Save on taxes and increase cash flow with a cost segregation study

August 15, 2015

By Adam R. Reisch, CPA, CFP®, CCA, CGMA

As tax day looms, many business owners wish they could have done more to lower their tax bill.  They also dream about those long-desired construction plans and the excitement of moving into a new or remodeled building. Wouldn’t it be nice if you could combine moving into an updated workspace with saving on your tax bill?  Guess what, you can!  If you are ready to move forward with building a new location or remodeling your current one, consider the potential opportunities to save on income taxes and increase your cash flow with a cost segregation study.

What is a cost segregation study?

A cost segregation study is an IRS approved analysis of hidden personal property for commercial buildings. The specialist who conducts the study will analyze the cost data including the contractor’s application of payments, change orders, owner incurred costs and indirect disbursements to determine what segments of the building qualify as personal property. This personal property can be depreciated over a shorter life than the 39 years required for most buildings. Generally, about 15 to 55 percent of costs can be segregated to shorter lived assets.

What type of construction does a study apply to?

A cost segregation study applies to:

  • Newly constructed commercial buildings
  • Existing commercial buildings undergoing renovation or expansion
  • Leasehold improvements and “fit-outs”
  • Purchases of existing commercial properties
  • All post-1986 real estate construction, building acquisitions or improvements
What are the benefits of cost segregation?

The main benefit a company gains from performing a cost segregation study is tax savings in the year of the study, but this main benefit leads to several other advantages.  If the study is performed in the year the building is constructed the depreciation for that year will be based on the segregated costs. If the study is performed in a year other than the year the building is constructed, a catch-up deduction is allowed in the year in which the study is performed. These additional depreciation deductions lower a business owner’s tax burden.  The decreased tax liability increases the cash flow of the business and allows the business owner the flexibility to reinvest those savings in retirement plans, additional equipment or other business needs.

Perhaps the greatest benefit of a cost segregation study is that these tax savings are generated with minimal effort from the business owner! A study is performed by a cost segregation specialist who works directly with the contractor to obtain the proper evidence to support the breakout of personal property from the cost of the building.

What type of business could benefit from a cost segregation study?

The most common types of industries that benefit from cost segregation studies are:

  • Retail
  • Grocery stores
  • Office buildings
  • Financial institutions
  • Hotels
  • Warehouses
  • Manufacturing
  • Processing plants
  • Medical buildings
  • Nursing homes
  • Restaurants
  • Apartment complexes
  • Auto dealerships
  • Casinos
  • Distribution centers
  • Franchises
  • Medical centers
  • Shopping malls
  • Sports stadiums

A well-performed cost segregation study provides business owners with an excellent opportunity to lower the amount of taxes they have to pay and increase their cash flow. Be sure to discuss this with a specialist who is aware of the IRS standards for what constitutes a properly performed and documented study and enjoy the benefits of cost segregation today!

For more information or assistance on tax planning and preparation, call 888-556-0123, email or submit our online form.

This article was previously published in the March 2012 Tri-State Business Times.

Related Articles

Working remotely
Remote employees impact tax considerations for businesses

March 19, 2024

Examining potential impacts of $78 billion tax package

February 7, 2024

New filing requirement impacting millions of businesses

February 7, 2024