Cost Segregation

What is a Cost-Segregation Study?

Cost-Segregation is an analysis of commercial real estate property where certain assets can be segregated from the real property assets for tax-reporting purposes. Commercial buildings have a standard depreciation schedule of 39-years, and residential properties are depreciated on a 27.5-year schedule. Within these categories, certain assets within the building and land improvements can be depreciated more quickly, over 5, 7, or 15 years, which results in significant tax savings.

A cost-segregation study is designed to:

  • Reclassify real property
  • Accelerate tax depreciations
  • Recapture missed depreciation deductions from previous years
  • Provide detail for future asset retirement
  • Create an audit trail
  • Improve cash flow.

What Qualifies?

If you lease or hold commercial property in the form of newly constructed buildings, purchased buildings, renovations or leasehold improvements constructed, purchased, or renovated after 1993, it may be a good candidate for a cost-segregation study. Newly constructed or purchased properties with a depreciable tax basis of $750,000 or more and updated properties or improvements with a depreciable tax basis of $300,000 or more are excellent candidates.

The best time to perform a cost-segregation study is in the same calendar year that your newly constructed building or purchased property is placed into service. In some instances, a building constructed or purchased in previous years may still benefit from a cost-segregation study. Clients can capture “missed” depreciation for past construction, purchases, expansions, renovations, and leasehold improvements. In these “catch-up” cases, no amended tax returns are required and all past accelerated depreciation can be taken in one year by filing a Form 3115 (Change in Accounting Method).

There are always exceptions to the rule. The engineers and professionals at The Jennings Denovich Group have helped many clients whose assets fell outside these guidelines. If your property does not quite fit these categories, please contact us for a free estimate to see if your project is a viable candidate for a cost-segregation study.

What are the Benefits?

The primary benefit of conducting a cost-segregation study is increased cash flow; this comes from greater tax deductions by accelerating eligible property to shorter recovery periods. Although there is no set guaranteed amount of tax savings that will result from a cost-segregation study, the chart below illustrates typical savings by property type. All data are based on the thousands of studies performed by the engineers and specialists at The JD Group.

A properly documented cost-segregation report with work papers creates an audit trail and ensures appropriate cost and asset classifications that can help the taxpayer avoid problems in the future.

Our specialists work directly with your CPA to guarantee the accuracy of cost data and ensure that all required information is included for a complete review before filing your tax return.

The JD Group Difference

When deciding where to turn for your specialty-tax-service needs, your decision should not be based solely on the promised return on investment. There are many factors to consider before choosing your cost-segregation provider, such as their methodology, the reputation of the firm, and the qualifications of the individuals who will perform the work.

A quality cost-segregation study consists of an engineering-based analysis of the property. This analysis involves a detailed review of construction plans, cost documentation, and a thorough on-site visual inspection by a qualified cost-segregation professional. The data are then compiled and assembled in a detailed report that breaks down all construction components of the property, allocating each asset into its proper class life (5, 7, 15 or 27.5/39 year).

Many firms offering “cost-segregation studies” use a simpler method that takes a short-cut approach. Although the IRS “allows” any cost segregation approach the client chooses to submit, a detailed, engineering-based cost-segregation study will produce the best benefit available and is the most accurate and easiest to defend.

Here’s what sets The JD Group apart from other firms:

  • Our engineers and specialists have performed thousands of studies since 2000 resulting in more than a billion dollars of deferred taxes for our clients.
  • Our detailed engineering approach results in studies that are fully compliant with the Cost Segregation Audit Techniques Guide issued by the IRS.
  • We provide complete IRS back-up and support with every cost-segregation study we perform.
  • The JD Group is a national firm, working in all 50 states.

Always engage a cost-segregation firm with experience in delivering quality engineering-based studies conducted by experienced engineers and specialists.

Quality, trust, and integrity are the cornerstones of our business and our work.

Contact us today for a free consultation regarding your cost-segregation opportunity—or visit our Free Estimate page to start the process online.