Today will share with you one of the best kept secrets of the IRS. It is called Cost Segregation.
What is Cost Segregation?
In simple terms, cost segregation is a strategic tax planning tool that allows companies and individuals who have constructed, purchased, expanded or remodeled any kind of real estate to increase cash flow by accelerating depreciation deductions and deferring federal and state income taxes.
For example, a commercial building is depreciated over 39 years. What cost segregation does is take the whole building and it breaks the building up into various parts that can be depreciated between 7 to 15 years. For example, the carpet and flooring in a commercial building wears out before 39 years, so we can depreciate it in much fewer years. The benefit from this is you get a huge tax break. Instead of taking a small deprecation deduction over 39 years you take a large deduction over 7 to 15 years. There are parts of the building that will still be deprecated over 39 years, but you will get a much higher depreciation deduction the first 7 to 15 years. You can start cost segregating your building even if you have owned for several years.
Lower Your Taxes!
Cost Segregation is a hidden jewel in which the IRS gives you, the property owner; an opportunity to maximize the return on your investment. Cost Segregation has been around since JFK signed it into law to help stimulate the economy back in 1963. Then in 2008, it was extended to go back five years instead of two, as part of the stimulus plan. That expired in September 2010; all property owners should be looking into Cost Segregation, because you can still go back two years to recapture over paid taxes.
A cost segregation study will identify items that can be properly classified as tangible personal property or land improvements; rather than real property that is depreciated over 27.5 or 39 years. The resulting tax benefits begin in the quarter the study is complete and continue throughout the depreciable life of the identified assets. Most fortune 500 companies use this in their tax strategy.
The Internal Revenue Service (IRS) states in their audit manual that it is their expectation that property owners and accountants will become more exposed to this type of depreciation see the benefits, and thus, they expect to see an increase in these studies. Over the last few years, companies have been claiming they do these studies, but in fact they only do a partial study just doing a base cost segregation study. This is not what the IRS considers a “Quality Study.” Per IRS guidelines, there are 13 items or parts, to what they consider a “Quality Study.” The last thing you, the property owner, want is to have an audit by the IRS, or invest in this study and only get half of a job done!
If a respected company does your Cost Segregation study and does a complete job, that would include an onsite engineers report then you do not have to worry. Reports from a good company are a very acceptable type of depreciation and recommended by the IRS. However, only five percent of commercial property owners use this tax strategy, because they have a lack of knowledge about them or do not have the experience in these studies to perform them. These reports exist to assist your accountant to enhance his or her ability to lower your income tax liability to give you an option on tax strategy.
Cost Segregation works best when the property has been in service for ten years or less. Over the years it has been changed; in some cases for the better and others,not. After certain cases such as Hospital of America vs. Commission, it implemented many of the old laws into a very strategic tax strategy.
What to Expect From a Cost Segregation Report
A cost segregation report will show you how much you can expect to save on your taxes each year when you use the process that process for your business. Many businesses are looking for a break and financial concerns are plaguing many, especially new business owners. Cost segregation can help you to pay taxes for the depreciation that will occur on your business over many years. You will then pay an adjusted tax amount and this can relieve some of the financial burdens that many businesses are facing right now by increasing your present cash flow.
When you hire a cost segregation service provider, they will use many factors to design your tax-savings report. This is what will then be presented to the IRS to help you start lessening your taxes immediately. If you are constructing your business, this is the best time to implement the strategy, but if you are adding on, or even remodeling you will want to use a service to help you decrease your taxes during this time.
You want to make sure that you have a professional on your side so that your report is accurate and you get the maximum amount of deductions. This is a specialized field and you want to make sure that anyone that you are planning on working with has this specific knowledge. You also need to remember that you are working with the IRS and you want to do everything in your power to ensure that you are complying with all of their guidelines and this is where an experienced cost segregation service can make all of the difference. I you know another business owner that has successfully completed the cost segregation process; you may want to find out what company they used and also utilize this company to see similar results.
You may want to get online and investigate any company that you want to complete your cost segregation report. This will show you if there have been many complaints about the company you are interested in working with. If you find the company that you are interested in has a lot of negative information attached to them, you may want to look for another company that has a better track record with customer service.
A cost segregation report can help you keep more money in your pocket each year. If you find a reputable company you will be ready to begin the process and you will see the results each year.
