Business Benefits of a Cost Segregation Study
Accelerating Depreciation and Boosting Cash Flow: The Power of Cost Segregation Studies
Business owners who own commercial and residential properties often look for ways to improve their cash flow and reduce their income tax obligations. A cost segregation study is a practical and effective method that can help enhance fiscal efficiency. This approach has a variety of applications, including restaurants, hotels, office spaces, manufacturing, retail centers, apartments and auto dealerships. It offers considerable financial benefits that are significant and diverse.
Breaking Down the Cost Segregation Study
A cost segregation study is a strategic tool that can boost the deductions of your property investments. Essentially, it involves the reclassification of certain components of a property, allowing owners to accelerate their depreciation deductions on those specific elements.
Every real estate property is composed of several different parts. Beyond being a simple asset, it’s an ecosystem, with numerous components contributing to the business’s operational efficiency. Some of these components are eligible for quicker write-offs, leading to significant tax savings.
Ideal Timing for a Cost Segregation Study
While a cost segregation study can be undertaken at any point after the purchase, renovation or construction of a property, it’s most commonly executed within the year of property acquisition, construction or remodeling. However, “lookback” studies can also be performed on assets already in service in previous years, with the results implemented via the Accounting Method Change Form 3115.
A Tool for Enhanced Cash Flow
The primary aim of a cost segregation study is to pinpoint all personal property and land improvements eligible for a 5, 7 or 15-year recovery period. By accelerating the depreciation deduction of these specific assets, property owners can significantly reduce their current tax liabilities, resulting in increased cash flow.
In essence, a cost segregation study enables you to segment your purchase price into categories of items that have faster depreciation deductions. The outcome? Increased short-term cash flow as a result of reduced tax payments.
On average, cost segregation studies can reclassify 15-45% of a building’s basis into “short life” assets (with a lifespan of 20 years or less). For a $1 million project, this can equal between $30,000 and $90,000 in increased cash flow. The extent to which a cost segregation study benefits your business hinges on various factors, such as your tax rate, the cost of your assets, the nature of your business and the duration you plan to own the asset.
An Investment Worth Making
Although there are costs associated with conducting a cost segregation study, the potential for long-term tax benefits makes it a worthy investment for property owners. By accurately identifying and accelerating depreciation on specific components of your property, you can enhance your cash flow, improve your bottom line and bolster the financial health of your business. If you would like to discuss a cost segregation study, contact an Adams Brown advisor.