What is a Cost Segregation Study?
A Cost Segregation Study is a comprehensive analysis of capital expenditures on a new construction project, major remodeling or alteration, leasehold improvements, or purchase of an existing building. The purpose of separating those expenditures into the appropriate asset classifications are for tax savings and cash flow for the owner/investor. Cost segregation studies are important because the federal government assigned a 39 year depreciable life to commercial buildings and related structural components, a 5 or 7 year depreciable life to most equipment, and a 15 year depreciable life to land improvements. Taking into consideration the enormous difference between the lives assigned to the various categories, and the inflexibility of the current system, it is easy to understand the importance of proper classification of the various assets included in your project.
How does a Cost Segregation Study help me?
A Cost Segregation Study can help you by:
Maximizing tax savings by adjusting the timing of deductions.
Through a cost segregation study, assets depreciable lives are accelerated where appropriate. This in turn accelerates expense and decreases taxable income. As a taxpayer, you pay less during the early stages of a buildings life. Under certain circumstances, segregated assets may qualify for the additional bonus depreciation.
Increasing cash flow by reducing tax liability.
Because your tax liability is reduced during the early stages of the building life due to the accelerated depreciation expense, you use less operating cash for taxes. Funds that would have gone to pay taxes are now available for income producing activities.
Possibly reducing state and local real property taxes.
In certain circumstances, the cost segregation study can assist in reducing the building costs allocable to real property. The tax savings will depend upon the classification of the property as real or personal by applying applicable state law.
Avoiding headaches and backtracking work upon an IRS audit.
An internal legal memorandum issued from the IRS notes that a taxpayer bears the burden of determining the depreciable basis of equipment or assets that are considered personal property and sets forth standards for a "quality" cost segregation study. In addition, it states that an "accurate cost segregation study may not be based on non-contemporaneous records, reconstructed data, or taxpayers’ estimates or assumptions that have no supporting records." In other words, taxpayers who plan to take advantage of a cost segregation study will need to maintain accurate records that establish the items that constitute personal property and that properly allocate costs to these depreciable items.
Can’t my current accountant do the allocations of my property?
We have found that 10 to 40 percent of the property allocations are often incorrectly calculated, or "guessed". In working with Kiesling Associates LLP, you can expect to be served by one of the only Midwest firms that have the expertise of a cost segregation specialist with over 20 years of construction experience. In order to deliver a quality cost segregation report, we utilize the tools and techniques approved by the IRS that your current accountant may not have. The process requires a thorough knowledge of the court cases, IRS rulings, and procedures that deal with cost segregation. We know our way around the blueprints, the industry lingo and the proper way to analyze and document our findings. We may end up knowing more about your property than your current accountant!
Will this cause trouble with my current accountant?
At Kiesling Associates LLP, we strive to work with other firms in delivering a timely and accurate final report, which will tie back to your construction project balance. In past projects, our accounting brethren have often recommended that a cost segregation specialist be involved in this type of study. We strive to develop mutually beneficial relationships both with you, the taxpayer, and your current service provider. We will work with your current accountant in order to deliver the final project under a mutually acceptable timeline.
How do I know if a Cost Segregation Study is right for my project?
Typically a 30 minute visit with you to assess your project is all we need. By providing us with the construction cost detail or appraisal, we can provide you with a free estimate of the benefits associated with our cost segregation services.
What projects qualify for a Cost Segregation Study?
Current construction, major remodeling, leasehold improvements as well as acquisition projects easily qualify for our cost segregation services. For buildings constructed or purchased in the past, we can complete the study and make a "catch-up" adjustment for your current year end. Often times, this adjustment can completely wipe out taxable income for the current year. We have experienced great results on both purchased and new build properties for the current and prior tax years.
What is the approach you use for a Cost Segregation Study?
Our approach includes working closely with the general contractor and subcontractors, only asking you to make the first introduction. From there, we will ask the contractors for some additional information, only asking you for assistance when necessary. Our steps typically include blueprint analysis, invoice review, site tours, direct cost analysis, indirect cost allocation, preliminary asset listing, tax research, general ledger tie-out, and preliminary report. Our final step is the issuing of the IRS "quality" report that is "accurate and well documented" with regard to the IRS requirements of “classification, explanation and substantiation.”
Can I see some examples of past results?
Additional information is attached, which details the results of some cost segregation studies done on various types of facilities. We have extensive experience in the area of cost segregation, performing studies on various types of buildings ranging from $300,000 to over $110 million.