What Is a Cost Segregation Study and How Does It Save You Money?
If there were a universal small business handbook, cost segregation would merit a page or two tops. It’s not scintillating, and it’s certainly not simple.
But it is a common-enough tax strategy that can yield considerable savings. That makes cost segregation studies (determining whether and how you can put this tactic to use) a worthwhile investment.
So, put on your learning caps and read on to learn more about cost segregation, cost segregation studies, and how they can save you money.
What Is Cost Segregation?
When you own an asset, such as real estate, you get to make “depreciation” tax deductions. These are spread across the supposed “useful” life of the real estate: typically 27.5 years for residential properties, and 39 years for nonresidential real estate.
In reality, real estate is often so much more than property. It’s a structure that sits on top of the property, and even various components inside and outside of that structure. Some of those components can be written off more quickly than others.
A cost segregation study helps you determine what those components are, and how quickly you can accelerate your tax savings on those assets.
How Does a Cost Segregation Study Save You Money?
Let’s say you own a piece of business real estate. It likely has a “tax life” of 39 years over which you can deduct for depreciation. And you might have made various improvements — whether they were improvements to the land around the building, or non-structural upgrades to the building itself — to that real estate.
Well, depending on what those improvements are, you might be able to quicken the pace of depreciation, to either 15, seven or even just five years. Did you add a parking lot? Put up a fence? Do some landscaping to make the property look more attractive? These are all examples of land improvements that can have a much shorter tax life.
In a cost segregation study, someone examines your commercial real estate. They then separate it into different parcels depending on how they appreciate: personal property, land improvements, buildings/structures and the land itself.
You can use that study not just to determine new deductions for purposes of preparing your taxes, but as documentation should the IRS decide to audit you. Your tax savings effectively become additional cash flow, too, which any small business can always use more of.
McManamon & Co.’s cost segregation studies combine the expertise of our tax specialists and engineers to provide small businesses with reports that meet IRS standards, not to mention real, tangible savings. In fact, an investment in a cost segregation study typically yields savings of between 15 and 20 times the cost.
Have you bought or built real estate in the past 10 years, or do you have plans to do so in the future? Call us at 440.892.8900 or contact us online today. Our experts can provide you with a free evaluation of your property.
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