With rising inflation and economic uncertainty, there is no better time to maximize cost-efficiency than the present. While business executives are looking to make more capital investments, they are also considering minimizing the tax burden on operations and properties using methods like cost segregation. Using this analysis to reduce costs due to asset depreciation can be highly worthwhile for business owners.
However, cost segregation analysis is often an option many business owners overlook but can be an easily actionable solution. One of the main reasons is that business owners do not know how it works nor the outlook of implementation.
Cost segregation analysis comes with many benefits for small and big businesses. Here at Expense To Profit, we take pride in introducing business owners to foolproof strategies to reduce overhead costs while boosting profits significantly. We will explore everything you need to know about cost segregation analysis. We will also address how to take advantage of it before significant changes are implemented at the end of 2022.
What is Cost Segregation Analysis?
Cost segregation analysis reviews real estate components and categorizes them appropriately.
It is the belief that a building, when acquired, is more than the tangible physical edifice erected. Other aspects of the building, such as the fencing, landscaping, accessories, and fittings, are also components.
All of these items, depending on usage, have various lifespans of 5 to 15 years. However, these items are grouped in the building acquisition.
Cost segregation analysis presents property owners or taxpayers to properly evaluate the property value during the first year of acquisition. This results in an appropriate upfront tax deduction.
Introduced in 2002, the bonus depreciation rate was 30%. A year later, it was increased to 50%. However, the Coronavirus Aid, Relief, and Economic Security (CARES Act) combined with the Tax Cuts and Jobs Act (TCJA) increased the bonus depreciation rate to 100%.
However, the extended bonus depreciation rate will only be available until December 31, 2022. After which, the bonus rates will decrease year after year until 2026. Thus, you must take advantage of the 100% bonus depreciation rate opportunity before the end of the year.
How Does Cost Segregation Analysis Work?
Cost segregation analysis hopes to increase your cash flow by accelerating depreciation write-offs, significantly lowering federal and state income taxes. About 40% of real estate components fall into different categories that can be written off faster than the physical structure.
If you were to purchase those components each, they would depreciate throughout 5, 7, or 15 years; however, buying them as part of the real estate will collectively depreciate for 27.5 years for rental buildings or 39 years for commercial buildings.
Land and buildings do not qualify for bonus depreciation. Only components of a building do.
Cost segregation analysis identifies these components and classifies them under the 5, 7, and 15-year depreciation period. After which, you can claim a 100% bonus depreciation on those components.
Self-constructed and newly acquired properties can significantly benefit from a cost segregation analysis. Remodeled, expanded, and restored properties also stand a chance to benefit from the study.
Types of Real Estate Properties Considered for Cost Segregation Analysis
The types of buildings considered for cost segregation analysis, resulting in 100% bonus depreciation, include:
- Food processing facilities
- Corporate offices
- R&D facilities
- Cold Storages
- Medical centers
- Car/Truck repair and many more
Importance of Cost Segregation Analysis
Your property’s cost segregation analysis allows you to update your annual tax reports and reduce future tax payments. It also helps identify non-useful components of your property you can auction off.
Another importance of the analysis is that you can adequately ascertain and classify the depreciation period of the components of the real estate. And as a result of the CARES and TCJA Acts, you can get 100% bonus depreciation on the tax write-off.
With fewer tax deductions, your business will have more resources than you can reinvest back into your firm.
Real Estate Components That Qualify for Cost Segregation Analysis
The following items are classified under cost segregation analysis:
- Electrical/electronic appliances
- Parking lots, etc.
Necessary Documents for Cost Segregation Analysis
The necessary documents needed for a cost segregation analysis include:
- Site survey document
- Construction budget
- Architectural drawings and designs
- Change orders
- Tenant list
Cost segregation analysis typically takes around 30 to 60 days to complete and should be done by a professional cost evaluator.
Cost segregation analysis presents a unique opportunity for small and big businesses to access more resources by reclaiming past depreciations. Any business that believes that have assets that may qualify for cost segregation should look to do so before the end of 2022.
Expense To Profit is committed to improving your business cash flow and profit by reducing expenses. You can reach out to us to learn about cost segregation analysis for your business and other strategies to reduce your overhead costs significantly.
Published by Marc Freedman
Marc currently serves as our Chief Cost Evaluator, expertly advising our client management team on how to help you successfully achieve your business and financial growth goals. A respected mentor to all he consults with, he is an avid collaborator and contributor to the spend consultant community, guiding thought leaders to formulate, design, and install the best operational solutions available to their clients.