Cost segregation: is it right for your business?

• Author: Carter, G. Keith
• Position: ADVICE: TAX SAVINGS

COMMERCIAL PROPERTY owners who do not utilize cost segregation may be overpaying taxes every year. All federal taxpayers are eligible for accelerated depreciation expense deductions on certain components of a building. Without cost segregation, taxpayers are not able to take full advantage of the tax law.

With a cost segregation analysis, on the other hand, taxpayers can benefit from larger depreciation deductions, which can increase cash flow and also lower capital costs. The use of cost segregation studies as a tax strategy is becoming increasingly popular and the amount of tax savings that a business or commercial property owner can realize could be very substantial. And while it is complex, with many rules governing cost segregation studies and the associated depreciation, your tax professional can help you determine if these tax laws can benefit your business.

A cost segregation study is used to determine and reclassify the components of a commercial building that may be depreciated at an accelerated rate. A detailed analysis of the costs associated with the commercial property is needed in order to conduct the study; those costs would include the cost of land, improvements made to the site, and buildings and equipment in use.

Building and acquisition costs are depreciated over 39 years; however, shorter-lived assets may qualify for a shorter depreciation period of 5, 7 or 15 years. The structural portions of a building do not qualify for accelerated depreciation, but those that support the building can qualify. Examples of shorter-lived building components can include:

* Portions of electrical, mechanical, and plumbing systems

* Carpets and floor coverings

* Wall coverings and partitions

* Signage and lighting

* Cabinetry and fixtures

* Paving and sidewalks

* Landscaping

There is significant potential for reducing tax...