To claim tax deductions, a property owner needs to apply the non-cash depreciation expenses against their taxable income, which effectively offsets tax liability. Instead of utilizing a straight-line depreciation method for real estate assets to capture tax deductions, your clients can accelerate the depreciation of fixed assets via a cost segregation study that generates significantly more tax benefit.
Depreciating assets over a shorter tax life results in considerably more annual tax deductions for the property owner, especially within the first five years of the building’s lifecycle. Further, by conducting a formal cost segregation study, you are assured the correct and most beneficial taxable life for all assets, based on relevant tax rules established by the IRS.
Enter The Mechanics Of Cost Segregation For Accelerated Deprecation
The recommended way to conduct a cost segregation study is to team up with experts who have both engineering and accounting experience. This dual expertise is extremely valuable when determining capitalization versus expense, relative to the tangible property regulations, and the correct categorization of capitalized assets.
By the accelerated depreciation of fixed assets, your clients are able to use the tax savings to recover costs from their construction project or apply toward upgrades, which will continue to give them an edge over their competitors. To capture these benefits, consider using an engineer who is paired with a CPA with a specific background in cost segregation to identify every allowable accelerated depreciation deduction benefit. Generally, CPAs and their building owner clients do not have the practical experience in construction or engineering to correctly identify and/or estimate the value of personal property assets.
With a cost segregation study, you identify, segregate and classify qualifying property into asset groups with shorter depreciable lives, generally with a three-, five-, seven- or 15-year recovery period.
If a large percentage of qualifying assets are able to be frontloaded into these time frames, you may liberate a considerable amount of cash flow in the shorter term for your clients.
Generating ROI From A Cost Segregation Study
Once you’ve done a cost segregation study to take advantage of accelerated depreciation of fixed assets, the tax savings should be substantially greater when compared to straight-line depreciation deductions.
However, a cost segregation study also presents opportunities to capture even more tax benefits. Through a deep analysis of a client’s property, it may be assessed that they also qualify for green building incentives, like the 179D deduction or solar power credits. An assessment of these additional opportunities should be included within the overall tax savings strategy for your clients who own real estate.
Going through the process of the accelerated depreciation of fixed assets is a tax planning strategy that will provide substantial value to your client base. By uncovering every possible tax incentive by using an experienced cost segregation provider, you make your client’s investment in the study worthwhile.
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