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September 2001 Tax savings through cost segregation Most buildings include items that you can depreciate over five, seven or 15 years … if you can document and support your cost allocation When segregating the costs of a construction project, it’s easy to properly identify and depreciate – for federal tax purposes – the costs of manufacturing equipment, office furniture and fixtures, and computer equipment over five or seven years. However, the construction-related costs, which may account for 80-90% of the overall project cost, are all too commonly lumped together as real property. As a result, the annual tax depreciation deductions for a facility itself are spread evenly over the next 39 years. Reducing tax lives from 39 years (using straight-line depreciation) to five, seven or 15 years (using accelerated methods) results in an opportunity to significantly reduce your tax liability. With this in mind, the primary goal of a cost segregation study of a newly constructed, acquired or expanded facility is to identify all construction-related costs that qualify for shorter depreciable lives. Our approach to cost segregation involves demonstrating the tax savings of accelerated depreciation. In addition, the cost segregation/engineering professionals with whom we work can calculate the potential tax savings that you would lose if you neglect to take advantage of accelerated depreciation. How you can benefit Planned projects. If you’re planning to build a new facility or purchase or expand an existing one, you may benefit greatly by conducting a cost segregation study. We can help you realize tax benefits through accelerated depreciation deductions; the net result is increased cash flow, which in turn can be used to underwrite current or future expansion. Completed projects. If you have already built or purchased a building but did not perform cost segregation, you may realize significant benefits as well. In fact, you can recover depreciation deductions for prior years by filing the proper forms with the IRS. Example. For a typical 75,000-square-foot light manufacturing facility with construction costs totaling $3 million, it’s reasonable to assume that: 15% of the total construction cost will qualify as seven-year property, and 10% of the total construction cost will qualify as 15-year property. The potential federal tax savings of moving these costs from 39-year real property to seven-year and 15-year property are featured below.
The true benefit really becomes apparent when you move from a light manufacturing environment to a heavy manufacturing or high-tech environment. For example, the construction cost of a high-tech chemical or pharmaceutical processing facility can range from $10 million to $50 million, and the tax savings may range anywhere from 25 times to 75 times those featured above. Success stories. Here are a few examples of federal tax savings (cost segregation studies can also result in lower state income tax liability):
Surviving IRS scrutiny. Another benefit of our cost segregation services is the independence and objectivity provided by a third-party review of project costs. Our cost segregation studies have consistently withstood the scrutiny of the IRS. Based in Mesa, Arizona, and serving closely held businesses in the East Valley, the Phoenix area and throughout Arizona, Schmidt Westergard & Company, PLLC, is an independent full-service tax, audit, accounting and business advisory firm focusing on the middle market. |
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