The objective of Cost Segregation is to increase cash flow and maximize tax benefits for buildings, properties and improvements.  It is an analysis of building or purchase costs done by tax and construction engineering professionals according to IRS rulings and procedures.  The end result of the cost segregation study is a reclassification of assets to help the owner maximize tax benefits and improved cash flow of their property.

Why Should I Do A Cost Segregation Study?

Increased cash flow

A Cost Segregation Study will do three important things:

1. Create Immediate Tax Savings

2. Increase Cash Flow--by accelerating depreciation deductions and deferring income tax payments.

3. Catch-Up Prior Year Accelerated Depreciation--Cost segregation studies allow a client to "catch-up" previously under-reported depreciation without filing amended tax returns. All "catch-up" depreciation can be taken in the current year tax.

But, most importantly, it puts cash in your pocket now. Let us help you utilize the benefits of a cost segregation study that tens of thousands before you have benefited from.

Case Study

•  An Apartment Complex purchased at a cost of $8,000,000
•  Purchased in 2000
•  Current tax year 2008

Summary of Benefits:

•  Catch Up Depreciation (Section 481 (a) Adjustment)....$1,446,822
•  Year 1 Increased Depreciation..........................................$1,418,773
•  Year 1 Tax Savings.............................................................$581,697
•  Years 1-5 Increased Depreciation....................................$1,306,576
•  Years 1-5 Present Value of Tax Savings..........................$543,607
•  All Years Present Value of Tax Savings...........................$335,006

Meaning ... you'd have an extra $581,697 hit the bottom line this year instead of paying that in taxes now you can pay down debt, use to purchase another  piece of property, buy new supplies, hire new sales people, etc., etc.

Things You Need to Know About Cost Segregation

Can my accountant or CPA perform a study?

Here is what the IRS says:

"The preparation of cost segregation studies requires knowledge of both the construction process and the tax law involving property classifications for depreciation purposes; a preparer's credentials and level of expertise may have a bearing on the overall accuracy and quality of a study. In general, a study by a construction engineer is more reliable than one conducted by someone with no engineering or construction background. However, the possession of specific construction knowledge is not the only criterion. Experience in cost estimating and allocation, as well as knowledge of the applicable law, are other important criteria. A quality study identifies the preparer and always references his/her credentials, experience and expertise in the cost segregation area." (IRS Cost Segregation Audit Techniques Guide chapter 4)

Accountants may have specific knowledge of the appropriate tax law, but they are typically absent of the required construction expertise. Most accounting firms don't have construction engineers on staff to physically inspect the property, examine architectural/engineering drawings and analyze cost data. Accountants may be able to find some of the deductions, but without construction expertise they may overlook substantial assets that can be reclassified.

Did my accountant already do a cost segregation study?

Unless your study was done before 1996 when the tax laws changed, then you are probably depreciating the building assets incorrectly. Or, if you do not have a cost segregation report that is typically 40-70 pages, prepared by a professional who has the IRS required expertise, who has followed the 13 IRS steps and used industry costing manuals such as RS Means or Marshall and Swift, then you did not have a cost segregation study.

Doing a cost segregation study won't save me any money!

This is true only if you have passive losses or if the entity is losing money and has no ability to either carry back or carry forward the losses generated. We don't perform a cost segregation study without providing a free initial evaluation and cost proposal to you, then we can evaluate the cost vs. savings factors before any work begins. We do not to start any projects unless there is significant value for you.

How does cost segregation work with a sold property?

An owner can conduct a Cost Segregation Study on properties sold within the last three years even though they're not currently part of their holdings. A Cost Segregation Study can help these owners to receive a refund of overpaid taxes on those properties. This tax savings is money that would never have been realized without a cost segregation study. By doing a cost segregation study you will take gains on the lowest rates possible, thus saving significant tax dollars.

When can I expect a return on my investment in a cost segregation study?

Immediately! In almost all cases, year one tax savings far exceed the entire cost of the study. What's more, fees are entirely tax deductible!

Will our chances of being audited increase?

No! Quality Cost Segregation Studies are industry standard and are accepted and approved by the IRS. When you do a cost segregation study on property put in service before the current tax year, you are filing a IRS pre-approved automatic change in accounting method (form 3115). No amended returns are required. In our experience of all cost segregation studies audited almost all are because the IRS randomly selected the company or individual for audit not because they had a cost segregation study.

What happens if the IRS does perform an audit?

We completely support our cost segregation report. We are very well versed on IRS rulings, procedures and court cases which allow for cost segregation studies. Our report exceeds all 13 of the IRS elements of a quality cost segregation study. Our reports provide support and documentation for every item we reclassify and we always provide a clean audit trail to support our findings.

Won't we will get the deduction in the future anyway without the study.

Yes, A Cost Segregation Study does not increase the total amount of depreciation taken, but rather allows it to be taken sooner. The value of that deduction today is worth more than the value of a deduction in 39 years. By having the current tax savings, you can use that money to make additional money. No one wants to pay the IRS before they have to.

My Accountant has segregated percentages of construction costs based on invoices or contractors application for payment, so we are already benefiting.

Without the construction expertise coupled with the tax law guidance, there will likely be valuable tax benefits missed. But even more important, doing this could cause significant problems with the IRS as this method will not withstand IRS audit guidelines.

Does a cost segregation study need to be done at any specific time of the year?

No. Cost segregation studies can be done at any time during the year. Many companies and individuals pay estimated taxes throughout the year and cost segregation studies can help minimize those payments.

For a free proposal and analysis or to learn more, contact our Cost Segregation expert, Bob McGoldrick at 813-289-7721 or bobm@consultechonline.net.