Cost Segregation

Over the past several years, cost segregation has become an important service to many companies. It provides numerous advantages and benefits that can be used as a tax saving tool. By accelerating depreciation deductions, both individuals and business owners can significantly increase cash flow.

The first step in determining cost segregation is to conduct a cost segregation study. The goal of this study is to identify, segregate, and reclassify project-related costs currently classified as real property, in order to turn them into shorter depreciable tax lives for both federal and state income tax purposes. This can be accomplished through a variety of methods, and a company specializing in cost segregation services is equipped with the necessary resources and information to make this happen. Together, a team of qualified individuals will assess your current situation and help you turn it into something that will enable you to receive positive benefits and results.

This article will outline what cost segregation actually is, the services provided by a company specializing in this field, and its overall importance. Read on to learn when to consider this as a viable option, the qualifications that must be met, its financial benefits, the approach, and how to find additional information and receive a free quote. You will also learn how to conduct further research on this topic so that you may more adequately determine if it is right for you.

Cost segregation studies are a strategic tool that allows both individuals and business owners who have constructed, purchased, expanded, or remodeled real estate to increase cash flow by accelerating deductions from depreciated property while deferring federal and state income taxes. By formulating a plan, you will be able to save money by converting costs that are currently classified as real property into shorter depreciable tax lives for tax purposes.

Due to fairly recent IRS rulings, certain procedures have allowed tax payers to change previous accounting methods in order to take full advantage of these understated depreciation expenses. This can be done without the need to amend tax previous tax returns, which saves individuals and business owners ample time.

Cost segregation studies were started in the 1960s, and have been commonly called component depreciation studies or investment tax credit studies, along with various other names. No matter what name you use, it can ultimately save you tax dollars while increasing your cash flow. Over 300 court cases and IRS rulings in the U.S. support the many benefits of cost segregation. Thos benefits and the many advantages it provides are discussed in more detail below.

Companies who specialize in cost segregation services can provide multiple services to you and your company. By using previous court cases and IRS rulings, they will be able to draw from past experiences of others, and to figure out how the law will benefit your particular situation. When you approach a company to inquire about how cost segregation can help you, they will employ a team of individuals who are experienced in the various fields necessary to make it all happen. This team will most likely include: in-house project coordinators, engineers, estimators, and accounts. Many firms have also established strategic partnerships with other firms that specialize in valuation services for conducting real estate appraisals, machinery and equipment appraisals, business valuations, and insurance appraisals.

Cost segregation services are usually equipped with an extensive library of tax court cases, tax regulations, and IRS revenue rulings, all for use to help you. This library enables the firm to take full advantage of any existing tax laws that may benefit you the client.

Each service has been implemented to fit a variety of needs. No matter what type of property you own, there may be a tax law that will fit your specific situation and help you save money in the long run. When you begin, a consultant will help you analyze your particular situation to determine whether or not cost segregation will be right for you.

Cost is extremely important because of the numerous complexities of existing tax laws. This is because these laws provide various asset lives and categories that may be applied to a wide range of building projects. Often times, tax payers and accountants do not understand exactly how to apply these tax rules. Normally, the building cost is depreciated over a long period of time. At the time of construction, the general contractor will provide you with a monthly draw request. Here, the contractor will combine various construction costs into single line item categories.

The categories are made up of multiple components, for example, the electrical contract might include light fixtures, panel boards, and conduit all buried within a single line item. Construction costs are sent to the accountants who prepare the depreciation schedules and tax returns. If your contractor did not break out the various building components, the accountant will be hard-pressed to identify them. If this is the case, the construction costs related to the entire project are placed in a long tax life. A cost segregation study can help you identify, segregate, and reclassify these components into a shorter depreciable tax life. The bottom line is that it saves you money. A firm specializing in cost segregation can help you begin this process, and explain its many benefits and advantages.

The ideal time for beginning a cost segregation study is when plans are being drafted to purchase, construct, expand, or remodel a building. If at all possible, this study should be completed during the calendar year the building is considered to be placed in service. It should be noted, however, that it is possible to perform a cost segregation study on a building as far back as 1987. Recent IRS procedures make classifying assets without the need to amend prior tax returns easier.

Here, you will be able to capture all of the understated depreciation expense for any asset that has been improperly classified in the past. This is what can really help you to actually save money.

When you actually start this process, you will be guided by individuals who are knowledgeable in the various areas that will apply to you. Because you will receive assistance from an entire team of people, instead of just one person, all necessary areas will be studied, and due attention given to each. The rules and regulations for each item will be carefully reviewed, which will allow you to take maximum advantage of your overall savings. You will also learn how cost segregation will benefit you in the future, and how to get the most out of your investment.

Before you can begin a cost segregation study, you must first find out if your building project will meet the necessary qualifications. A cost segregation firm can help you do this. While there are several types of buildings that do actually qualify, it is important to note that not every building project will fall into the correct category or meet the minimum qualifications.

In general, convenience stores, car washes, and gas stations may qualify for cost segregation. Likewise, shopping malls, strip centers, fitness centers and other sporting facilities, as well as casinos, golf courses, and resorts may also fall into this category. Such buildings can be reclassified from a 39-year “real property” to 15-year “land improvement” project.

While requirements may vary from one location to another, the rules and regulations are generally the same. The same tax laws will apply on a federal level no matter where the building project is located, so taking advantage of cost segregation studies and cost segregation services can be made fairly easy. It will also provide you with options that weren’t possible with prior tax laws. This has changed since 1987, when the laws were amended.

There are several benefits to a cost segregation study. The three main benefits are listed in this section. As stated above, considering this option can really work in your benefit, no matter the building project, provided it meets the necessary qualifications.

When considering cost segregation studies, think about the main objective, which is to increase overall cash flow through depreciation of building projects. This is a very effective means of taking advantage of the previously amended tax laws that have made this possible. Because of the nature of the tax rules and regulations, you will be allowed to go back several years and save money on previous projects.

Another benefit of cost segregation services is that you will be able to increase the net present value of tax savings. These savings are achieved from the accelerated depreciation of your property. This is often considered an especially important benefit of cost segregation.

A third benefit is that it allows for independent third-party analysis that will expand Internal Revenue Service examination. This can be especially helpful across the board. It can also prove more advantageous for you in the future.

There are other benefits that can be gained through cost segregation. As tax laws and regulations continue to change, these benefits will expand your possibilities for not only future building projects, but also for those present and past as well. A cost segregation study will show you all of the different ways in which to take advantage of this option, and how the currently tax laws can help you. This can be especially helpful if you own several businesses or operate a chain. Whether all of your buildings are in the same state, or scattered throughout the United States, you will be able to take full advantage of all the cost segregation has to offer.

When a cost segregation study is conducted, professional engineering and cost estimation methods will be used to determine the cost basis of your real estate for both federal and state income tax depreciation purposes. There are a number of steps involved in doing this. They are outlined below.

The first step is for the cost segregation firm to obtain and review a summarized schedule generalizing both the contractor’s and property owner’s costs. This summary will also include: the pay request of the contractor, copies of change orders, and dollar amounts associated with each item. Copies of all invoices paid by the owner to other subcontractors will also be provided.

The next step is to analyze project-related cost information to the fixed asset accounting records of you, the property owner. The site work is then reviewed. This includes any electrical, mechanical, and structural work that has been done, as well as the costs associated with completing it. This will help the firm develop an understanding of the overall project and what it will mean for you.

A visit to the site so the information obtained can be confirmed and reconciled. Cost engineering and estimation procedures are then followed.

Next, the costs are appropriately allocated. Once this has been accomplished, the accountant can then begin the reclassification process. A fully documented report is then produced and reviewed to be sure all information is accurate.

If you are considering cost segregation studies and cost segregation services, you will first want to conduct some research of your own to find out if you will benefit from its many advantages. Because many companies have websites listing a wealth of information on the Internet, this may be a great place to start. Some firms will also offer you a free quote, which can be helpful. If you are unsure about how cost segregation will affect you, consult a firm specializing in this for more information.

When beginning the cost segregation study process, keep in mind that state income tax laws will vary form one state to another, which may affect you if you own property in more than one state. Federal laws, however, are the same no matter where the property is located, so the advantages and benefits you will receive from this process will be the same throughout. Through cost segregation, you will be able to see a larger return on previous investments, while maximizing your cash flow in the present and future.