The COVID-19 crisis has hit all of us, but some more than others. If you own one of the many companies that need to conserve cash and reduce expenditures on equipment this year, you may find that you are not able to claim as many depreciation tax deductions as in the past. However, if your company owns real property, you should look into another depreciation option: a cost segregation study.
Business buildings generally depreciate over a 39-year period (27.5 years for residential rental properties). Typically, companies depreciate a building’s structural components — including walls, windows, HVAC systems, plumbing and wiring — along with the building. Personal property (such as equipment, machinery, furniture and fixtures) is eligible for a shorter , more accelerated depreciation period of five or seven years. Land improvements, such as fences, outdoor lighting and parking lots, are depreciable over 15 years.
Often, businesses allocate all or most of their buildings’ acquisition or construction costs to real property, overlooking opportunities to allocate costs to shorter-lived personal property or land improvements. Items that appear to be “part of a building” may in fact be considered personal property. Examples include removable wall and floor coverings, removable partitions, awnings and canopies, window treatments, signs and decorative lighting.
A cost segregation study combines accounting and engineering techniques to identify building costs that can be allocated to tangible personal property rather than real property. Although the relative costs and benefits of a cost segregation study will depend on your particular facts and circumstances, it can be a valuable investment.
It may allow you to accelerate depreciation deductions on certain items, thereby reducing taxes and boosting cash flow. Thanks to the Tax Cuts and Jobs Act, the potential benefits of a cost segregation study are now even greater than they were a few years ago because of enhancements to certain depreciation-related tax breaks.
Worth a look
Cost segregation studies have costs all their own, but the potential long-term tax benefits may make it worth your while to undertake the process. Contact us if you would like to discuss the pros and cons of a study.