The Value of a Cost Segregation Study
Cost segregation is the process of identifying, segregating, and reclassifying components of commercial property into shorter depreciable tax lives. The core benefit of a cost segregation study is the additional cash flow that is created by reducing an owner’s current taxable income. For all practical intents, a cost segregation study can be viewed as a long-term no-interest loan from the federal government. What’s more, the cost of the study is a deductible business expense.
Who can benefit from a cost segregation study? A good cost/benefit analysis begins with answering these key preliminary questions:
- Does the property qualify for a cost segregation study?
- What is the owner’s tax status?
- What are the probable tax savings?
- How long does the owner plan on owning the building?
- What is the cost of a study?
The relative value of a cost segregation study depends on a number of factors, including the owner’s tax status, the building type and use, and the cost of the study. The ideal cost segregation study is one that provides a good ratio of study cost to tax savings while meeting all of the IRS requirements.
Not All Studies are Created Equal
Because there is no bright line test for determining what items qualify for accelerated depreciation, cost segregation studies can vary widely in approach, methodology, and quality, with corresponding variations in tax savings. A cost segregation study done at 10,000 feet by a CPA with no engineering or construction cost-estimating background might identify a few items, such as carpet or a parking lot, that qualify for accelerated depreciation. It is extremely unlikely, however, that this approach will identify more than a small fraction of what an owner is entitled to. More importantly, this methodology may not withstand IRS scrutiny. The IRS audit guidelines clearly state that “a study conducted by a construction engineer is more reliable than one conducted by someone with no engineering or construction background.”
Identifying all of the building items that can legitimately be accelerated requires specialized construction and engineering expertise combined with in-depth knowledge of the tax laws, IRS rules and court cases governing cost segregation studies. This is a field where experience and expertise count. A study performed by a team of engineers and construction specialists who also understand the relevant tax law and who have conducted thousands of studies is more likely to be cost effective, attract less attention, and be more easily defended should an audit occur.
Cost Segregation Services, Inc. is an engineering firm with extensive construction expertise and in-depth knowledge of the tax laws governing cost segregation. As cost segregation specialists, our sole focus is on maximizing the legitimate benefits available to you, the owner.
With thousands of studies conducted across the US, our level of experience is unequaled.
Unlike the vast majority of firms offering cost segregation, Cost Segregation Services, Inc. does not outsource the work. All engineers are on staff and all completed studies are reviewed by a senior engineer prior to final sign off and delivery. The systems in place ensure that each study is double-checked for accuracy as well as delivered within 4-6 weeks of receipt of the requested documents. And because cost segregation is all we do, we are able to offer our services at a cost that truly makes sense.
