Typically, commercial property is depreciated over 39 years. Owners deduct 1/39th of the property’s value from taxes, apart from the land. By conducting a cost segregation study, the depreciation process can be realized sooner. Depending on the building type, a cost segregation study takes 20 to 45 percent of the building costs out of 39-year depreciation and puts it into five, seven or 15-year depreciation recovery periods.
Items that may qualify for faster depreciation include specialty HVAC, signage, electrical wiring, landscaping, parking lot improvements, exterior lighting, underground utilities, decorative millwork, flooring, carpeting, and built-in audio visual projectors and screens. Generally, any property used to operate a business may be eligible for a faster write-off. Additionally, depreciation on indirect construction costs, such as construction interest, and architecture and engineering fees can be accelerated. By maximizing depreciation in the early years of ownership, cash flow is increased since less income tax is paid.
A fast-food chain built 10 new restaurants from 2019 to 2021. The average cost per store was $600,000, excluding the equipment and land. A cost segregation study was conducted.
Without the study. The chain must generally depreciate 100 percent of the building cost over 39 years.
With the study. The chain depreciated 20 percent of the building cost over 15 years and 25 percent over five years. For all 10 buildings, the total taxes deferred over a cumulative five-year period exceed $700,000. Now, the owners have $700,000 they can use to run the business, pay off debt, or invest.
Cost segregation studies are conducted in accordance with the current IRS Audit Technique Guide. We use a five-step process that includes on-site verification, construction cost estimating, asset reclassification, revised fixed asset schedule (FAS), and report completion. The IRS has made it clear that only experienced professionals should conduct cost segregation studies. Property owners, or professionals without the proper experience who perform these studies themselves, are likely to have trouble withstanding IRS scrutiny.
Our accountants and CPAs work with cost segregation specialists that will help you evaluate your situation.