The Benefits of a Commercial Property "Cost Segregation" Review
Commercial property owners will use a "Cost Segregation" review to identify and reclassify personal property assets to shorten the depreciation time for taxation purposes thus reducing current income tax obligations.
For example, Commercial Property Tax Accelerated Depreciation or "Cost Segregation," may result in an average of increased cash flow of $37,500 to $750,000 for typical commercial property values of $500,000 to $10 million resulting in the following benefits:
An immediate increase in cash flow
A reduction in current tax liability
The deferral of taxes
The ability to claim “missed” depreciation deductions from prior years without having to amend prior year tax returns.
Click Here to Calculate Your Accelerated Depreciation Benefit
The Fee Schedule
GMG agrees to complete their Incentive Analysis at no cost. If the Analysis demonstrates sufficient benefit to the Client, GMG procurement fees will be charged on a per project or hourly basis in accordance with Circular 230. The procurement fees will not exceed ten (10) percent of the value of the accelerated depreciation for Cost Segregation.
What is "Cost Segregation"
Cost Segregation is the practice of identifying assets and their costs, and classifying those assets for federal tax purposes. It enables commercial real estate owners to reallocate real property (under Code Sec. 1250) to personal property (under Code Sec. 1245). This results in a substantially shorter depreciable tax life and accelerated depreciation methods. They must be "engineering based" and prepared by individuals with expertise and experience.
To do this correctly one must engage an experienced engineer with a thorough understanding of construction finance. The engineer will review all blueprints, architectural drawings, and electrical plans to isolate structural and mechanical components from those that are considered personal property in addition to identifying architectural and engineering fees that can be segregated.
The Process of a Cost Segregation Study
Our service partners Growth Management Group (GMG) will process an engineering-based cost segregation study that will provide more precisely segregated property information, and will give the CPA information and detailed supporting documentation in order to meet with strict IRS regulations and requirements for audit defense. The GMG Audit Defense Guarantee is provided to all clients that GMG works with for Specialized Tax Incentive services. If at anytime their work, methodologies or calculations are challenged or scrutinized by the IRS, GMG will offer the defense support necessary to explain or illustrate their findings. They follow strict IRS Guidelines, revenue rulings and case law. They also utilize the 2004 IRS Technique and Guidelines that can be found online HERE
In the IRS Cost Segregation Audit Techniques Guide (ATG), Chapter 4, the prime attribute of a high-quality cost segregation study is “preparation by an individual with expertise and experience.” The Audit Techniques Guide adds: “Preparation of cost segregation studies requires knowledge of both the construction process and the tax law involving property classifications for depreciation purposes. In general, a study by a construction engineer is more reliable than one conducted by someone with no engineering or construction background. Experience in cost estimating and allocation, as well as knowledge of the applicable tax law, are other important criteria.” GMG provides such expertise in addition to providing an Audit Defense Guarantee.
The IRS requires that engineering-based studies be performed. Since most CPA firms and tax professionals lack either the necessary tax expertise to properly segregate the different types of property or the engineering expertise necessary to analyze construction drawings and conduct engineering cost estimates, we work in cooperation with your CPA or tax professional to compliment and augment their service to you the client. We have access to experts in both engineering and tax that will work with your tax professional.
Cost Segregation Approaches
Various approaches may be utilized in completing cost segregation, including:
- Detailed Engineering Approach from Actual Cost Records
- Detailed Engineering Cost Estimate Approach
- Survey or Letter Approach
- Residual Estimation Approach
- Sampling or Modeling Approach
- "Rule of Thumb" Approach
See the IRS Audit Techniques Guide Chapter Three for a detailed discussion of these different approaches and the expectations pertaining to each.
Please find below a list of additional links that apply to Cost Segregation: