Owners of buildings used in a business or rented may achieve substantial tax deferral from the results of cost segregation studies. A cost segregation study is an analysis performed by trained professionals to identify property that should be classified as tangible personal property or land improvements, rather than as a building. The analysis enables the owner to identify property that can be depreciated over 5, 7, or 15 years instead of the 27.5 years (residential) or 39 years (commercial) that typically apply to buildings. This acceleration of deductions can result in substantial tax deferral benefits.
Cost segregation studies apply to newly acquired or constructed property, leasehold improvements, and property that was placed in service in recent years. For property placed in service in prior years, the IRS allows a current “catch-up” deduction for additional depreciation deductions to which you were entitled but did not claim in prior years. This can generate substantial current tax savings.
The benefit of a cost segregation study for a smaller building generally will be less than that of a larger property, but may still be very beneficial. We have worked on cost segregation studies involving buildings used in several industries, including auto dealerships, banks, apartments, healthcare, and manufacturing.
For property placed in service in 2009, additional tax incentives available include 50% bonus depreciation and the increased limit in Section 179 expense to $250,000. Bonus depreciation allows taxpayers to write off 50% of the cost of qualified property with a recovery period of 20 years or less and certain qualified leasehold improvement property that is placed in service in 2009. Thus, the 5-, 7-, and 15-year property that is identified in a study may qualify for this additional depreciation deduction that wouldn’t normally be identified if the property was being depreciated over 27.5 or 39 years. These tax incentives for 2009 make cost segregation studies even more beneficial for the current tax year.
One of DDF’s most recent cost segregation studies on a $7 million newly acquired facility generated tax savings in the first year of $110,000. The estimated present value of accelerated deductions exceeded $460,000, assuming current tax rates and a long-term holding period. This equated to a return on the cost of this study of 37 to 1.
If you believe that you may be a candidate for a cost segregation study, please contact Paula Hanson or Brandi Marcum at 859.255.2341. We can provide you with a free estimate of the cost and benefits of a study of your property.
Brandi Marcum, CPA
