A cost segregation study identifies personal property assets that are grouped with real property assets. The study then separates the personal assets for tax purposes. Personal property includes both a building’s non-structural elements, indirect construction expenses, and exterior land improvements. Conducting a CSS requires the experience of an engineer who has a good understanding of construction finance. The engineer examines the construction drawings, the electrical plans, and the blueprints and then separates the structural and mechanical components from the ones that are classified as personal property. A cost segregation study that is well documented will help you:
- maximize your savings
- create an audit trail that will help you resolve the IRS inquiries
- help reduce real estate tax liabilities and
- help manufacturers take advantage of retroactive savings. This is for properties added since 1987.
A cost segregation study identifies the cost of a building that would normally depreciate over a period of 27.5 to 39 years. It then re-classifies the cost which results in accelerated depreciation. The cost for non-structural items such as sidewalks, wall coverings depreciates over a shorter period such as 5,7 or 15 years. The more the tax deductions the higher the cash flow and lower the cost of capital. This is especially true during the first few years after which expansion or renovation starts.
Speaking about the manufacturing facilities, they can take full advantage of cost segregation if the building was purchased, constructed or renovated, or expanded after 1987. Cost segregation is considered most effective for these kinds of properties and a study that is done properly can uncover tax deductions for buildings that were purchased, constructed, or expanded before 1987.
When is cost segregation essential?
A cost segregation study becomes essential when a new manufacturing facility is constructed or when acquiring an existing manufacturing building, renovating an existing manufacturing facility, or when expanding it.
When a cost segregation study is not conducted in the above-mentioned scenarios it can cost owners of the manufacturing facilities significant tax benefits. Get a complimentary detailed preliminary analysis of your property!