax years and free up those previously designated tax dollars for business expansion, to improve cash flow, or to pay down high-interest debt.
Whenever a business constructs a new facility, a Cost Segregation Study can be done simultaneously with the construction so that the tax advantages can begin immediately upon completion of the building. This is perhaps the most simple and straightforward type of Cost Segregation Study, because the property’s components are brand new and more easily identifiable. A Cost Segregation Study can also be performed when an existing building undergoes major capital improvements, for example, due to renovation or a build-out. Businesses can also have a Cost Segregation Study done when they acquire and take ownership of an existing facility. Finally, there is also an opportunity for businesses to perform a Cost Segregation Study on property acquired up to 15-years ago and “catch-up” depreciation in the current year.
A Cost Segregation Study enables a portion of building costs and land improvements traditionally depreciated between 27.5 to 39 years to be reallocated to asset classes with much shorter depreciable lives. The result – and the benefit to the property owner – is an acceleration of depreciation deductions, a reduction in tax liabilities for the current and future years, and an increase in cash flow. Some examples of eligible tangible personal property and non-structural components include items such as decorative millwork and retail furniture (counters, shelving, etc.); sidewalks, parking lots, drainage, and landscaping; and electric, gas, and plumbing hook-ups relating specifically to manufacturing and processing equipment. A good Cost Segregation Study is extremely comprehensive and thorough, assessing every component of the property to determine if it can contribute to the depreciation acceleration and drive dollars to the client’s bottom line.
Many businesses can also find additional savings/refunds by having a Utility Study conducted at the same time as a Cost Segregation Study, as some of the information that is collected for a Cost Segregation Study may also be used for the Utility Study. A Utility Study is a study of a business’s utility usage to determine the percentage of utilities consumed in processes which are exempt from sales tax. By conducting both studies at the same time a business could realize even greater savings.
Learn more about Cost Segregation Studies at www.tsacpa.com.
Robert J. Bauer, CPA, Principal, Tronconi Segarra & Associates LLP Certified Public Accountants / Business Consultants. For more information, contact me at firstname.lastname@example.org or 716.633.1373.