Cost Segregation is a tool that can be used to help maximize tax benefits and should be taken into account for all commercial business owners.
When buying a piece of commercial property, new or old, the standard tax life of that property is 39 or 27.5 years. Cost segregation allows you to divide up individual components of that building and assign the correct tax life to each item giving you a larger tax break sooner than you would have if you had grouped everything together in the 39 or 27.5 year period. To give you an example, an acquired office building's price not only includes its structure (39-year tax life), but also landscaping (15-year tax life), carpeting (five- or seven-year tax life), data cabling (five-year tax life), and a number of other shorter-lived assets. In many instances, property owners unknowingly classify a property's entire depreciable basis (the purchase price minus land and other non-depreciable items) as real property. This seemingly small oversight significantly reduces the property's after-tax returns.
There have been some recent changes that make cost segregation even more valuable than it was before. Those changes take place under Bonus Depreciation. According to John Blake at ccim.com, “Bonus Depreciation allows individuals and business to immediately deduct a certain percentage of their asset costs in the first year they are placed in service. The tax law made used property eligible for bonus treatment for the first time and increased the bonus percentage to 100 percent through the tax year 2022.”
Not only is cost segregation a useful tool when purchasing a property, it can also be used during renovations. Building improvements such as plumbing, ventilation systems, and alarm system are treated as 15-year assets to give a few examples. There are other improvements that may qualify for a three, five or seven year period and qualify for bonus depreciation. A cost segregation study is crucial to make sure you are getting the best bang for your buck!
Sources:
Eric Johnston, Improving Economics [article]. https://www.ccim.com/cire-magazine/articles/improving-economics/
John Blake, CPA, The Value of Cost Segregation Studies [article].https://www.ccim.com/cire-magazine/articles/2020/winter/the-value-of-cost-segregation-studies/