Many companies during the pandemic have not been involved in buying equipment in the past year and have stepped into conserving cash. The upside is that the chances for companies to claim the same depreciation tax deductions as they have been during the previous years are very few. However, a cost segregation study can help you accelerate depreciation deductions which in turn result in reducing your taxes and increasing your cash flow. With the enhancements of depreciation-related tax breaks by the Tax Cuts and Jobs Act (TCJA), CSS benefits have increased when compared to the previous years.
Instead of following the same old method of calculating the depreciation of an asset by dividing its value by 27.5 years, a cost segregation study divides a property into different components and helps the owner depreciate an asset over a shorter period of time. This in turn results in reducing the taxable income and increases the cash flow. The different components here include personal property, land improvements, the structure of a building, and land assets.
Building components |
Example |
Depreciation period |
| Personal property | Furniture, equipment, phone lines, signage, carpeting, etc. | 5 to 7 years |
| Land improvements | Parking lots, sidewalks, fences, etc | Over 15 years |
| Structure of a building | Roof and the foundation of a building | Over 27.5 years. |
| Land assets | Nil | Not depreciated |
Calculating the tax savings
A cost segregation study when conducted at the right time can yield a lot of benefits. A CSS exactly identifies which building component can be treated as a personal property that can be depreciated over a period of 5 or 7 years or as land improvements that can be depreciated over a period of 15 years. By allocating the costs accordingly, you can accelerate the depreciation deductions and reduce your property tax bill. Do not forget bonus depreciation. If the assets qualify, the tax savings can be great.
Conducting a cost segregation study
As per the IRS audit technique guide, there is no qualification described as such for a cost segregation preparer. CSS conducted by civil engineers is considered good when compared to the CSS conducted by people who do not have a civil background. Apart from this, experience and expertise in the field of cost segregation matter a lot.
Tax benefits that are rewarding
Cost segregation study is a valuable investment even though it depends on certain facts and circumstances. Though it might cost you a reasonable amount, the tax benefits from it are long-term and worthwhile. CSS is a good idea to reduce your property taxes as:
- it maximizes your tax savings
- increases cash flow and
- a CSS when properly documented helps in resolving IRS inquiries during the earlier stages.
To get your cost segregation study done visit Expert Cost Segregation.