Own Property? Here’s a Smart Way to Save on Taxes
Own property? Here’s a smart way to save on taxes.
If you’re a property owner looking for ways to reduce your tax bill, cost segregation might be the strategy you’ve been missing. This powerful depreciation method can help you unlock significant tax savings—and it’s easier to take advantage of than you might think. Keep reading to learn how cost segregation can put more money back in your pocket.
Understanding Depreciation
Depreciation is a reduction in the value of an asset over time resulting from wear and tear, deterioration or obsolescence. The tax law acknowledges depreciation by allowing taxpayers to take deductions over a period of years. Generally, the number of years over which the property can be depreciated depends on the category into which it falls under the Modified Accelerated Cost Recovery System (MACRS), which applies to business assets acquired after 1987. For example, Commercial and Industrial properties are, by default, depreciated on a standard 39-year schedule.
Tax law also permits certain component parts, termed individual “Assets,” to be deducted at accelerated rates. For instance, the category “landscaping” can be refined into Assets such as “bushes, shrubs and retaining walls.” Categorizing Assets in this way allows each individual Asset, once considered to all be under landscaping, to have a different depreciable life, based on the MACRS Depreciation Schedule . Using this detailed method to categorize individual Assets can result in tax savings because Assets have greater value in their first few years.
Cost Segregation Studies0
Accelerating Depreciable Assets is the essence of Cost Segregation Studies (“CSSs”). CSSs identify and reclassify personal property Assets that are grouped with real property assets to shorten their depreciation time for tax purposes. This accelerated depreciation can result in an increase in Cash Flow and/or a decrease in Tax Liability for business and property owners.
Other advantages of a Cost Segregation Study (CSS) include:
- Assets can be depreciated over a shorter time, resulting in lower tax payments. This, in turn, can free up cash that can be used to meet the business’s other needs.
- Cost Segregation Studies (CSSs) can establish the depreciable tax value of certain building components that are likely to be replaced in the future, much earlier than a 39-year schedule would recognize.
- CSSs can also identify opportunities for other tax credits and deductions.
- CSS documentation creates an audit trail that can prove invaluable in the event of an IRS audit.
Tax Cuts and Jobs Act of 2017
The Tax Cuts and Jobs Act of 2017 expanded the benefits of Cost Segregation Studies. Among the most notable changes are the following:
- The expansion of property qualifying under Internal Revenue Code Section 179, which allows businesses to deduct the full purchase price of qualifying equipment and software purchased or financed during the tax year. The changes apply to assets placed in service in tax years after 2017.
- The rules for bonus depreciation have changed. A business must claim first-year bonus depreciation for qualified property placed in service during the year, unless it chooses to opt out by property class.
- The same property may be eligible for both changes.
Despite obvious and significant benefits, CSSs may not be appropriate for every business. There may be downsides, including the possibility of triggering depreciation recapture (i.e., the amount of income that must be reported when the sale price of an asset exceeds its tax basis or adjusted cost basis) and understatement penalties for taxpayers that use Cost Segregation too aggressively).
If you think you may benefit from a Cost Segregation Study, then the prudent thing to do is to minimize your risk by hiring a team that is familiar with how these Studies are conducted and reported.
Our affiliate, Keystone Cost Segregations, is a professional team of CPAs, engineers, and construction estimators who provide affordable CSSs. Contact Keystone at (970)986-4004 or office@keystonecostseg.com to learn more about their services and if a Cost Segregation Study is right for you.
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