Cost Segregation Studies
Maximize Tax Savings and Increase Business Cash Flow
The ultimate return on any investment (ROI) is the net cash flow realized after all expenses and costs have been paid. And that includes Federal and State income taxes. Because it isn’t what companies make that counts, it’s what they keep after taxes.
Cost Segregation is a valuable, often overlooked tax strategy that can increase cash flow through accelerated depreciation. Correctly reclassifying certain fixed assets as personal property instead of real property can significantly reduce their depreciable lives and reduce tax liability.
The below graphic illustrates how cost segregation works and how much you could save.
What is Cost Segregation?
Cost Segregation is the process of identifying, and separating construction-related personal property assets from real property assets. Personal property is considered items that are attached to the building or land, but are not required for the overall basic operation of the building. While land improvements are part of real property, they have a shorter asset class life, and are often reclassified, as well.
A Cost Segregation Study reclassifies these assets, allowing you to depreciate them over a shorter tax life. For commercial buildings, the depreciable life is reduced from 39 years to a much shorter 5, 7 or 15 years, depending on the asset class.
Here’s a sampling of the types of property that are identified and reclassified through a cost segregation study:
- 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
- Parking lots, sidewalks and fencing
- Landscape and hardscape
Why Use an Engineering and Appraisal Approach
Paragon’s highly experienced Cost Segregation Engineers specialize in the analyses of complex mechanical and electrical systems with in-depth tax knowledge set the standard for identifying the maximum Section 1245 Personal Property supported by the current tax law. Experience confirms that accounting based approaches only find a fraction of the qualified property by comparison.
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. This approach is supported and documented through years of tax rulings and court cases.
Benefits of a Cost Segregation Study
- Maximize depreciation deductions on new construction or renovations
- Optimize purchase price allocations on acquisitions of properties
- Realize immediate tax savings on demolition write offs
- Determine true insurable replacement cost after exclusions
- Establish real market value after exemptions for property tax
- Recover lost benefits from past years without amended returns
- Get big tax savings from simple design and terminology changes
New Construction Tax Engineering
Make Tax Engineering™ part of your new construction tax strategy.
Depreciation Recovery Look-Back Study
Recover previous years’ overpaid taxes and increase cash flow.
Retirement Studies for Renovations
Identify remaining life of fixed assets before throwing in dumpster.
A major corporate headquarters complex was completed several years ago, and an accounting based cost segregation study identified 12% of the $200M cost as personal property. Upon review years later by a newly appointed tax executive, an engineering based study by an expert firm found 28% personal property resulting in a major refund from the IRS.