Uncover tax savings on your construction project with a cost segregation study
June 18, 2018
By Adam Reisch, CPA, CFP®, CCA, CGMA
It’s building season, and as you’re paying attention to project costs on your next commercial build or remodel, a cost segregation study is more beneficial than ever due to changes in bonus depreciation set in place by the Tax Cuts and Jobs Act.
A cost segregation study is an IRS-approved study that seeks to separate your personal property asset cost from the true building cost, allowing deprecation during a shorter lifespan. The benefits have skyrocketed under the act. Commercial property owners can realize an increase in bonus depreciation from 50 percent to 100 percent for assets placed in service from Sept. 27, 2017, to Jan. 1, 2023, on their next tax bill, making now the perfect time for a cost segregation study.
During such a study, a specialist will analyze the project cost data to identify your personal property as independent of the building cost. Examples of personal property include special purpose/decorative lighting, floor and wall coverings that are not essential to the structure, computer network equipment, communication systems, cabinetry that is not essential to the structure, office equipment and more. Each project will have unique personal property elements to be evaluated for qualification.
Personal property can be depreciated during a shorter time than the 39 years typically required for building projects. Nearly every industry can benefit, and projects that qualify include:
- Newly constructed commercial buildings
- Existing commercial buildings undergoing renovation or expansion
- Leasehold improvements and “fit-outs”
- Purchases of existing commercial properties
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.
The following is an example of a $2 million project and the savings uncovered during a recent cost segregation study performed pre-tax reform. The total tax savings realized is before any bonus depreciation or §179 depreciation, which can increase the savings to the taxpayer even more significantly if his/her tax situation for the year qualifies:
5-Year Property $281,183
7-Year Property $20,960
15-Year Property $190,548
Total Personal Property and Land Improvements $492,691
39-Year Property $1,698,048
Total Project Costs $2,190,739
Total tax savings $88,162
In this scenario, had the 100 percent bonus depreciation been available on the 5, 7 and 15-year property, the total tax savings would have increased to $135,000.
Owners we’ve worked with who have undergone these studies are able to free up cash from their tax burden allowing them to pay down debt, invest in the market and expand their operations.
Alternatively, clients have chosen to invest in their people by channeling those savings into their company’s 401(k) plan. This approach generates even more tax savings and, in today’s competitive talent landscape, increased investment in employee benefits can go a long way to attracting and retaining the best talent.
Historically, projects of at least $500,000 and above have been the best fit for cost segregation studies. Now, with 100 percent depreciation, the investment into a study could be worthwhile for owners with smaller projects looking to save on their tax bill. To determine if your project is a good fit, have a conversation with your certified public accountant.
This article was previously published in the Tri-State Business Times.