How Does a Cost Segregation Study Work?

How Does a Cost Segregation Study Work?

Building costs are generally classified for federal income tax purposes into three categories. Each has a different depreciation recovery period and method under the Modified Accelerated Cost recovery System (“MACRS”)

Tangible Personal Property      5 or 7 Years    200% DB

Land Improvements                   15 Years          150% DB

Real Property                                39 Years         Straight Line

Our Cost Segregation Study will help identify items that should be properly classified as tangible personal, rather than real property that are depreciated over 39 years. The tax benefits begin in the first tax year and continue throughout the depreciable life of the identified assets.

For example, a taxpayer that owns a manufacturing facility could classify the cost of certain equipment foundations, exhaust and ventilation systems, security systems, and electrical distribution as tangible personal property. Certain site improvements such as landscaping, underground utilities, and site lighting could qualify as land improvements.

Knowing the difference is critical. So is the ability to support and document the decisions. That’s why you need expert advice. Identifying items to be reclassified is only half the battle. The other half is to determine the costs legitimately associated with each item. The complication is locating single-item costs. For example, suppose you know that a portion of your facility’s electrical distribution for specific manufacturing equipment should be in the shorter-life category. You look at the contractor’s charges under electrical and find that all the electrical costs for the job are bundled into a single number, but you need only the cost associated with the electrical distribution serving manufacturing equipment.

Our professionals can un-bundle the costs and assign them appropriately ··not only the direct costs, but also a portion of any indirect costs, such as architect and engineering fees, contractors general conditions, permits, bonds, etc. We have extensive knowledge of construction methods, engineering, and the Internal Revenue Code including the applicable Tax Court cases and Revenue Rulings. Our expertise is the ability to read blueprints and fully understand construction materials, costs, and taxation. We are consultants that bridge the gap between your accountants and the construction team.

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