Cost Segregation

Use Depreciation to Your Advantage

Cost segregation is a tax savings strategy intended to maximize tax deductions and in doing so, reduce an owner or investor’s tax liability. It’s a strategy that large companies and professional investors have used for more than 30 years to reduce their tax burden and enhance after-tax returns. Cost segregation (CS) can be applied to any commercial or rental property, whether it was recently built or acquired a dozen years ago. Despite being eligible, smaller family-owned businesses sometimes miss out on the benefits of cost segregation studies simply because they aren’t aware of them.

Although many people think of CS solely in terms of commercial office space, the strategy is actually applicable across almost any kind of building or structure, from car dealerships to manufacturing facilities to residential rental units to retail shopping centers and stores. And contrary to popular opinion, cost segregation studies aren’t only applicable to brand-new construction — any facility acquired within the last 15 years may be a good candidate for CS. In addition, buildings undergoing renovation, remodel, or expansion may also be suited for CS.

Cost Segregation: How It Works

Cost segregation starts with a thorough analysis of real property and building improvements with the aim of identifying costs that can be classified into shorter recovery periods. Indirect costs, including architectural and engineering fees, can be allocated to increase the total cost basis of depreciable tangible personal property. The BPM CS team has the experience to identify frequently overlooked and embedded costs that can be reclassified for accelerated depreciation or possibly expensed, establishing a roadmap for the proper classification of future assets.

Because organizations tend to treat most of their assets as real property, thereby depreciating them over longer recovery periods than is required, our clients often turn to BPM to uncover numerous under-depreciated assets that would benefit from cost segregation. Personal property and land improvements are often improperly classified as ”building” and should instead be reclassified with a shorter recovery life. Conversely, taxpayers will also unknowingly apply incorrect rules and definitions for Bonus Depreciation and Qualified Improvement Property, opening them up to regulatory and compliance issues not to mention unnecessarily paying too much in taxes.

Real Industry Experience

Cost segregation studies focus on physical building property, often straddling the lines between the domains of real estate, construction, and engineering. The BPM CS team is closely aligned with our Real Estate Industry Group, and as such takes full advantage of the team’s breadth and depth of expertise in the real estate industry. But the CS team also functions as a standalone service that helps clients in all industries maximize depreciation and reduce their current tax burdens while improving cash flow. To see what our CS team can do for you, and whether your business might benefit from a cost segregation study, contact BPM today.