Cost Segregation Services
Cost Segregation is a tax strategy that
permits the allocation of building costs between real estate
and personal property based on case law and IRS guidelines
utilizing qualified engineers, estimators or architects to
determine the proper cost segregation. The benefit of this
tax strategy is an acceleration of the tax deductions resulting
in additional cash for the company from a reduction in taxes
and a recovery of prior taxes.
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About Cost Segregation?
Cost Segregation is an often overlooked,
under-utilized, and misunderstood tax strategy for building
- It is not a tax gimmick or tax shelter.
- It does not play fast and loose with the Internal Revenue
- It is not something that needs to be hidden or buried
in work papers.
- The concept has been accepted by the Internal Revenue
Service who uses cost segregation examples in published
regulations and internal memoranda.
- If properly structured, cost segregation is an effective
means of significantly accelerating depreciation deductions
in the early years of a building’s tax life thereby
increasing cash flow.
- Cost Segregation can be applied to a new building or
to an existing building.
- A cost segregation study can be applied to a building
that has been previously acquired within the past 10 years,
and once completed, its benefits can be utilized immediately.
Thus, if a taxpayer acquired a building in 1998 and did
not apply a cost segregation study, the taxpayer can have
the study done in 2004 and take the entire missed depreciation
in 2004. The IRS considers this a change in accounting method
and gives automatic consent to the change when the form
3115 is filed.
- Generally, any building, not including land, with a cost
of $750,000 or more is a potential candidate for a cost
What is Cost Segregation?
The genesis of Cost Segregation is from
a type of depreciation referred to as Component Depreciation.
Cost Segregation is the application of engineering/ architectural
studies to buildings to separate from the buildings those
parts of a building that can be classified as personal property.
If a portion of a building can be classified as personal property,
the depreciation of such property follows the rules for personal
property and not the rules for real property. Currently, commercial
real property is depreciable over 39 years while personal
property is generally depreciable over 3-7 years. The impetus
for Cost Segregation comes from a United States Tax Court
decision, Hospital Corporation of America v. Commissioner,
109 T.C. 21 (1997). In that case, Hospital Corporation of
America (“HCA”) owned several buildings that were
subject to long depreciation periods. HCA separated through
engineering studies the structural portion of the buildings
from the non-structural portion, and depreciated the latter
over 5 years.
Although the Tax Court found the property
subject to longer depreciation periods, the Tax Court held
that HCA had not proven that the property was personal property.
However, the Court did not state that it could not be proven.
In making its determination, the Tax Court found the following
criteria to be important:
- Is the property capable of being moved;
- Is the property intended to remain permanently in place;
- Is the property capable of being replaced;
- How extensive a job is the removal of the property;
- How much damage is sustained upon removal;
- How is the property fixed; Can the property be used in
How Can Cost Segregation Benefit
- Cash flow generated now.
- Taxes are reduced by accelerating depreciation deductions.
- Taxes are then repaid gradually through decreased depreciation
deductions in the later years.
- Savings are measured by the Net Present Value of the
increased net cash flow.
For more details on Value Defined, LLC's
Cost Segregation Services, please email us at firstname.lastname@example.org
or contact us at 419-931-3005.