Putting your expenses in the right category can have a big effect on your cash flow.
When you buy or build a facility, it’s important to make sure your assets are properly segregated into the right classifications for tax purposes. While you will get your depreciation eventually even if you don’t do this, doing so properly can give you more of the cash you need now to run your business.
“In its simplest form, if you get $10, would you rather have $10 today or $1 per year over the next 10 years?” says Tony Constantine, tax manager with Cohen & Co.
Accountants call this cost segregation. For nonresidential property, assets depreciate over a 39-year period. But there are numerous items that can be depreciated on a faster schedule, freeing up more money from taxes.
“When you look at a project, it is made up of structural stuff that can be depreciated over 39 years,” says Constantine. “But when you break down the components of a building, there are land improvements, sidewalks, curbs and parking lots that can be written off over 15 years. Carpeting can be written off over seven years. When you look closer at project costs, there are significant savings by writing certain assets off quicker.”
Not everyone is taking advantage of the tax savings available in those early years.
“Either they are not aware of it or they just don’t think about the fact that they can write some of this stuff off quicker,” says Constantine. “Sometimes they just don’t understand it, and sometimes it gets lost in the rush to get something done. Taxes are at the back of their mind.”
In the past few years, taxpayer-friendly legislation has led to more interest in cost segregation because there are even larger potential savings than were available in the past.
“The government took something that was worthwhile before and made it even more worthwhile,” says Constantine.
Not everyone will be able to benefit from cost segregating assets, but the less time you’ve spent in your building, the more likely you can find some tax savings.
“If you are considering buying a building, you should be looking at this,” says Constantine. “If you are building a building, you should be looking at this. If you bought a building in the past few years, you should consider it. If you are a few years down the road since you bought the building, say about 10 years, then it may not make a lot of sense to do it.
“The further out you go, the less the benefit would be. If you bought or constructed a building in the last five years, then you should definitely look into it.”
Doing a cost segregation study is the first step. This is much easier — and therefore cheaper — to do during construction because the costs can more easily be broken out. If the study is on an existing building, an engineer may have to evaluate what can be reclassified and determine its value in today’s dollars. A study might cost anywhere from $3,500 to $30,000, but on many projects, the tax savings can offset those costs.
As an example of what a study might reveal, electrical and plumbing are usually considered part of a structure and have to be depreciated over 39 years, but if they are supporting a specific piece of equipment, they may be able to be reclassified and depreciated over a shorter time span.
“Medical offices are typically a good candidate for that reason,” says Constantine. “They have a lot of dedicated electrical and plumbing for their equipment. In a manufacturing setting, there might be equipment with special cooling or electrical systems. Even a reinforced concrete floor to support a machine can be included.”
How to reach: Cohen & Co., www.cohencpa.com