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Buying a building? You need to consider a Cost Segregation Study

Buying a building? You need to consider a Cost Segregation Study

What is a Cost Segregation Study?
A cost segregation study is a review and analysis of the specific components of building/improvement costs used to reclassify applicable costs to personal property or land improvement property with shorter tax depreciation lives. Historically, cost segregation studies have provided taxpayers with increased after tax cash flow and long term net present value tax benefits. The favorable bonus depreciation rules and expanded section 179 expensing provisions of the 2017 tax act increase the importance of a cost segregation study. Now more than ever anyone constructing or purchasing a building for use in a business should consider a cost segregation study.

Benefits of a Cost Segregation Study

The benefits of a cost segregation study include:

  • A direct increase in after tax cash flow
  • A decrease in current tax liability
  • The deferment of taxes
  • The ability to reclaim “missed” depreciation deductions from prior years, without having to amend tax returns.

Bonus Depreciation enhanced and expanded with the 2017 tax law changes
100% bonus depreciation until December 31, 2022

Bonus depreciation is generally available for property that has a tax depreciable life of 20 years or less. Under the new tax law taxpayers will be able to expense 100% of property that qualifies for bonus depreciation, so long as the property is acquired and placed into service after September 27, 2017 and before January 1, 2023. After December 31, 2022, expensing of such property placed in service will phase down to 80% in 2023, 60% in 2024, 40% in 2025 and 20% in 2026.

Used Property now eligible for bonus depreciation

Under the new tax law, the type of property eligible for bonus depreciation is expanded to include used property, as long as it is the first use by the taxpayer.

Therefore, in many cases building/improvements costs that a Cost Segregation Study are reclassifies as property with a depreciable life of 20 years or less will be eligible for an immediate tax deduction using bonus depreciation.

Qualified Improvement Property could be eligible for special tax treatment
Qualified improvement property (QIP) is defined as any improvement to an interior portion of a building that is nonresidential real property if the improvement is placed in service after the date the building was first placed in service. Under the new law in many cases qualified improvement property will now be eligible for an immediate tax deduction with the Section 179 expensing election.

The Section 179 expense election is available to purchases of tangible personal property and certain qualified real property, such as Qualified Improvement Property described above. There are limitations on the availability of the Section 179 expensing amount. Currently, taxpayers can elect to expense up to $1 million of qualifying property and this $1 million amount is reduced dollar for dollar if total qualifying expenditures exceed $2.5 million.

Therefore, subject to the limitations described above, costs reclassified as tangible personal property or Qualified Improvement Property by a Cost Segregation Study may be currently deductible for federal income tax purposes under Section 179.

The Takeaway
Due to the favorable bonus depreciation and Section 179 expensing rules included in the 2017 tax law changes, every business that is constructing or purchasing a building should seriously consider a cost segregation study. Doug Wood, CPA, CCIFP, CGMA one of our Small Business Partners, performs Cost Segregation Studies for Herbein + Company and is ready to answer any questions you may have about the new law and its impact on your real estate property.  Read more about Doug here.

For additional information contact us today.