Business owners often invest in buildings and land to expand their operations. Those things cost a lot of money, but there is a way to get your cash out of the investment faster – a cost segregation study. Cost segregation studies (“cost segs” for short) allow you to ‘break up’ your purchase price into groups of items that have faster depreciation deductions. At its most fundamental level, a cost segregation study gives you more short-term cash flow because you are paying less in taxes.
Cost seg studies can be prepared for a wide variety of properties including new construction, building purchases, property remodels, additions to existing property, or tenant finish-outs. Additionally, cost segs don’t always have to be done in the same year as the purchase or when the work was completed.
To complete a typical cost seg, a site visit to the building is required. Cost seg personnel will walk the property taking pictures and measurements of the items that can take the faster deductions. After this site visit is complete, cost break-downs are calculated. On average this process can yield tax savings of anywhere from $20,000 – $100,000 over a five year period.
There are various factors that help determine whether a cost segregation study will be beneficial for a particular business owner. Some of these determining factors include:
- How much did it cost? The higher the initial cost, the greater potential for tax benefits.
- What type of business is it? Some industries, such as restaurants, have special rules for even shorter depreciation.
- How long will you own the property? If you anticipate selling the property in the near future, there may be less benefit.
- What’s your tax rate? The higher the tax rate, the greater the tax savings.
As a business owner, you worked diligently to choose the right property to invest in. If you think a cost seg may be beneficial for your property, reach out to us and we’d be happy to discuss the options with you.
By: Kim Pruskeby