BGBC Partners, LLP Tax Update: Cost Segregation Studies
You may have heard of a cost segregation study, or even had a specialist try to sell you one. In this Tax Update, we are going to highlight the tax benefits of cost segregation studies, discuss factors which may point to whether you should have one done, and how to find a competent professional to conduct one.
The concept of cost segregation is not something new. It has however become more popular over the past 20 years. Some of the rise in popularity can be attributed to the Tax Court issuing several favorable rulings involving these studies.
The tax benefits of a cost segregation study arise from the identification of assets within a building which can be depreciated over a shorter life than they are prior to the study. The real benefits come from reclassifying items which are being depreciated using 39 years, and reclassifying that asset to a 3, 5 or 7-year life. Shorter lives mean accelerated depreciation deductions and that means less taxes in the current and near future.
So, when do you have a cost segregation done? A Study can be conducted at the time a property is purchased, renovated or constructed. However, if you have never had a Study done, or if it has been several years since you had one done, you should also consider it.
While there is plenty to be excited about cost segregation studies, the IRS does scrutinize these studies during tax audits. It is also worth noting that a position that is too aggressive might be challenged by the IRS resulting in a 20% penalty on any tax underpayments. In addition, depreciation recapture on shorter-life property is considered ordinary income if there is a gain when the property is disposed.
Therefore, it is crucial that a qualified and experienced professional conducts the study. So where do you find the right professional? There are professional groups such as the American Society of Cost Segregation Professionals (ASCSP) which have professional testing and certification requirements for members. Members include CPA’s and other professionals who are well-versed in the intricacies of what constitutes a depreciable unit-of-property, and the proper depreciable life of various assets.
Our firm, BGBC Partners LLP, has more than 20 years of experience conducting cost segregation studies. We are very knowledgeable of the recent legal developments affecting these studies, and have a highly proficient team of experts who can deliver effective results, in a timely manner and cost effectively.
If a pesky auditor does come around, BGBC will defend the study and is willing to work with you on a reasonable fee for doing so.
In the end, the benefits can far outweigh the drawbacks of a properly performed cost segregation study. If you feel like your company may benefit from a cost segregation study, feel free to contact BGBC Partners, LLP, for more information. In the end, you may find that your building is a goldmine of accelerated tax deductions!