There’s a lot to think about when purchasing a facility for your business, or even constructing a new one. Regardless of how the building is purchased, building owners need to consider the benefits of cost segregation. A cost segregation study could help enhance the tax depreciation associated with the real property.
A cost segregation study analyzes the cost of purchasing or constructing a building and properly allocates the cost into the correct asset classification. This classification is important, as the general rule for the tax depreciable life of a commercial building is 39 years. Therefore, a cost segregation study saves the business owner current taxes by accelerating depreciation using a shorter depreciable life. It is important to note that a cost segregation study does not increase the overall depreciation allowed. However, it is a great tool to accelerate depreciation in the early years of owning a building.
“If you’re going to depreciate the building over time, regardless if you use cost segregation or not, you’ll get more money in your pocket today by saving tax dollars versus depreciating a commercial building over 39 years,” says Tim Schlotterer, CPA, director, tax and business advisory services, GBQ Partners LLC. “Ultimately you’re still going to depreciate the full cost of the building, but it’s just a matter of how quickly you want to and are able to depreciate it.”
Smart Business spoke with Schlotterer about what you need to understand about cost segregation and how to prepare for a cost segregation analysis.
What are some key things you need to understand about cost segregation?
You should consider doing a cost segregation study for any building purchases made over the last 10 years that have not been examined, based on your current tax situation. It may not make sense if you’re in a loss situation. Any taxpayer who owns a building that is profitable should consider cost segregation to reduce his or her tax liability.
How can you prepare for an analysis?
You need to provide the individuals conducting the analysis with some details about the building. This includes drawings of the building and tax depreciation schedules if the building has been placed in service in previous years. If the building is newly constructed, you should provide the final pay application (schedule of values) provided by the general contractor, which documents all costs associated with construction.