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Cost Segregation is an extremely useful tool for reducing your income tax and maximizing cash flow for your business. A cost segregation study separates the buildings real property, land and personal property and groups those assets based on their useful class lives. Typically a commercial building is depreciated over a period of 39 years using the straight-line method of depreciation, meaning that the taxpayer will need to hold the property for the entire 39 year period in order to recoup their investment. Since the majority of property is only held for an average period of 10 years, a taxpayer that uses this method of depreciation will lose 75% of that buildings value in deductions. Thankfully, there’s a solution. By using a cost segregation study we can separate assets into 5, 10 and 15 year categories to accelerate the rate of depreciation and provide significantly larger deductions than would have been previously possible. The team at Net Profit Advisors is composed of some of the most experienced tax professionals, engineers, and accountants in the industry and have successfully completed more than 3000 studies in their careers. With our unrivaled level of expertise and experience, you can rest assured knowing that you’re getting the most out of your investments.
Where did Cost Segregation Come From?
– The practice of cost segregation came about in 1959 after the court case “Shainberg vs. Commissioner” when the IRS ultimately agreed with the courts decision to recognize cost segregation as a valid method for calculating depreciation. The Economic Recovery Act of 1981 brought in a new set of depreciation rules known as the Accelerated Cost Recovery System, which became mandatory for all properties placed in service after 1980. The ACRS drastically reduced the significance of useful lives and placed most tangible property in of 3,5,10, and 15 year recovery classes. Then in 1986 congress revised again the depreciation rules through the Tax Reform Act of 1986. This resulted in the creation of the Modified Accelerated Cost Recovery System(MACRS) that is still in effect today. MACRS is composed of two depreciation systems with their own pre-established class lives known as The General Depreciation System(GDS) and the Alternative Depreciation System(ADS). IRC §168(b); IRC §168(c). The GDS is used by most taxpayers unless they are required to use the ADS based on the nature of the property. The ADS is used when; the property is used 50% or less for business, the property is used predominantly outside the U.S during the year, the properties use is tax-exempt, the property is tax-exempt bond financed, or if the property is used predominantly in a farming business and placed in service in any tax year during which an election has been made not to apply the uniform capitalization rules to certain farming costs. IRC §168(g)(1); IRC §263A(e)(2);IRC §280F(b)(1);
When can I perform a cost segregation study?
– Cost Segregation can be done anytime a building is constructed, purchased, or renovated. However, not everyone should perform a cost segregation and not everyone is qualified to perform one. For instance, if a taxpayer plans to sell a building within a year of purchasing it, most likely a cost segregation wouldn’t be a useful tool for them because even the reclassified 5 year assets will not have a chance to fully depreciate and the taxpayer will be subject to IRS depreciation recapture. On the other hand, if a taxpayer has owned a building for 5 years and hasn’t performed a cost segregation study, it would be in their best interest to have one done before selling the building. This is because any assets reclassified as 5 year property will be 100% deductible because they already held it for 5 years, therefore those assets are fully depreciated. Deductions can also be carried forward, meaning if a cost segregation study results in $400,000 of deductions and the taxpayers income is only $200,000; the additional $200,000 can be taken as a deduction on the following years income.
– If you are planning to renovate or construct a building, now is the best time to start tax planning. The reason why it is so important to have a tax strategy in place before renovating or constructing a building is because the manner in which those renovations are carried out can have large implications on the way a taxpayer will deduct their expenses. Net Profit Advisors work with our clients and their developers to create a strategic timeline for renovations and repairs as well as new construction.
– If you’re not sure whether or not now is the right time to perform a cost segregation study, contact our team for a free property evaluation to see what your options are and how we can help.
Why hasn’t my CPA brought this to my attention?
– Many of our clients first question is why haven’t their CPA’s already performed a cost segregation study. The answer is simple, they can’t. Cost Segregation is a very labor intensive process that requires a thorough understanding of construction, real estate, and specific IRS legislation as it relates to performing a study. The IRS preferred method of performing a cost segregation study is an engineering based approach. Since most CPA’s aren’t also part time engineers, they lack the technical background required to complete such evaluations. With that said, the cooperation of a CPA is quintessential to the successful implementation of a cost segregation study. Net Profit Advisors will work closely with your CPA to ensure his or her understanding of the process so that they may be better equipped to help you in the future.
What are the costs associated with performing a cost segregation study?
– The mission at Net Profit Advisors is to help our clients increase their profitability and maximize cash flow, which is why we use a contingency based fee model. This means that our clients pay nothing until they have received the benefits associated with our work. We don’t believe our clients should have to spend money upfront to save money later, after all, the entire point is to maximize cash flow, not reduce it. So if you’ve been thinking about having a cost segregation study performed but don’t want to come out of pocket thousands of dollars, then Net Profit Advisors is the right choice. If we can’t save you money, you don’t pay a cent.