Contractors Hold The Key To Tax Savings For Project Owners

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August 18, 2006

Cost Segregation is a strategic tax savings tool allowing companies and individuals, who have constructed, purchased, expanded, or remodeled commercial real estate to increase cash flow by accelerating depreciation deductions and deferring federal and state income taxes.

Furniture, fixtures, and equipment are easily identified as depreciable over 5 or 7 years for tax purposes. However, a Cost Segregation Study goes further and dissects all construction-related costs to accelerate qualifying project costs over 5, 7 or 15 years versus 27 ½ or 39 years. Correctly identifying these shorter lived assets results in accelerated depreciation deductions, reduced tax liability in a project’s early years, and increased cash flow.

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For example, 15% to 20% of the total electrical costs in most buildings can qualify as personal property (depreciated over 5 or 7 years).

Every Study is NOT the Same

The Internal Revenue Service states that a quality Cost Segregation Study requires a team of analysts with a background in construction and engineering combined with knowledge of tax law and accounting practices. The optimal scenario is a combination of a Cost Segregation team working with the construction contractor to identify assets and related costs to maximize Cost Segregation Study benefits for the owner. Expect an experienced Cost Segregation team to use the contractor’s resources efficiently, minimizing their time commitment to the study.

Timing is Everything

The ideal time for a Cost Segregation Study can vary depending on the project owner’s tax situation.

Post-Purchase, Remodel, or Construction: “Look-Back” Studies If the purchase, remodel, or construction has already been completed, and tax returns already filed, a “Look-Back” Study can be done. Internal Revenue Service procedures allow an owner to easily claim missed depreciation on assets acquired as far back as 1987 without amending prior tax returns.

Placed in Service During the Year A building that has been recently constructed, purchased, or remodeled should have a Study completed before a tax return is filed. This allows an owner to optimize tax benefits with accurate classifications right from the start.

Pre-Construction When a construction or remodeling project is in the planning phase, the best time to consider a Cost Segregation Study is before the infrastructure of the building is set. Ideally, the cost segregation analyst and construction contractor work together to set up an accurate tracking system for items that qualify for accelerated depreciation which saves time and money for the owner.

Benefits of Cost Segregation

· Generates immediate increase in cash flow through accelerated depreciation deductions.

· Reduces income taxes and can also reduce property taxes.

· Provides an easy opportunity to claim ‘catch-up’ depreciation on previously misclassified assets.

  • Provides an independent third-party analysis that will withstand IRS review.

Many building owners are already educating themselves on the value of a Cost Segregation Study. It is a great time for those in construction to separate yourself from your competition by offering a way for your client to increase their cash flow and reduce taxes with surprisingly little participation and minimal effort.

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