Companies that make use of cost segregation services have the opportunity to maximize the tax depreciation benefits associated with the acquisition or construction of real estate while simultaneously minimizing the risk of being audited.
The cost segregation study can be beneficial for reducing the amount of taxes owed over the course of the shorter term and distributing the taxes over the course of the longer term. An application for the study can be submitted by the owner of a commercial building in order to have a portion of the building reclassified as one that is not commercial or productive.
During this process, the building section is typically regarded as intangible or useless for significant commercial activities such as production. As a result, it is not subject to taxes for the time being. Properties less than 39 years are eligible for benefits, whereas properties greater than this duration are depreciated automatically.
On the other hand, the cost segregation tax benefits are very high for more recently built properties. Many building owners choose this method because it can result in significant tax savings in a relatively short amount of time.
The following is detailed information about why selecting cost segregation as an option is an excellent choice for individuals who are eligible for it.
1 Cost-efficient
The fact that the cost segregation services are very reasonably priced and offer a satisfactory return on investment is among the many advantages offered by these services. In most cases, a cost segregation company is the one to carry out the process. You will be provided with an in-depth analysis of the overall strategy by knowledgeable professionals.
You receive an accurate estimation of the potential savings that you can make, and you are able to make an informed decision regarding whether or not to move forward with the plan.
2 It is the ideal option for anyone
The analysis of cost segregation is an excellent choice for any building you might own. According to what was discussed earlier, the building is eligible for the study if it is not more than 39 years old. In addition, there is not a predetermined minimum requirement for the size of the building, the area, or anything else.
Even for structures with a minimum base of approximately $500,000, the study indicates huge advantages and results in significant savings. In addition, there is no category of real estate that is deemed inappropriate for the investigation.
Hospitals, restaurants, car dealerships, warehouses, goods distributors, sports centers, sports complexes, food item manufacturing units, educational centers, cinemas, theaters, gyms, and any other property type you can think of that qualifies are all included in the scope of this study.
3 It is applicable for newly built structures
Aside from the building’s dimensions and land area, the time period in which it was constructed is another criterion determining whether it is eligible for the study. In order for your building to be included in the study, it must have been constructed, rebuilt, remodeled, or restructured after the year 1987.
Therefore, maintaining the age, having a minimum base amount, and ensuring that it is not too old can help you obtain the fair value of the cost segregation study. You have the option of contacting a cost segregation analyst, who will investigate the structure of the building and attempt to incorporate as much of it as possible into the study.
In addition, there are factors that need to be considered in order to guarantee the greatest possible benefits. The factors to take into consideration are listed below.
1 Value for Money
One of the factors you must consider is how long you will hold onto the property. When you go to sell the property, all of the exemptions will be investigated because the cost segregation process grants you benefits that you would not otherwise receive in the long run.
If you intend to sell the property within the next few years, then the study will not provide you with any significant benefits. It is important to keep in mind that the review is beneficial if you intend to keep the property for at least five years after it has been reviewed.
2 Tax bracket
It is a time-consuming process to perform the engineering analysis of your building as well as the cost segregation study. Experts are consulted to consider all aspects of the relevant function in order to determine the best option.
However, it is important to keep in mind that the amount that can be deducted is only equivalent to the tax bracket and cannot be significantly higher.
For example, if you are in the 10 percent tax bracket and participate in the cost segregation study, your potential savings will be equal to 10 percent of the total amount. In a similar vein, if you fall into the tax bracket that ranges from 39.60 percent to 40 percent, you get to keep the entire amount.
This indicates that the higher the tax bracket you are in, the greater the amount of money you save. Therefore, despite the fact that it is an advantageous choice for every owner of commercial property, its advantages are maximized for owners who fall into the highest possible tax bracket.
3 The methods used in sales
During the time that you are conducting the cost segregation study, your real property will be transformed into tangible property. When you go to sell it, the Internal Revenue Service requires that you pay taxes on the amount of depreciation that occurred during the year at the standard rate.
When you go through the process of recapture, it’s possible that the taxation amount will end up being higher than what you’ve already paid in total.
To draw a conclusion, consulting a cost segregation analyst by employing cost segregation services might be the most effective way to obtain the tax benefits of cost segregation. You will be able to get a reasonable estimate of how much money you will most likely save. You will also be able to determine whether the procedure is worthwhile and come to an informed choice as a result of this.
Who Should Consider Availing of Cost Segregation Services?
If a taxpayer meets the following criteria, they may be eligible to reduce their tax liability and significantly increase their cash flow by utilizing cost segregation services:
- The company plans to or has recently constructed or bought a building
- The company newly renovated an existing building it owns or leases
- The purchase/construction/renovation cost was at least $300,000
