s the economy in Ohio and other states has sta-
bilized in recent years, investment in real estate,
new manufacturing plants and other assets have
increased. This creates an opportunity for valu-
able tax planning strategies – particularly a
cost segregation study.
What Is Cost Segregation?
Most companies overstate their non-residential real prop-
erty (39-year) on their tax returns. A cost segregation study
tackles this problem by reclassifying assets to maximize
personal property, resulting in optimized depreciation of
deductions and substantial cash flow benefits.
Cost segregation can be a pretty intricate topic as it re-
quires an understanding of complex tax code and of the
materials and methods of construction design. A quality
analysis requires professionals with knowledge in engi-
neering, accounting and tax to ensure the study maximiz-
es components that qualify for accelerated depreciation.
A study conducted by experienced professionals will also
help ensure that these classifications are documented to
withstand IRS scrutiny.
When To Consider A Study
Cost segregation can benefit your company if you’ve re-
cently acquired business properties in any of the following
ways:
• Construction of new buildings
• Renovation of existing structures
• Purchase of existing properties
• Leasehold improvements
• Any post-1986 real estate acquisitions
(this one often gets ignored!)
While it’s easy to recognize the opportunity for cost seg-
regation on a newer acquisition, don’t forget that cost
segregation studies can also be completed on properties
held for a number of years.
The IRS allows a catch-up
adjustment for taxpayers who
have missed out on accelerat-
ed depreciation. So, for exam-
ple, if you own property where
you could have taken $1 million
in depreciation with an analysis,
but you’ve only taken $200,000
in depreciation, the IRS allows for
a catch-up adjustment of $800,000,
allowing you to make up the depre-
ciation.
How Much Could You Save?
We recently had the opportunity to re-
view an auto dealership that had under-
gone an $8.4 million renovation. It was
originally purchased three years earlier
for $2.9 million. After reviewing the original
purchase, construction budget and other
documentation, a detailed engineering-
based cost segregation study was complet-
ed. The result: the client saw increased cash
flow of $757,000 over 5-years with a net pres-
ent value savings in excess of $590,000.
Cost Segregation Benefits
The IRS has issued new regulations governing
when expenditures should be capitalized and when
they can be expensed. As part of these new regulations,
the IRS puts emphasis on tracking “units of property” and
allows for disposition of assets when an asset is removed
from service.
A detailed cost segregation study should provide detailed
breakdowns of your assets, which makes tracking assets
much easier in the future. You’ll not only realize the sav-
ings of the study, but also future savings by accurately
tracking repairs and disposals.
Is cost segregation right for your business? Contact your
Rea advisor to find out.
5