Introduction:
Is your business taking advantage of every opportunity to optimize its tax position? If your building’s construction costs are being depreciated over 30 years, it might be time to explore the benefits of a cost segregation study. This strategic approach can potentially accelerate depreciation on specific items, reducing taxes and bolstering cash flow. Let’s delve into the basics of depreciation and how businesses can leverage cost segregation studies for maximum tax savings.
Depreciation Basics:
Typically, business buildings face a 39-year depreciation period (27.5 years for residential rental properties). While structural components adhere to this timeline, personal property and land improvements can often qualify for accelerated depreciation over shorter periods. However, many businesses overlook these opportunities and allocate the majority of their building costs to real property.
Identifying Opportunities:
The distinction between real and personal property is not always clear-cut. Items seemingly integral to a building, such as removable wall coverings or dedicated cooling systems, may actually qualify as personal property if they serve more of a business function than a structural purpose. Recognizing these opportunities is crucial for maximizing tax benefits.
Cost Segregation Studies:
Enter the cost segregation study – a comprehensive analysis that combines accounting and engineering techniques to identify building costs eligible for accelerated depreciation. While the feasibility of such a study depends on individual circumstances, the potential benefits make it a valuable investment for businesses seeking to optimize their tax position.
Tax Law Enhancements:
The Tax Cuts and Jobs Act (TCJA) has enhanced certain depreciation-related tax breaks, further amplifying the advantages of cost segregation studies. Increased limits on Section 179 expensing, expanded 15-year-property treatment, and temporary boosts in first-year bonus depreciation create an environment where businesses can benefit significantly from a well-executed cost segregation strategy.
Implementing Change:
For businesses considering cost segregation studies, the window of opportunity is open. Even if past returns were based on incorrect assumptions about building components, there’s no need to amend them. By following specific procedures in the next tax return, businesses can secure automatic IRS consent for a change in accounting for depreciation.
Conclusion:
While cost segregation studies may not be suitable for every business, they present a compelling opportunity for those seeking to enhance tax savings. To determine the feasibility and potential benefits for your business, reach out to us at [email protected] Our experts will assess whether a cost segregation study aligns with your business objectives, ensuring that the resulting tax savings outweigh the study’s costs.
A Cost Segregation Study May Cut Taxes and Boost Cash Flow | NKSFB, LLC
