Hidden Savings Within Your Building

Cost Segregation – Why use a Engineering Aproach?
Approximately eight years ago, we were approached by a Cost Segregation Engineering firm. We knew about cost segregation studies; but, we had never worked with an engineering firm. They emphasized the fact they specialized in “Engineering Approach”. So what’s the big deal? Before I continue, let me explain what a cost segregation study is.

How Does it Work?
Building costs are generally classified for tax purposes into three categories. Each has a different depreciation recovery period over which the cost of that category must be depreciated (i.e., expensed).

Tangible Personal Property- 5 or 7 years
Land Improvements- 15 years
Real Property- 27½ or 39 years

In addition to shorter depreciation periods, the first two categories can be depreciated on an accelerated basis while the last cannot. The term accelerated in this content, means more depreciation expense can be taken in the earlier years of the asset’s assigned life than in later years. This is a big deal. It can save taxpayers a lot of money!

A cost segregation study identifies assets that should be properly classified as tangible personal property or land improvements, rather than real property subject to a 39 year (non-accelerated) depreciation life.

For example, a taxpayer that owns a manufacturing facility could classify (or reclassify) such assets as security systems, ventilation systems, equipment foundations, loading dock equipment, etc.

Why an Engineering Approach?
Less than a year before meeting the engineering firm, we had moved into a new location. Most of the building at that time was basically a shell. We did our own build-out of the “raw” space. We diligently kept track of all expenses incurred. We classified the expenditures as personal property, land improvements or real property, keeping in mind the benefits of depreciating assets over shorter lives.

We decided to “test” these engineers by asking them to do a cost segregation study on our new building. We were sure what, if any, reclassifications would be small and insignificant.

Several weeks later, after visiting us and touring our building, their report was done. Much to our surprise, their engineering approach to the study had reclassified several hundred thousand dollars worth of assets into either personal property or land improvements. This amounted to a total first year tax savings of close to $100,000. It has been a wonderful marriage of accounting and engineering firm ever since, which has benefited many of our clients.

By. Robert D'Andrea, CPA
Principal

Labels: Accounting, Cost Seg Studies, CPA, D'Andrea