Using a Cost Segregation Study to Accelerate Tax Deductions in Commercial Real Estate

Getting tax deductions for commercial real estate developers can be somewhat of a quagmire if you don’t have a great tax accountant. Find one who knows the best strategies to ensure you’re taking aggressive tax deductions when they’re due. Ideally, you want to keep your cash flowing from year to year, without having to wait on an accelerated tax deduction when your property depreciates.

Cost segregation for tax purposes is a forte of the construction accountants at Miller & Company, LLP.

Providing you with the sometimes-elusive cost segregation tax benefits is a service that comes naturally when you rely on the expertise of the best accountants in New York City, Washington DC and Sarasota, FL.

Knowing Your Business

As your top Sarasota certified public accountant (CPA) gets to know your company’s specific operations — as well as the details of each project in which you’re involved — a cost segregation study is one of the most practical steps to ensure you take advantage of the most aggressive tax deductions possible.

A cost segregation study for tax purposes includes:

• Separating the personal pieces of the property from the structural components
• Identifying each personal property’s value
• Classifying and analyzing the personal properties that are deductible on your federal returns
• Relying on the Internal Revenue Service (IRS) process for calculating the depreciation value of the property

To accurately assess which personal property items are eligible for accelerated tax deductions, your commercial real estate accountant follows a set of complex rules.

Factors affecting the classification of personal property depend on a number of variables, including:

• How difficult the personal property is to move or remove from the structure
• How the items are attached to the structure
• If the property is intended to remain fixed
• What its life expectancy is determined to be

It’s All in the Details

Cost segregation is by no means a deceptive or risky endeavor. In fact, the practice has been successfully employed and supported by court rulings since the early 1960s. And in 1997, the United States tax court made it official, ruling that cost segregation for tax purposes is allowed.

Knowing which items meet the criteria for personal property allocations is another key factor that only an experienced commercial property tax CPA in Sarasota fully understands and can verify. A complete analysis of the building by a valuation expert is required to determine which benefits are allowable.

Some personal property examples that your accountant looks for while performing the cost segregation study include:

• Various wiring, such as that used for security systems or other systems with a shorter life span
• Specific HVAC lines and vents that often are considered a part of the building’s structure
• Signage and decorative lights
• Wall partitions that are moveable
• Shelves and cabinets
• Decorative millwork
• Landscaping and fences
• Isolated parking lots
• Sidewalks
• Fire protection
• Alarm systems

Even More Aggressive Tax Deductions

Residential apartments typically depreciate over 27.5 years, while other commercial buildings follow a 39-year depreciation schedule. A cost segregation study for tax purposes allocates personal property assets over a shorter span, varying from five to 15 years. By reclassifying the property, you then defer taxes significantly and increase your cash flow. The accelerated tax deductions are taken in earlier years, reducing your tax liability in those specific years.

Commercial real estate investors and owners optimize these cost segregation tax benefits quicker than ever, sometimes even immediately with the passage of the Tax Cuts and Jobs Act of 2017, which allows individual commercial real estate professionals and businesses to deduct a percentage of the costs of some personal property assets the very first year they go into service.

And for the first time, even used property is eligible for the tax bonus. The latest commercial real estate tax law also increased the percentage of the bonus treatment to 100 percent through 2022 that previously was only 50 percent in 2019.

Additional Cost Segregation Tax Benefits

Your cost aggregation study, performed by a construction accounting team that understands the complexity of the process, becomes more urgent and impactful than ever.

In fact, your CPA may turn up even more tax benefits you may not have known about, such as those covered by the 2015 Protecting Americans from Tax Hikes, commonly referred to as the PATH Act.

The PATH Act affected the results of a cost segregation study in regards to renovations. A new group of assets deemed “qualified improvement property” was created to replace retail, restaurant and leased improvement properties that follow a 15-year depreciation schedule.

And it also included improving assets that aren’t structural — such as alarms, ventilation and plumbing systems. But to follow the letter of the tax laws, your tax accountant must remain abreast of the technicalities inherent in these laws.

Strategic Planning Required

By bringing your tax accountant into the planning stages of your project, you can prepare for these aggressive tax deductions and set your deadlines accordingly. As an integral part of your team, your CPA automatically conducts a cost segregation study as a part and parcel of your overall strategic financial planning.

The qualified commercial real estate accountants at Miller & Company, LLP are proficient in these specific accounting duties. But they’re experienced and knowledgeable in all your accounting needs — from payroll and business valuation to cash flow management, and succession planning. They provide a multilingual team of experts to assist you every financial step of the way. Contact the firm today to ensure you receive all the accelerated tax deductions for which you’re entitled.

DISCLAIMER