Maximize Tax Savings with a Strategic Cost Segregation Study

A cost segregation study is a powerful tax planning tool that helps commercial property owners accelerate depreciation deductions, reducing taxable income and improving cash flow. By reclassifying components of a building for tax purposes, owners can unlock valuable tax benefits that might otherwise be overlooked.

What Is a Cost Segregation Study?

A cost segregation study involves a detailed analysis conducted by experts, typically using accounting and engineering techniques. The goal is to identify and separate building components—such as electrical systems, plumbing, and removable carpeting—that qualify for shorter depreciation periods.

Instead of depreciating these components over the standard 39-year timeline for commercial buildings, a cost segregation study allows eligible components to be depreciated over much shorter periods, often five, seven, or 15 years. This reclassification accelerates tax deductions and creates an opportunity for significant cash flow improvements.

Understanding Depreciation Rules

Under standard depreciation rules:

• Real property components, such as walls, windows, HVAC systems, and wiring, are typically depreciated over 39 years.
• Personal property, including equipment, furniture, fixtures, and certain removable items, qualifies for accelerated depreciation, generally over five or seven years.

Unfortunately, businesses often allocate most or all of a building’s acquisition or construction costs to real property, missing opportunities to assign costs to personal property or land improvements. However, items like removable wall coverings, partitions, awnings, and signs may qualify as personal property and be depreciated more quickly.

Don’t Overlook Outdoor Savings

Outdoor property components also present potential tax-saving opportunities. While outdoor lighting, parking lots, fencing, and landscaping are typically depreciated over 15 years, they may still qualify for tax deductions.

For example:

• Capital improvements, such as upgrading business lighting for enhanced security or adding landscaping to improve curb appeal, are deductible over time.
• Routine maintenance, such as lawn mowing or minor repairs, is generally deductible immediately as business expenses.

Why Invest in a Cost Segregation Study?

The benefits of a cost segregation study can be substantial. By identifying building costs allocable to tangible personal property, a study allows businesses to:

• Accelerate depreciation deductions.
• Reduce current-year taxable income.
• Boost cash flow for reinvestment or other business needs.

The Tax Cuts and Jobs Act (TCJA) further enhances the value of cost segregation studies through changes to depreciation rules, including increased bonus depreciation for qualifying property.

Consider the Costs vs. Benefits

While a cost segregation study involves upfront costs, the long-term tax benefits often outweigh the expense. For businesses with significant real estate investments, the tax savings generated can be a game-changer.

Get Started Today

Unlocking tax savings with a cost segregation study requires expert guidance. Our team at HoganTaylor can help you evaluate whether this strategy makes sense for your business and guide you through the process. Contact a Tax or Wealth advisor today to learn more and explore the potential benefits for your specific situation.

The HoganTaylor Tax Practice

If you have any questions about the content of this publication, or if you would like more information about HoganTaylor's Tax practice, please email Tony Otto, Tax Practice Lead, at jotto@hogantaylor.com.

INFORMATIONAL PURPOSE ONLY. This content is for informational purposes only. This content does not constitute professional advice and should not be relied upon by you or any third party, including to operate or promote your business, secure financing or capital in any form, obtain any regulatory or governmental approvals, or otherwise be used in connection with procuring services or other benefits from any entity. Before making any decision or taking any action, you should consult with professional advisors.