Accounting News and Notes

Gwinnett CPA Firm Presents Cost Segregation 101…Helping Atlanta Business Succeed

Cost Segregation (CS) is simply an IRS compliant method of accelerating the depreciation on commercial buildings, thus boosting your tax deductions and reducing your tax liability.  CS is implemented by an expertly performed study of the subject property that separates the various components of the building into categories that have varying schedules for depreciation.  Some parts of a building can be depreciated in as few as 5 years, some in 7, and others in 15.  Traditionally commercial buildings are depreciated with a “straight-line” method over a period of 27.5 or 39.5 years, depending on the type of property in question.  It’s easy to see the beneficial effect on cash flow of “front-loading” much of the depreciation.  Another advantage is that you do not have to file an amended return; you can begin applying CS to your estimated tax payments at any point.

While Cost Segregation has been available in its present form for about 12 years, many property owners have not taken advantage of this excellent, IRS–approved method for increasing your current deductions and keeping more of their own money.  What could you do with tens of thousands of dollars in tax savings?  Reinvest in your business?  Take advantage of the great deals available to investors in the current down cycle?  Buy something you’ve always wanted?  It’s up to you, and Cost Segregation might be a way to make it happen.

Most commercial property that is already being depreciated for tax purposes can apply CS and reap its benefits.  Buildings acquired after 1986 that have a cost basis exceeding $300,000 (excluding land value) can often experience significant current tax savings with CS.  Retail space, office buildings, apartment complexes, restaurants, and manufacturing facilities are good candidates for CS, but almost any kind of commercial space could probably apply CS to good advantage.  Also, renovations and leasehold build-outs can often use CS for increased cash flow.  One note:  CS is usually NOT cost-effective if you will not continue to own your property for at least 5 years after applying CS because your extra deductions are subject to recapture by the IRS when a building is sold soon after utilizing the benefits of CS.

A good rule of thumb is that you will increase your current cash flow by 5 to 10% of your buildings’ cost basis in the first 5 years of CS application.  This translates to $50,000 to $100,000 per $1,000,000 of building cost in those first 5 years.  

CS has seldom been the subject of an IRS audit when performed by a reputable engineering firm that properly documents the analysis.  The old version of CS, “the component method,” was problematic, but a court case, Hospital Corporation of America v. Commissioner, decided in 1997, made significant changes in the way CS is applied and how the IRS handles returns that use CS for depreciation.  Some CS-performing firms have carried out thousands of CS studies without a single instance of triggering an audit.  If you’re considering CS, you’ll want to find such a firm to conduct your CS study.

Contact a reputable firm that will work with you and your accountant to make sure the job is done right and your tax savings are optimized.  The author represents one such firm, Cost Segregation Services, Inc. that has been performing CS studies since 2002.  CSSI has a vast wealth of experience and has never caused one of its clients to be audited due to its CS study.  You can get answers to your questions and receive a no-cost estimate by contacting the author Tim Robinson, Cost Segregation Services, Inc., Atlanta, GA 678-313-9047 tvrobinson@bellsouth.net and visit www.costsegserve.com