Achieve tax savings

One of the greatest challenges facing all businesses today is cash flow, or the lack thereof. You can boost cash flow by increasing revenue or reducing expenses, but there may be other ways to improve your bottom line without cutting costs or adding new customers.

The answer may lie right in the facility in which your business operates. One way to improve your cash flow is to accelerate the depreciation deductions for your facility using a cost segregation study. Cost segregation is a tax savings strategy that is used by many businesses to reduce taxes and increase cash flow.

Smart Business spoke with Alan Vaughn, CPA, tax partner at Habif, Arogeti & Wynne, LLP, about the benefits of cost segregation studies.

What exactly is a cost segregation study?

In simple terms, a cost segregation study will defer your taxes by accelerating depreciation deductions. The study involves separating the components of a building and its improvements into shorter lives for tax purposes as specified by the IRS. The standard depreciable life for a building is 39 years for commercial properties and 27.5 years for residential properties. After completing the study, portions of the buildings can be shortened to five-, seven- or 15-year lives. The end result is that depreciation deductions are front-loaded into the early years, thereby reducing taxes and pushing those liabilities out up to
15 years.

Can you give an example of a typical study?

Let’s assume that a doctor’s practice is constructing a new medical office building at a cost of $10 million. After the cost segregation study is completed, the practice should be able to deduct approximately $1.35 million in depreciation deductions during the first five years. This is in comparison with $3.41 million in depreciation that would have been deducted over the same five-year period, resulting in additional depreciation deductions of $2.06 million. Assuming a 40 percent tax rate, this results in tax savings of about $825,000. Considering the time value of money, the study provides the practice with $616,000 present value savings over the life of the office building.