Has your business acquired, constructed or substantially improved a building recently? You may want to get a cost segregation study to develop a strategy around capitalizing your fixed assets. It could allow you to accelerate depreciation deductions, to ultimately reduce taxes and increase cash flow.
Tony Constantine, CPA, a tax partner at Ciuni & Panichi, Inc., says, unless you’re in the business of owning real estate, you may not be aware of the benefits of a cost segregation study. In fact, some accountants don’t understand how these studies can provide savings.
“You don’t even have to be the property owner. A major tenant that does a large build-out could take advantage of this if they own the improvements,” he says.
Smart Business spoke with Constantine about cost segregation studies, depreciation and how they apply to your fixed assets.
How can a cost segregation study reduce your company’s taxes?
IRS rules generally allow business owners to depreciate commercial buildings over 39 years. They can depreciate structural components — walls, windows, HVAC systems, elevators, plumbing and wiring — along with the building.
Companies often allocate all or most of a building’s acquisition or construction costs to real property, overlooking opportunities to allocate costs to shorter-lived personal property or land improvements. Personal property, depreciable over five or seven years, can include removable wall and floor coverings, detachable partitions, awnings and canopies, window treatments, signage and decorative lighting. In addition, certain items qualify if they serve a business function. Examples include reinforced flooring to support heavy manufacturing equipment, electrical or plumbing installations, and dedicated cooling systems for server rooms. Land improvements — fences, outdoor lighting and parking lots — are depreciable over 15 years.
A cost segregation study applies engineering methods to quantify the building materials, reconciling that to the purchase price. It uses statutes and case law to determine how items can be depreciated.
What other tools can apply to fixed assets?
The tangible property regulations provide a framework for determining when to capitalize an expense and when to expense it.
Additional incentives amplify the benefits of putting a strategy around your fixed assets. Section 179 allows for an immediate expensing of tangible personal property, such as desks and equipment. That limit was $500,000 in 2017, but under the Tax Cuts and Jobs Act, it jumps to $1 million in 2018.
Another incentive is bonus depreciation, where employers write off a percentage of the cost basis of an asset with the first-year depreciation. Prior to the new tax law, a 50 percent bonus depreciation was available for new property. Now, any asset, new or used, acquired from Sept. 27, 2017, to 2023 can be written off at 100 percent.
What else should business owners know about creating a fixed asset strategy?
Don’t just look at the hypothetical benefit; consider the whole picture. How do you maximize the provisions and use them to get the biggest benefit? You might be in a situation where, depending how the ownership is structured, if you create losses, they’ll be limited. So, paying $10,000 for a study and an extra depreciation deduction doesn’t make sense. Other times, a study might increase cash flow by $50,000 but cost $10,000. Some people will think that’s great and they’ll do it. Others won’t think that’s enough margin to go through the hassle.
Apply a global strategy — not only for this year, but next year and beyond. Your tax adviser can look at your situation, tax rate structure and the provisions that are applicable to see where and when your company gets the biggest benefit. But you also need to provide a clear picture, if you plan to sell an asset in five years, rather than keep it for the full term, that changes the modeling and potential benefits.
If you already invested in depreciable buildings or improvements, it may not be too late to take advantage of a cost segregation study. A ‘look-back’ study allows you to claim missed deductions in qualifying previous tax years. You can also review your depreciation schedule to see if equipment, for example, is in the wrong asset class.
Insights Accounting is brought to you by Ciuni & Panichi, Inc.