Q: What is a Cost Segregation Study?

A: A way to reclassify building components used to operate a business
such that they can provide significant tax benefits, immediately
increasing cash flow.

A Cost Segregation Study is an IRS accepted asset reclassification process that
accelerates tax depreciation deductions.  In it's most simplified form, certain parts of
real estate are reclassified from 39 year or 27.5 year property into the shorter life 15, 7
or 5 year property for depreciations purposes.  

Since Cost Segregation Studies can recapture available depreciation from previous
years and return it to the owner in the first year as a "catch up", the benefits of these
studies are substantial.  Cost Segregation Studies require a high degree of tax
expertise combined with specialized engineering staff knowledge and compliance with
strict IRS guidelines.

Q: What Are the Benefits of a Cost Segregation Study?

A: Reducing taxes and retrospectively collecting tax relief that you are
due.

Some examples of the benefits of Cost Segregation Studies are as follows;
A 345 room hotel costing $30,500,000, accelerated $3,750,000 in additional
depreciation and reaped an additional tax benefit of over $1,300,000 in the first
4 years.
A 36 story rental building constructed at a cost of $80,000,000 experienced
accelerated depreciation of over $8,500,000 and an additional estimated tax
benefit of over $3,000,000.
A development of 230 townhouses costing just over $20,000,000 was able to
isolate over $2,700,000 in accelerated depreciation and experience an
additional tax benefit of over $1,000,000 in the first four years.

Q: How does a Cost Segregation Work?

A: Specialized engineers document every component of your building,
determining which parts can be depreciated early. The results are
documented in the form of a study, which IRS accepts as justification
for accelerated depreciation.

The first objective of any cost segregation study is to identify, segregate and
reclassify building project related costs that are currently classified as residential
real property with an asset life of 27.5 years or non residential real property with
an asset life of 39 years to shorter depreciation lives of 5, 7 or 10 years.  

When assets are classified to shorter depreciation lives, the amount of
depreciation taken out each year increases.  This accelerates the depreciation
of the asset and consequently increases the amount of income tax deductions
the entity will take on the reclassified assets.

Q: When is the Best Time to Do a Cost Segregation Study?

A: In the best case scenario, cost segregation studies should be done
as soon as plans are drafted for new construction, expansion of
existing construction, remodeling of existing space, or purchase of a
building are completed.  

The goal would be to complete the study during the construction period so that
the accelerated depreciation begins the day the new or modified structure is
placed in service.

However, there are a multitude of other scenarios in which a business can
benefit. For example, a business that has been in operation for many years can
retrospectively depreciate certain items resulting in a lump sum reimbursement
from the IRS.

Q; Why Are These Studies Complex?

A: Identifying components for cost segregation can be difficult due to
complex tax laws.

Cost Segregation is the result of the many tax laws that establish different asset lives
and categories of asset lives that may apply to a building project.  Most of these are
not well known outside the cost segregation industry and consequently are not applied.
This leaves the acceleration undone on large parts of the property and places it in a
longer deprecation life than is allowable.  

Confusion occurs when contractors combine single line item categories in the monthly
draw into an undefined lump sum.  There are often numerous components hidden in
the one number draw request.  Since they are not broken out, it is difficult to identify
them for segregation to different asset lives.  Change orders are also often not
detailed enough, which makes it difficult to track back and determine the cost of each
component.  

Many times blueprints are not complete and it is difficult to know exactly what the
property consists of.  Facing the daunting task of resolving this complexity, many
taxpayers simply place the entire project related construction cost into the longer 39
year or 27.5 year tax lives.   Our engineers are masters at dissecting the complexities
of these documents and determining the line item break outs required to segregate
them into different asset lives.

Q: What Are Some Of The Largest Benefits Of A Cost Segregation
Study?

A: Here are just a few of the benefits:

Significant allocation of direct costs to shorter asset lives
Also allows accelerated depreciation of indirect costs and soft costs
Lowers current income tax liability and increases cash flow
May recapture additional depreciation back to 1987 in a one year "Catch-Up"
Maximizes the utility of new construction investments
Faster write down of renovations and or expansions
Ideal to expense leasehold improvements and tenant build outs
No need to amend previously filed tax returns; for entity or shareholders
Improves the overall climate for capital investment and improvements
No increase in chances of an audit, case law now implies "presumptive approval"
if forms are filed properly and the study is done according to the IRS guidelines
Cost Segregation reallocation combined with the bonus depreciation laws for
2002-4, have a major cumulative impact

Q: What Are Some Major Areas of Cost Allocation That Can Be
Accelerated?

A: Various building components used for the operation of a business,
such as:

Finished Carpentry
Indirect or Soft Costs
Owner incurred costs paid outside the G C contracts
Electrical
Security & Communications Systems
Electrical for Machinery and Equipment
Decorative Lighting
Plumbing
Sanitary Drainage
Storm Drainage
Trench Drains
Exterior Gas Lines
Interior Kitchen Equipment
Grease interceptors
Site Work
Site Lighting
Exterior Decorative Lighting
Security Lighting
Pavement
Walkways and Curbings
Landscaping
HVAC
Specialty Equipment
Process Air Conditioning
Duct work for Kitchen
AC for Computer processing
Special refrigerant equipment
Wall and Floor coverings
Specialty finish woodwork
Decorative Millwork

Click here for a PowerPoint presentation with more detailed information on MCOM's  Cost Segregation Services!

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contact us  for a FREE analysis of your building or construction plans.
Cost Segregation FAQs
Finished Carpentry
Examples of building
components that can be
depreciated on an
accelerated/ retrospetive
basis:
Michael Cannon, CEO
Wall & Floor Coverings
Electrical Equipment
Specialty Finish Woodwork
Decorative Millwork
Security & Communications
Security Lighting
Plumbing
Drainage
Kitchen Equipment
Exterior Decorative Lighting
Interior Decorative Lighting
Site Work
Landscaping
Walkways, Curbing &
Pavement
HVAC Components
Call or email for a FREE evaluation!
Phone: 305 942 6035
email: mcannon@mcomcorp.com