The IRS has said that a Cost Segregation Study is a lucrative tax strategy that should be used on almost every major purchase of commercial real estate. The ultimate benefit of a cost segregation study is a reduced tax liability and an increase in cash flow. It is estimated that you can increase cash flow by $70,000 for every $1 million dollars of building cost.
Companies and individuals who have constructed, purchased, expanded or remodeled any kind of real estate can increase cash flow by accelerating depreciation, taking advantage of tax deductions and credits such as the §45L Tax Credit or the §179D Tax Deductions, and deferring federal and state income taxes. One key aspect of a cost segregation is it lays the foundation for the inevitable Partial Asset Disposition
Apollo Energies helps you identify assets within the building you own which can be reclassified into much shorter depreciation recovery periods than the building itself. Maximizing your tax benefits by identifying, classifying and segregating the personal property components and land improvements resulting in depreciable lives of 5, 7 and 15 years insted of 27.5 or 39 years. This is an IRS approved tax strategy, and a Cost Segregation study decreases your tax liability while increasing your company’s cash flow and bottom line.
What is Cost Segregation?
Simply put, cost segregation is a strategic tax tool that allows taxpayers to accelerate their depreciation expense, which in turn increases cash flow. To do this, qualifying project-related costs that would be classified as 39-year real property are identified and reclassified into shorter depreciable lives (5 or 7-year personal property or 15-year land improvements) for federal income tax purposes.
Provides Additional Benefits
While the main focus of the study is to help lower taxes some amazing benefits will also follow. Depending on your state, you may qualify for lower property & casualty insurance premiums. In most areas, your real estate taxes will drop. Why? Because tangible personal property may be assessed at a lower rate than real property. Additionally, you may be able to negotiate better terms with your bank. Again, the reason is simple. A cost segregation study increases cash flow. Your banker sees that as additional “debt-service” coverage. For many, a cost segregation study increases debt-service coverage as much 2 to 3 times.
And then there's the tax savings from a partial disposition that you may not have taken.
Example of Potential Savings
Consider a typical two-story office building with a total construction cost of $1.5 million dollars, and assume that 10% of the cost of the building was improperly classified as real property (39-year) instead of personal property (7-year). By moving the 10% improperly classified as 39-year property to 7-year property, the first year tax savings realized would be approximately $27,000.
When should you consider a cost segregation study?
The following are a few examples of when a cost segreagtion study would be greatly beneficial.
- • Constructing a new facility
- • Acquiring an existing facility
- • Renovating or expanding an existing facility
Clients that have built or purchased buildings or facilities in the past and have not performed a cost segregation study, may benefit from a study which allows for the correction of missed depreciation in past years.
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