Tax Incentives Blog

The main trigger to consider conducting a fixed asset disposal study is when you plan to renovate real estate property. When planning to demolish or renovate a building – whether tearing out lighting, HVAC units or other components – these assets are effectively abandoned or retired from the building. The tangible personal property’s remaining depreciable basis can be written off (for tax) once the asset is retired.

The concept is simple enough, but the challenge can be ascertaining the correct value for the component parts of the building. By performing a cost segregation on the original acquisition of the building, you obtain the value of the original components at the snapshot in time of the acquisition, thereby allowing you to the write off the remainder of the basis upon disposition of that old property.

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.

CPAs have a core set of accounting responsibilities they carry out on a daily basis. Today, however, CPA firms and the clients they serve are expecting accountants to know and do more.Clients that are property owners want to take advantage of every tax savings opportunity possible. This means CPAs need to help them navigate the complex world of cost segregation and accelerated depreciation for fixed assets. 

The recently issued “repair regulations” provide guidance regarding the capitalization of amounts paid to acquire, produce or improve tangible property. 

Final tangible property repair regulations provide rules covering three general areas:

• Costs to acquire or produce tangible property;
• Costs to improve tangible property; and
• Dispositions. 

All cost segregation specialists are not created equal. Before outsourcing your client’s cost segregation study, you must do your due diligence to find the right service provider. Ask the following five questions to ensure your cost segregation specialist is equipped to maximize ROI and deliver an audit-ready study:

A taxpayer constructed a manufacturing facility for $12,081,885 and was depreciating the entire capital expenditure as a 39-year straight-line cost.

“My building’s too small and cost segregation only works for large properties.”

“Cost segregation must be done the first year of ownership, and I missed the boat.”

“I can’t change my accounting method and I have no idea how to amend tax returns.”

There are a number of misconceptions surrounding cost segregation, which ultimately leads building owners to miss too many deduction opportunities.

The benefits of conducting a cost segregation study are attractive to many building owners. By classifying assets and accelerating depreciation in a shorter period of time, you see an immediate increase in cash flow, a reduction in current tax liability, a deferral of taxes and the ability to reclaim missed depreciation deductions from prior years.

While the benefits of cost segregation are many, there are also inherent complexities that keep many property owners from pursuing these studies to arrive at greater tax savings.

Are you happy with your current tax savings strategy to reduce your tax bills? If the answer is “no,” have you told this to your CPA or financial advisor? If not, it’s likely your CPA or financial advisor is assuming you are perfectly content with your current tax strategy.

That’s okay: With a little insight, you’re able to see where your business can take advantage of capturing tax credits and incentives offered by the government on a federal, state and local level.

The following are four expert tips to help you discover possible new savings through a number of viable tax credit and incentives: