Plain & Simple: Bright Business Insights Vol. 8 Winter 2023 Winter 2023 | Page 8

EVERY DOLLAR COUNTS

Business Benefits of Cost Segregation
Businesses need to increase cash flow wherever they can , especially in our unstable post-pandemic economy . Cost segregation is a tax strategy that helps business owners save money on the depreciating value of certain property assets . The money you save will increase your cash flow , which can in turn help you maintain your current assets and expand your business .
How Does Cost Segregation Benefit Businesses ?
Cost segregation reclassifies parts of your building or property as “ personal property .” The reason for doing this is to increase the rate of depreciation , which increases the number of tax deductions available to you as the owner of the building or property .
The tax court recently ruled that certain costs , classified as buildings subject to a 39 or 27.5-year lifespan , should be classified as personal property subject to a five , seven , or 15-year recovery period . The benefits of cost segregation are enormous for businesses . On average , for every $ 1 million of a 39 or 27.5-year property that is reclassified as a 5 or 15-year property , the present value of the net cash flow ( at 8 percent associated with the rate of depreciation ) is around $ 200,000 .
Multiply that the number of millions of dollars you can reclassify , and you could possibly generate hundreds of thousands , if not close to a million dollars in cash flow . That money can now go to improving other properties , maintenance , investments , or wherever it is needed in your business .
Can New and Established Businesses Benefit ?
Whether you just started your company within the last year or have been established for several decades , you can still benefit from a cost segregation study . The IRS allows a taxpayer to go as far back as 1987 to reclassify personal property items that have been incorrectly depreciated . This change is prospective and no amended returns are required . A change in accounting method can