Whether a manufacturer is still trying to navigate the impact of 2020’s volatility or ready to move forward with expansion in 2021, a cost segregation study can uncover tax deduction opportunities. With these tax savings, businesses can improve their cash flow and gain more resources to invest in growth.
A cost segregation study analyzes all costs associated with the purchase, construction, renovation, or expansion of commercial real property and identifies those that qualify for a shorter tax depreciable life. Such items can include:
- Dedicated electrical systems supporting office or manufacturing equipment
- Dedicated plumbing systems supporting manufacturing or kitchen equipment
- Parking lots and sidewalks
- Stormwater management
- Carpeting and other specialty flooring
- Specialized cabinetry and countertops
The typical tax depreciable life of a non-residential commercial building is 39 years; however, a cost segregation study will identify costs that qualify for shorter tax depreciable lives of 5, 7 or 15 years. These accelerated depreciation deductions lower your tax liability and provide the organization more cash to invest back into your business. Here is an example of how a cost segregation study can benefit a business.
An Example of the Cash Flow Potential from Cost Segregation
| Scenario: |
| Manufacturer Plant Renovation / Year in service: 2020 |
| Assumptions: |
| U.S. Tax Rate: 21% || Discount Rate: 7% |
| State Tax Rate: 7% || Building Basis: $20,138,663 |
| After Tax Effect: 26.53% || Convention: Half Year |
| Return on Investment: |
| 115 to 1 |
| Estimated Benefits: |
| Additional Depreciation Year 1 || $16,535,700 || Tax Benefit Year 1 || $4,386,900 |
| Additional Depreciation Years 2-6 || ($2,145,100) || Tax Benefit Years 2-6 || ($569,100) |
| || $14,390,600 || || $3,817,800 |
| Net Present Value over 39 Years: || $2,880,800 |
While businesses may get the most benefit from a cost segregation study within the first year of buying, building, or improving a property, a study can look back at assets placed in service in prior years and “catch up” the depreciation through a Change in Method of Accounting. These modifications can provide tax advantages in the current year. The Tax Cuts and Job Acts (TCJA) also expanded the bonus depreciation rules, providing more opportunities for property owners to save. For property with a depreciable life of 20 years or less, the TCJA increased bonus depreciation to 100 percent for property placed in service between September 27, 2017, and January 1, 2023. The rule also extended bonus deprecation to purchased properties. This means the cost associated with qualifying components of a property (new or used) can now be fully deducted in their first year — as long as they fall within the specified placed-in-service timeframe. Additionally, the varying rates of bonus depreciation from previous years can also potentially enhance the benefit for a look-back study on assets placed in service in prior years.
If your walls could talk they would tell how a cost segregation study can provide your business tax savings.
How DHG can help
Conducting a cost segregation study can benefit your business, but the process of integrating engineering and accounting principles for federal tax depreciation purposes can be extremely complex. Working within the established IRS guidelines and the latest policy updates, DHG provides a comprehensive collaboration with professionals experienced in tax, construction, and engineering. We go beyond the study itself to research and coordinate all accounting issues related to your project. The scope of our approach also includes providing a comprehensive breakdown of your building into its varying units of property to assist with the potential for future dispositions.
At DHG, you benefit from our team of professionals, combining federal and state tax policy insight and capital expenditure specialists with engineering, construction, and manufacturing industry analysts. Together, we will help you navigate the complex classification of accelerated deductions for your property or planned construction/renovation, so your organization can enjoy greater cash flow and tax savings.
To learn more about how we can put our technical knowledge, industry intelligence, and a future-focused approach to client success to work for you, please contact us at firstname.lastname@example.org.