Post Tax Reform Benefits of a Cost Segregation

What is Cost Segregation?

In simple terms, cost segregation refers to the process of identifying and reclassifying personal property assets that are grouped with real property assets. The separation of these assets can increase cash flow, reduce tax liability, and uncover hitherto overlooked deductions that can be extremely beneficial to you.

A cost segregation study can help you to identify assets where the depreciation time can be shortened. Depreciating a portion of your assets over a shorter period can lead to substantial tax savings – usually upwards of several thousands of dollars.

In order for assets to benefit from the shorter depreciation time, they must first be classified as personal property assets instead of real property assets. Personal property assets are comprised of a number of things. Namely, non-structural aspects such as furniture and carpeting, and exterior land renovations such as landscaping and sidewalk maintenance. Indirect construction costs are also included in this classification.

A cost segregation study will help you to determine what can be depreciated over a shorter tax life. For furniture and fixtures, this is five or seven years, whereas for land improvements, this is 15 years. This is massively shorter than the 39-year period that a non-residential building will be depreciated over.

How Did Tax Reform Affect Cost Segregation Studies?

New regulations from the Tax Cuts and Jobs Act (TCJA), mean that taxpayers can take advantage of bonus depreciation. Bonus depreciation lets a certain percentage of asset costs be deducted the first year they are placed in service. 

Before recent reforms took effect, only new property would qualify for bonus depreciation. However, following the reform, this is also available for used property. The amount of bonus depreciation is set to increase to 100 percent by 2022’s tax year, as opposed to 50 percent in 2019. 

So, what do these changes mean for your business? Well, if you perform a cost segregation study now, it will have a greater impact and lead to you getting even more financial benefits. Following a cost segregation study, anything that has been reclassified as personal property could be eligible and is also able to be expensed in the first tax year following your cost segregation study. 

What is an example of cost segregation with the new bonus depreciation rules?

If the entire purchase price of a building that cost $5 million was allocated, the depreciation deductions would amount to around $128,000 annually. An example of the changes a cost segregation study could have to your business is as follow: If only 35 percent of the property remains in the 39-year asset class, there’d be a total of $30,975 first-year depreciation. 15 percent of the building belongs to the 15-year asset class for a total of $37,500 first-year depreciation. 45 percent belongs to the seven-year category and five percent to the five-year asset class, would yield first-year depreciation totals of $321,525 and $50,000, respectively. 

How can PNF CPA & Advisors help you?

PNF works with the client and the cost segregation company to ensure that the best possible results are achieved. By working closely together, we ensure that you get maximized expenses. 

PNF can help you to navigate the complex, and often confusing, set of depreciation and asset allocation rules and get the best possible out come from your cost segregation study.