Among the many sophisticated tax tools we use to help clients increase their cash flow and defer federal income taxes and state income taxes are Cost Segregation Studies.
Using Depreciation to Your Advantage
Until recently, cost segregation studies were only applicable to large Fortune 500 companies and property owners.
Today, due to recent IRS rulings, smaller corporations and property owners can realize significant increased cash flow by accelerating the depreciation of real property costs and recovering unclaimed depreciation deductions.
Why should I choose PIASCIK CPA to perform a Cost Segregation Study?
Identifying the components eligible for more rapid depreciation and supporting that treatment is not a straightforward process.
In order to accurately and properly complete a cost segregation study, you need to work with professionals that have complete knowledge of the tax laws, cases, and ruling on Cost Segregation, along with real estate development and construction experience.
At PIASCIK, we not only have the tax expertise, but we have the expertise in construction and real estate to maximize your savings. Additionally, we work with and have access to a full team of engineers, architects, and appraisers to prevail if the IRS challenges.
Very few accounting firms are qualified to perform this comprehensive study!
Businesses with the greatest cost savings potential
At PIASCIK, we've conducted a number of Cost Segregation Studies nationwide resulting in hundreds of thousands of dollars in client savings. Those businesses realizing the greatest cost savings potential include:
- Apartment Complexes
- Auto Dealerships
- Hospitals, Medical Centers and Nursing Homes
- Office Buildings (Class A)
- Retail Chains, Supermarkets and Strip malls
- Recreation and Sports Facilities
How Does Cost Segregation Work and What Is it Worth?
Traditionally, owners of commercial buildings must depreciate building and structural components over a 27.5 or 39-year period.
However, using a cost segregation study, qualifying projects are identified, segregated and reclassified into shorter depreciable tax lives of five, seven or 15 years for federal and state income tax purposes. Savings are achieved by reducing tax liability in earlier years, thus enhancing cash flow.
The potential savings realized from a cost segregation study will vary based on a number of factors, including your effective tax rate—but it is not unusual to obtain savings approaching $100,000 on projects as small as $1,000,000 in total development costs.
The following table illustrates the potential benefits gained from a cost segregation study:
|Property Type||Total Costs (in millions)||Net Present Value
of Tax Savings
|Strip Shopping Center||$2.48||$117,738||$372,425|
|Office Building--Class A||$3.50||$158,668||$178,303|
Cost Segregation Checklist
While each engagement differs depending on the project, generally we need:
- A complete set of construction and site plans
- Current tax depreciation records
- Building cost budget information
- Final AIA application and a document of certification for payment or other cost information
- Change orders
- Direct or indirect costs paid by the owner that are not included in other documents
- Other information deemed appropriate.
Frequently Asked Questions
What is a cost segregation study?
A Cost Segregation Study (CSS) is a strategic tax tool for accelerating the return on capital from your property investment.
Cost Segregation Professionals such as PIASCIK generate cash tax savings by carving out shorter-lived assets, qualifying for five, seven or 15 year write-off periods that are normally embedded in a building's construction or acquisition costs that are generally depreciated over 39 years.
We believe you'll benefit from a CSS if: you've purchased, constructed or remodeled property after 1986; costs incurred exceed $500,000; you anticipate holding the property for at least a few years; and, you are in a high enough tax bracket to benefit from accelerated depreciation deductions.
Industries that benefit most often from CSS include: manufacturing, distributing and warehousing, automobile and truck dealerships, nursing homes, health care facilities, office buildings, medical centers, hotels, motels, apartments, and fast food restaurants.
If cost segregation is a legal method to generate large cash tax savings, why haven't I heard of it?
The genesis of cost segregation started with the Big 4 accounting firms, who only considered cost segregation studies on properties valued at $20 million or more—and at very substantial fees.
Now, businesses can take advantage of over 75 prior IRS revenue rulings and court cases to not only accelerate depreciation of certain assets but also to recapture unclaimed depreciation deductions.
This means that smaller companies can take advantage of this tax strategy at very affordable rates.
What does a cost segregation study cost?
Before conducting a Cost Segregation Study, PIASCIK performs a no cost feasibility study. If we determine your real estate warrants cost segregation, the total fixed fee will generally fall under 25 percent of the estimated Net Present Value (NPV) tax savings. NPV is the calculation of the present value of tax savings achieved over the 39-year depreciation period (life of the asset).
The total fixed fee can affect the real estate project. Additional factors, such as location, accessibility, and quality of the records and documents can also influence the ultimate cost.
How long does a cost segregation study take?
A Cost Segregation Study normally takes about six to eight weeks from the time we receive all of the appropriate documentation.
What will be needed to complete a cost segregation study?
While each engagement differs depending on the project, generally we need: a complete set of construction and site plans; current tax depreciation records; building cost budget information; final AIA application and a document of certification for payment or other cost information; change orders, direct or indirect costs paid by the owner that are not included in other documents; and other information deemed appropriate.
If I don't have the necessary documents and materials, can you still perform a cost segregation study?
Yes. We have construction, engineering, and other specialists that can do an extensive site visit. They will measure and estimate using currently accepted costing techniques and pricing guides to determine the costs that qualify for shorter recovery life periods.
Can cost segregation apply to projects not yet constructed?
Yes. For projects not yet constructed, PIASCIK can design and implement a cost accounting system. This system saves time and, by tracking segregated costs during the project's construction, produces the most thorough cost segregation study possible.
In addition, we stay abreast of issues concerning asset reclassification, including the Internal Revenue Code and regulations. Our expert analysis of these regulations and relevant case law results in a concise and defensible cost segregation report.
Without cost segregation, wouldn't we get the deduction in the future anyway?
Yes. However, a Cost Segregation Study essentially gives you an interest free loan from the government for the first 15 years, which you will then repay interest free over the remaining 25 years. Wouldn't you rather hold your money?
There are also advantages to doing a study if the building is going to be sold or upon the death of a building owner. The present or future value of the money you can save by having a Cost Segregation Study is usually quite substantial. Have the cash now to reinvest it!
Will my chance of being audited increase after a cost segregation study is completed on my property?
The chance of being audited does not substantially increase after a Cost Segregation Study. The Internal Revenue Service (IRS) accepts cost segregation. IRS audits challenge certain classifications, not concepts.
The full CCA TEXT
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