You may know that cost segregation can help to reduce your tax liability. But did you know that not all cost segregation studies are created equal? The IRS prefers accounting-based studies, because, of course, your tax liability is higher – and you pay them more money. However, engineering-based cost segregation studies do a much better job of reducing your tax liability – and you keep more money.
Here are 10 Reasons Why Engineering-Based Cost Segregation is better:
- Engineering-based cost segregation studies include detailed engineering analyses of the primary and secondary electrical systems and circuits. A critical key is understanding how portions of specialty systems, such as electrical circuits, telecommunications or exhaust systems, relate to specific business processes verses basic building functions.
- Cost Segregation Engineers specialize in detailed analysis of complex mechanical and electrical systems. Their engineering knowledge enables them to determine which portions do not serve a building function and, as such, qualify as personal property. Their in-depth tax knowledge enables them to identify the maximum IRS Section 1245 personal property supported by current tax depreciation law.
- Lumped sum costs are broken down into component details, identifying hidden personal property. These fixed assets are identified and priced using detailed appraisal and valuation techniques. In comparison, the lack of detail used in accounting-based approaches only find a fraction of the qualified property.
- Engineering-based studies look for and identify these types of often-overlooked personal property in detail, such as:
- Custom lighting, fixtures and built-in cabinetry
- Interior, removable walls
- Flooring and wall coverings
- Security systems, audio/visual equipment
- Telecommunication and network systems
- Specialty HVAC systems
- And more
- With accounting-based studies, partitions and related components are often considered IRS Section 1250 real property. An engineering-based cost segregation study reclassifies these types of assets as personal property, allowing you to depreciate them over a shorter tax life.
- Experienced cost segregation engineers are familiar with the IRS Depreciation Rulings and Procedures, making the tax class lives more accurate. For commercial buildings, the depreciable asset life is often reduced from 39 years to a much shorter 5, 7 or 15 years, depending on the asset class.
- During construction or remodeling projects, cost segregation engineers perform mid-construction inspections to verify and document methods of attachment and dedicated profiles of specific property units. They can also make recommendations during the design stage to achieve a higher percentage of depreciable personal property, while maintaining design integrity.
- Engineering-based Cost Segregation Reports contain direct relevant references to the IRS authority used for the reclassification of costs. For example, Revenue Procedure 2007-16 provides an automatic consent procedure that addresses taxpayers who have claimed less depreciation than what they were entitled to under the allowable amount.
- Accounting-based cost segregation uses many generalities, estimates and “rules of thumb” to assign costs to certain qualifying components of systems. They don’t include the detailed engineering drawings and reports included in engineering-based studies.
- Last, but not least, the most important reason why engineering-based cost segregation studies are better is that you get to keep more of your hard-earned money and pay less to the government.
Use our handy cost segregation calculator to see how much you can save with an engineering-based study.
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