If you own commercial property, you’re probably depreciating it over 39 years. That means that every year, you deduct 1/39th of the property’s value (excluding land) from your taxes. Depending on the value of your property, you could generate a million dollars or more in depreciation deductions over the 39 years.
Wouldn’t you like to get your hands on some of the money sooner?
By conducting a “cost segregation study,” you can dramatically speed up the depreciation process so you get your deductions faster. Depending on the building type, a cost segregation study takes 15 to 60 percent of the building cost out of 39-year depreciation and puts it into five, seven or 15-year depreciation recovery periods.
Items that may qualify for faster depreciation include electrical wiring, kitchen or laboratory plumbing, landscaping, parking lot improvements, site lighting, underground utilities, decorative millwork, built-in audio visual projectors and screens. In general, any property used to operate your business might be eligible for a faster write-off.
And there’s more. The depreciation on indirect construction costs, such as construction interest and architecture and engineering fees can also be accelerated.
By maximizing your depreciation in the early years of ownership, you increase your cash flow since you pay less income tax.
The Savings Can Be Significant
In one case, a fast-food chain built 10 new restaurants from 1992 to 1994. The average cost per store was $600,000, excluding the equipment. A cost segregation study was conducted. The results:
Without the study. The chain must generally depreciate 100 percent of the building cost over 39 years.
With the study. The chain can depreciate 20 percent of the building cost over 15 years and 25 percent over five years. For all 10 buildings, the total taxes deferred over a cumulative five-year period exceed $700,000. That means the owners have $700,000 they can use now to run the business, pay off debt or invest as they see fit. It’s almost like getting an interest-free loan from the government.
Caution: The IRS has made it clear that experienced professionals should conduct cost segregation studies. Property owners, or professionals without the proper experience who try to do this themselves, are likely to have trouble withstanding IRS scrutiny.
To learn more about the specifics of your situation, talk to your Geffen Mesher advisor.