Tax Reform Increases Costs Segregation Benefits

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Cost segregation studies could be useful to businesses who have acquired, constructed, or substantially improved a building. A cost segregation study can allow a company to accelerate depreciation deductions, which in turn reduces taxes and boosts cash flow. Under new policies in the Tax Cuts and Jobs Act (TCJA), the potential benefits have increased due to certain depreciation-related tax breaks.

TCJA changes

The TCJA has enhanced several depreciation related tax breaks, which may improve the benefits of investing in a cost segregation study. Some of these major tax breaks include:

  • Temporary increase in the first-year depreciation bonus from 50% to 100%
  • Permanently increase of limits on Section 179 expensing, allowing immediate deduction of the entire cost of certain fixed assets and equipment up to a specific threshold
  • Expansion of the 15-year-property treatment to apply to a greater range of qualified improvement property

Allocation of property

Usually, depreciation includes a building’s structural components. IRS rules allow commercial buildings to be depreciated over 39 years and residential properties for 27 ½ years. Building depreciation includes items that are part of the building such as walls and windows. Also considered to be part of the commercial building are elevators, plumbing and wiring, and HVAC systems.

Items that are considered to be personal property are eligible for accelerated depreciation, usually; over five or seven years, these include equipment, machinery, furniture, and fixtures. Land improvements, which include lighting, parking lots, and fencing, have a 15 year depreciation period.

Often businesses group all of their building’s construction or allocation costs to real property rather than sorting it into shorter-lived options such as personal property or land improvements. Many items are not simple to sort between personal property and real property, for example, removable partitions such as canopies and awnings, signs and decorative lighting, and removable wall and floor coverings. Other items could classify as personal property that would generally be thought of as part of a building if they serve a business function rather than only a structural purpose. Items that double for a business function can include reinforced flooring that supports heavy manufacturing equipment, dedicated cooling systems for data processing rooms, and electrical plumbing installations needed to operate specialized equipment. A cost segregation study can help to identify which building costs are allocatable to tangible personal property rather than real property by using accounting and engineering techniques in conjunction.

Weighing the costs

The benefits of a cost segregation study are different for every business, but it may be a powerful investment. We can help to make this assessment. Contact us at 949-860-9902 or click here, and we will contact you.

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