A cost segregation study can be very beneficial to you and your wallet. These types of studies are advantageous because they can help you significantly increase your cash flow by segregating the costs of various properties. The two major benefits of cost segregation are tax reduction and tax deferral. Cost segregation studies can also result in more accurate accounting and more accurate tracking of cost basis and depreciation.

With cost segregation, more income will be taxed at the capital gains rate as opposed to the typical income rate. Therefore, a cost segregation study can produce tax deductions which may substantially reduce the federal income taxes you owe on your property. Furthermore, cost segregation identifies property assets and reclassifies allocated costs to personal property. Personal property can be depreciated between 5 and 15 years, which may result in tax deferrals.

Cost segregation studies divide property into four fundamental groups: personal property, land improvements, land, and buildings. The property category through which you will achieve the greatest tax benefits is personal property. Personal property includes items such as fixtures, furniture, and equipment. Because these types of items have a shorter life span than other types of property, depreciation occurs between 5 and 7 years.

The double-declining balance accelerated depreciation method is used to determine personal property depreciation. This method assumes the personal property in question will lose the majority of its value during the first few years of its useful life. To calculate personal property depreciation using the double-declining balance method, the most current book value of the property and the property’s years of usefulness will be utilized.

Land improvement is another category of property from which significant tax benefits may be derived through cost segregation. Using the 150-percent declining balance method, property such as fencing and landscaping will be depreciated over a 15 year period of time. With this depreciation method, 150 percent of the straight-line annual percentage rate will be used to determine depreciation. This means simply that the difference between the cost of the land improvement and the land improvement’s expected salvage value over 15 years will be divided to arrive at the property’s depreciated value.

There may be some benefits to building cost segregation, whether the building is residential or non-residential. This may be especially true if building costs are divided into components. Most building structures will have a life expectancy between 27.5 and 39 years. Therefore, you may benefit from segregating components that do not have this lengthy of a lifespan. For example, the roof of a home may need to be replaced within 10 years, which is much less than the expected life of the overall building structure. Segregating these costs could be beneficial. Land is the only property that cannot be depreciated.

If you are considering using cost segregation techniques to reduce or defer taxes on your properties, contacting a CPA is highly recommended. A service like this should be undertaken by a professional with expertise in tax benefits, accelerated depreciation deduction, and write-offs. The benefits can be substantial but there are certain IRS requirements that must be adhered to.

Author Bio: Kiner & Associates is a full service Cincinnati CPA firm serving small businesses and individuals. We offer Cost Segregation services to help you minimize your business tax liability.

Category: Business
Keywords: cost segregation,personal property,personal property depreciation,CPA,taxes