Is there anything that can be done for someone who placed a building in service and did not get a cost segregation study completed?
That is a question we hear quite often. The IRS has a special procedure that allows a taxpayer to file for a change in accounting method, and a change in the depreciable lives of property is one of the approved methods that fall under this procedure. This allows the taxpayer to ‘catch up’ all of the excess depreciation deductions that were missed in prior years and take those deductions in the current year. In order to claim the additional depreciation deductions, you would need to file a form 3115, application for change in accounting method, by the due date of the related income tax return. When you combine the option of catching up the depreciation deductions with the recent law change that allows taxpayers to carry any losses back for up to five years, you have a powerful tool that can even provide a company that is losing money with a way to generate significant cash flow.
Are there any additional benefits?
One major benefit that comes to mind is the 50 percent bonus depreciation deduction that is available to property with a life of 20 years or less. When you combine the bonus depreciation deductions with a cost segregation study, you can increase your depreciation deductions dramatically. You do need to keep in mind that the bonus depreciation deduction ended in 2009 and that only newly completed property will qualify. We also caution clients to make sure that the deduction will result in current significant tax savings since the recapture costs can be high.
Who performs cost segregation studies?
If you are looking to hire someone to perform a study, you need to look to a qualified cost segregation provider. The IRS requires that these studies be completed by someone that has significant experience in both construction and engineering. In fact, if the study is not completed by someone with the proper credentials, its results may be disallowed upon audit. Typically, you should also have the cost segregation specialist coordinate with your CPA to ensure that the results are properly implemented and the benefits are fully realized.
Is there anything else owners should know about cost segregation studies?
While a cost segregation study can be a great source of deductions, you really need to look at the impact of those deductions to determine your current tax savings. Many factors will need to be contemplated when considering whether a cost segregation study makes economic sense, including holding period, passive activity rules, like kind exchanges and recapture issues. Once you have determined that you can effectively use the additional depreciation deductions, you will find that a cost segregation study may be the most cost-effective way to help you generate additional cash flow during these tough economic times.
Alan Vaughn, CPA, is a tax partner at Habif, Arogeti & Wynne, LLP. Reach him at [email protected] or (404) 892-9651.
