Could Your Business Benefit From a Cost Segregation Study? by Stacy Smith
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2022 Issue 1
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cost segregation study is a method of separating real property from land improvements and personal property to accelerate depreciation deductions. Or to put it simply, a cost segregation study can reduce your tax bill and improve your cash flow! Commercial property is generally depreciated over 39 years, and residential rental property over 27.5 years. Real property is more than just the building itself – it also contains plumbing, fixtures, carpeting, awnings, removable partitions, window treatments, lighting, HVAC systems … you get the idea. Personal property, such as equipment, machinery, furniture and fixtures, is eligible for depreciation over either five or seven years. Land improvements like landscaping, sidewalks, dumpster enclosures, fences, outdoor lighting and parking lots are depreciable over 15 years. Certain building improvements can also qualify as personal property if their purpose serves a business function over and above the basic structure, such as reinforced flooring that supports heavy manufacturing equipment, enhanced electrical or plumbing required to run specialized equipment, or cooling equipment needed for a data processing room. So rather than depreciating your building and its fixtures together over the life of the building, a cost segregation study allows you to front-load the depreciation on the items that can be split out, reducing your tax liability for those early years. You can find a sample list comparing different asset lives specific to restaurant fixtures and equipment at www.irs.gov/businesses/cost-segregation-guide-chapter-72industry-specific-guidance-restaurants.
Scan this QR code to find a sample list comparing different asset lives specific to restaurant fixtures and equipment.
How much tax savings can a cost segregation study provide? Whether a cost segregation study results in a reduction in your tax obligations depends on your facts and circumstances. But it can be a valuable investment, especially with enhancements to certain depreciation-related tax breaks. The Tax Cuts and Jobs Act (TCJA) increased limits on Section 179, which allows the entire cost of qualifying equipment to be immediately deducted. The TCJA also expanded 15-year depreciation to include qualified improvement property instead of only qualified leasehold improvement, retail improvement and restaurant property. And it temporarily increased first year bonus depreciation to 100% instead of 50% through 2022.
When should you conduct a cost segregation study? The best time to initiate a cost segregation study is at the time a building is purchased, constructed or undergoes a remodel. But if that’s not possible, you can conduct a look-back study in a future year. If a later study results in additional depreciation deductions, you won’t have to amend previous tax
