Tax Reform and Cost Segregation: More Savings Coming to Building Owners

January 11 2018 | by Thomas J. Moul, CPA

President Trump signed the Tax Cuts and Jobs Act into law on December 22, 2017, and the legislation is receiving plenty of press. Certain provisions, including lower business and individual tax rates and the complex tax breaks for pass-through entities are receiving most of the attention. One area that is not receiving much focus, but you should consider, is the impact of the tax act on Cost Segregation Studies.

What is a Cost Segregation Study and How Can It Save You Money?

A Cost Segregation Study is an engineer based analysis of the costs of commercial building construction or renovation. Under IRS rules, buildings are classified as real property, and as such, are depreciated over either 27.5 years (residential rental properties) or 39 years (all other commercial buildings). That is a long time to recoup the tax benefits of your investment, especially since the project was likely financed and paid for over a shorter period.

Here’s where the Cost Segregation Study can pay off. The Study will analyze the building plans, contracts and costs and determine how much of the project cost can be depreciated over a significantly shorter period as personal property and property improvements.

Personal property includes operating equipment and machinery, technology systems and furniture that qualify for 5 or 7 year depreciable lives. Property improvements such as landscaping and parking lots will be eligible for the 15-year depreciable life. The engineer’s report on a Cost Segregation Study will justify and document the conclusions to allocate costs to the shorter-lived assets and provide you with audit comfort and confidence.

Connection to Tax Act

How does the recent tax legislation enhance this strategy? The Tax Cuts and Jobs Act has expanded the ability to expense qualifying property immediately. This includes all personal property and most 15-year real property. Qualifying assets placed in service between September 27, 2017, and December 31, 2022, are eligible for immediate expensing. Beyond 2022, the deduction phases out by 20% per year. Coupling the ability to immediately write off assets with the benefits of a Cost Segregation Study can result in significant tax savings and increased cash flow for your business.

Next Steps

If you have completed a building project recently or have plans to expand, please contact me to learn more about this highly beneficial tool.

Also, I invite you to join me for a webinar on how to make sense of the numerous provisions in our new tax legislation. Watch this one-hour webinar today!

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