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COST SEG – COST SEGREGATION – GENERAL INFORMATION
Do you want to save money on your income taxes? Of course you do!
Our Financial Services can help you accelerate your real estate depreciation through an engineered Cost Segregation Study allowing you to expense 10% to 50% of the cost of your building in the FIRST YEAR!
The tax savings is guaranteed to be ten times the cost of the study!
What is Cost Segregation?
Currently, the IRS sees your building as one entity, depreciated using straight line depreciation over 27.5 or 39 years, or, in our analogy, a Big Mac. After an engineered Cost Segregation Study, the IRS will see the components of your building, e.g., decorative lighting or outdoor landscaping, much like we view a Big Mac as two all-beef patties, special sauce, lettuce, cheese, pickles, onions on a sesame seed bun.
An engineered Cost Segregation Study allows some components to be moved into 5, 7 or 15-year property depreciation categories – lettuce might be in the 5-year category and the sesame seed bun might be in the 15-year category, just like decorative lighting is 5-year property and landscaping is 15-year property with an engineered Cost Segregation Study.
Under the new tax bill, 5-year property, typically where the bulk of the reclassified components go, can be entirely expensed in the first year!
Which means, depending on the type of building, 10% to 50% of your building can now be written off in the first year!
How does Cost Seg benefit you?
The shorter depreciation categories on the reclassified property accelerate depreciation on the property, providing more depreciation expense, now, which reduces the tax burden, thus accelerating the cash flows associated with higher tax deductions and boosting the Return on Investment (ROI). The total depreciation expense over the life of the property stays the same, the expense is simply being accelerated; a dollar saved today is worth more than a dollar saved tomorrow.
The after-tax savings are commonly as much as 20 to 50 times the price of the Cost Segregation Study. URB Financial guarantees you that the tax savings will be at least 10 times the cost of the study, backed up CBRE, the largest real estate services company in the world.
Here are some actual examples:
Fast Food Restaurant Tax Savings: $430,000 Study Cost: $10,000 Auto Dealership Tax Savings: $600,000 Study Cost: $22,000 Limited Service Hotel Tax Savings: $590,000 Study Cost: $10,000 Apartment Building Tax Savings: $2,500,000 Study Cost: $11,000
The average tax savings is 12%, or $120,000 per million dollars of building cost (excluding land), however, there is a wide range as the component reclassification percentage can range from 10% to 50%.
CBRE provides a preliminary analysis which details the range of expected savings and the fee to perform the Cost Segregation Study. Customers will receive this before being asked to sign a contract.
What is the IRS’ position on Cost Segregation?
Journal of Accountancy
"Some taxpayers are reluctant to use cost segregation, equating it with a high-risk tax shelter. In truth, this reluctance is misplaced. If the cost of the components in the engineering report is well- documented, the cost segregation technique is no more aggressive than using a permissible depreciation method under the Internal Revenue Code."
Under prior law taxpayers would separate a building’s parts into its various components -- doors, walls and floors. Once these components were isolated, taxpayers would depreciate them using a short cost-recovery period. CPAs referred to this practice as “component depreciation.”
The introduction of the accelerated cost recovery system (ACRS) and the modified accelerated cost recovery system (MACRS) eliminated the use of component depreciation, but not the use of cost segregation. Hospital Corporation of America [HCA] v. Commissioner, 109 TC 21 (1997), is the seminal cost segregation case. In it, the Tax Court permitted HCA to use cost segregation with respect to a multitude of improvements. Critical to the Tax Court’s analysis was that in formulating accelerated depreciation methods, Congress intended to distinguish between components that constitute Internal Revenue Code section 1250 class property (real property) and property items that constitute section 1245 class property (tangible personal property). This distinction opened the doors to cost segregation.
Taxpayers have increasingly begun to use cost segregation to their advantage. The IRS reluctantly agreed that cost segregation does not constitute component depreciation (action on decision (AOD) 1999-008). In a chief counsel advisory (CCA), however, the IRS warned taxpayers that an “accurate cost segregation study may not be based on ... taxpayers’ estimates or assumptions that have no supporting records” (CCA 199921045). An independent, engineered Cost Segregation Study backs up your depreciation deductions and will pass an IRS audit.
The Tax Cuts and Jobs Act (TCJA), signed into law on December 22, 2017, is the largest overhaul of the tax code since the Tax Reform Act of 1986. The changes related to the tax treatment of building construction, building improvements, and building acquisition costs provide taxpayers with new opportunities to maximize tax benefits through a cost segregation study.
TCJA allows qualifying assets with tax recovery period of 20 years or less, new and used, to now qualify for the 100% bonus depreciation provision in the assets’ first year of service.
The tax reform package made two simple changes – both to bonus depreciation – that will make cost segregation studies more valuable. While the term “bonus” is often misunderstood as an added benefit beyond the asset’s depreciable tax base, it is a boost to accelerate the tax depreciation in the first year the asset is placed in service.
Bonus depreciation allows individuals and businesses to immediately deduct a certain percentage of their asset costs the first year they are placed in service. The tax law made used property eligible for bonus treatment for the very first time, and it also increased the bonus percentage to 100 percent through tax year 2022. Prior to this law change, only new property was qualifying, and bonus depreciation was expected to be only 50 percent in 2019.
This means that performing a cost segregation study will now have a stronger impact. Any assets that are removed from the “real property” bucket and placed in the “personal property” bucket may now be eligible for bonus depreciation and can be immediately expensed in the first year.
Consider the following example: A taxpayer purchases a building worth $10 million. After performing a cost segregation study, they can reclassify 20 percent of those costs as personal property. By assigning these assets a shorter depreciable life, they can apply bonus depreciation and write off $2 million of that $10 million purchase price in Year 1. A taxpayer with a 25 percent marginal tax rate would save $500,000 in taxes, or 5 percent of the purchase price, that first year.
Link to: Cost Seg Advanced Strategies and FAQs
Link to: Cost Seg Estimate Application Form
Do you want to save money on your income taxes? Of course you do!
Our Financial Services can help you accelerate your real estate depreciation through an engineered Cost Segregation Study allowing you to expense 10% to 50% of the cost of your building in the FIRST YEAR!
The tax savings is guaranteed to be ten times the cost of the study!
What is Cost Segregation?
Currently, the IRS sees your building as one entity, depreciated using straight line depreciation over 27.5 or 39 years, or, in our analogy, a Big Mac. After an engineered Cost Segregation Study, the IRS will see the components of your building, e.g., decorative lighting or outdoor landscaping, much like we view a Big Mac as two all-beef patties, special sauce, lettuce, cheese, pickles, onions on a sesame seed bun.
An engineered Cost Segregation Study allows some components to be moved into 5, 7 or 15-year property depreciation categories – lettuce might be in the 5-year category and the sesame seed bun might be in the 15-year category, just like decorative lighting is 5-year property and landscaping is 15-year property with an engineered Cost Segregation Study.
Under the new tax bill, 5-year property, typically where the bulk of the reclassified components go, can be entirely expensed in the first year!
Which means, depending on the type of building, 10% to 50% of your building can now be written off in the first year!
How does Cost Seg benefit you?
The shorter depreciation categories on the reclassified property accelerate depreciation on the property, providing more depreciation expense, now, which reduces the tax burden, thus accelerating the cash flows associated with higher tax deductions and boosting the Return on Investment (ROI). The total depreciation expense over the life of the property stays the same, the expense is simply being accelerated; a dollar saved today is worth more than a dollar saved tomorrow.
The after-tax savings are commonly as much as 20 to 50 times the price of the Cost Segregation Study. URB Financial guarantees you that the tax savings will be at least 10 times the cost of the study, backed up CBRE, the largest real estate services company in the world.
Here are some actual examples:
Fast Food Restaurant Tax Savings: $430,000 Study Cost: $10,000 Auto Dealership Tax Savings: $600,000 Study Cost: $22,000 Limited Service Hotel Tax Savings: $590,000 Study Cost: $10,000 Apartment Building Tax Savings: $2,500,000 Study Cost: $11,000
The average tax savings is 12%, or $120,000 per million dollars of building cost (excluding land), however, there is a wide range as the component reclassification percentage can range from 10% to 50%.
CBRE provides a preliminary analysis which details the range of expected savings and the fee to perform the Cost Segregation Study. Customers will receive this before being asked to sign a contract.
What is the IRS’ position on Cost Segregation?
Journal of Accountancy
"Some taxpayers are reluctant to use cost segregation, equating it with a high-risk tax shelter. In truth, this reluctance is misplaced. If the cost of the components in the engineering report is well- documented, the cost segregation technique is no more aggressive than using a permissible depreciation method under the Internal Revenue Code."
Under prior law taxpayers would separate a building’s parts into its various components -- doors, walls and floors. Once these components were isolated, taxpayers would depreciate them using a short cost-recovery period. CPAs referred to this practice as “component depreciation.”
The introduction of the accelerated cost recovery system (ACRS) and the modified accelerated cost recovery system (MACRS) eliminated the use of component depreciation, but not the use of cost segregation. Hospital Corporation of America [HCA] v. Commissioner, 109 TC 21 (1997), is the seminal cost segregation case. In it, the Tax Court permitted HCA to use cost segregation with respect to a multitude of improvements. Critical to the Tax Court’s analysis was that in formulating accelerated depreciation methods, Congress intended to distinguish between components that constitute Internal Revenue Code section 1250 class property (real property) and property items that constitute section 1245 class property (tangible personal property). This distinction opened the doors to cost segregation.
Taxpayers have increasingly begun to use cost segregation to their advantage. The IRS reluctantly agreed that cost segregation does not constitute component depreciation (action on decision (AOD) 1999-008). In a chief counsel advisory (CCA), however, the IRS warned taxpayers that an “accurate cost segregation study may not be based on ... taxpayers’ estimates or assumptions that have no supporting records” (CCA 199921045). An independent, engineered Cost Segregation Study backs up your depreciation deductions and will pass an IRS audit.
The Tax Cuts and Jobs Act (TCJA), signed into law on December 22, 2017, is the largest overhaul of the tax code since the Tax Reform Act of 1986. The changes related to the tax treatment of building construction, building improvements, and building acquisition costs provide taxpayers with new opportunities to maximize tax benefits through a cost segregation study.
TCJA allows qualifying assets with tax recovery period of 20 years or less, new and used, to now qualify for the 100% bonus depreciation provision in the assets’ first year of service.
The tax reform package made two simple changes – both to bonus depreciation – that will make cost segregation studies more valuable. While the term “bonus” is often misunderstood as an added benefit beyond the asset’s depreciable tax base, it is a boost to accelerate the tax depreciation in the first year the asset is placed in service.
Bonus depreciation allows individuals and businesses to immediately deduct a certain percentage of their asset costs the first year they are placed in service. The tax law made used property eligible for bonus treatment for the very first time, and it also increased the bonus percentage to 100 percent through tax year 2022. Prior to this law change, only new property was qualifying, and bonus depreciation was expected to be only 50 percent in 2019.
This means that performing a cost segregation study will now have a stronger impact. Any assets that are removed from the “real property” bucket and placed in the “personal property” bucket may now be eligible for bonus depreciation and can be immediately expensed in the first year.
Consider the following example: A taxpayer purchases a building worth $10 million. After performing a cost segregation study, they can reclassify 20 percent of those costs as personal property. By assigning these assets a shorter depreciable life, they can apply bonus depreciation and write off $2 million of that $10 million purchase price in Year 1. A taxpayer with a 25 percent marginal tax rate would save $500,000 in taxes, or 5 percent of the purchase price, that first year.
Link to: Cost Seg Advanced Strategies and FAQs
Link to: Cost Seg Estimate Application Form
