If you have built, purchased or renovated your business property in the last ten years, there is a tax planning strategy with your name on it – Cost Segregation.
Although most companies typically finance their property for a maximum of 30 years, IRS regulations require that commercial buildings be depreciated over a 39-year period, obviously minimizing your annual tax deduction. With a Cost Segregation Study, you can accelerate your building cost deductions and generate tax savings while increasing your businesses cash flow.
The first step of this tax strategy involves performing an engineering based review that breaks building costs into separate components. The study then identifies costs that IRS regulations allow to depreciate over a much shorter time frame. Examples of shorter-lived assets include wiring and other specific expenditures that support machinery, movable walls and other fixtures and land improvements. Instead of being depreciable over 39 years, these costs can depreciate over 5, 7 or 15 years. They can also be coupled with other accelerated depreciation provisions, resulting in a significant amount of the cost being deductible immediately.
Play “Catch-Up” with Your Deduction
For a business that is great news, but it gets even better! Typically, taxpayers can only amend a tax return that is within three years of its due date. However, rules written by the Internal Revenue Service indicate that the results of a Cost Segregation Study may be treated as a Change in Accounting Method; that’s a complicated way of saying you can implement the Study for a building that was put in service many years prior. This provision allows you to recalculate the depreciated costs as if the completed study was prepared at the same time the building was put in service, and claim a “catch-up” deduction (Section 471 Adjustment) in the current year so you may recognize all prior depreciation.
Implementing a Cost Segregation Study can create significant tax savings,
and there may be no better time to start your “catch-up” contribution than for 2016.
2016’s federal tax rates are a maximum of 35% for C-corporations and 39.6% for pass-through entities such as S-corporations and partnerships. The newly elected Trump Administration promises us much lower tax rates in the near future – maybe as early as this year. So, we should assume that this adjustment will likely not carry the same value at the lower future rates as it does now.
Write-Offs Offer An Added Bonus
In addition to this potential lucrative benefit, a Cost Segregation Study will also identify component units of property for your building that can be written off in the future, should you need to replace them. Heating, venting and air conditioning systems, electrical systems, and plumbing systems qualify as units of property under IRS Regulations.
If you have invested in your business building in the recent past and haven’t heard of the Cost Segregation Study, please contact me to learn more. It’s not too late to capture these tax deductions on your 2016 returns!