Cost Segregation

Posted on Tuesday, January 10, 2017

By using cost segregation, you may be able to write off some parts of depreciable business real estate faster than other parts.

With this approach, you separate the cost of a large asset, such as a building, from its parts that are not structural components. The result is shorter depreciation methods for the non-structural components and increased cash flow because you don't have to wait so long for your deductions.

For example, a commercial building is generally depreciated over 39 years. But with cost segregation, you may be able to write off some of the property in 5, 7 or 15 years.

The IRS has given its approval to this method of depreciation in many cases. One example: A hotel complex, which included a casino, constructed a large pylon sign to attract passers-by. The sign wasn't attached to any building in the complex. The hotel complex operators wanted to write off the entire cost over a five-year period.

Since the sign should be treated as a land improvement, the IRS said the cost must generally be written off over 15 years. However, the cost attributable to the sign's electronic circuitry can qualify for a five-year write-off. (IRS Field Service Advice 200203009)

Moral of the story: Whenever possible, separate component costs to speed up deductions. Examples of property that qualify for a shorter life write-off are carpeting, kitchen plumbing, electrical wiring, landscaping, parking lot improvements, site lighting and underground utilities.

Ask your tax adviser for more information about conducting a "cost segregation study," which helps substantiate depreciation deductions on your tax return.

Posted in Tax And Accounting Topics For Business

Disclaimer: The information contained in Dulin, Ward & DeWald’s blog is provided for general educational purposes only and should not be construed as financial or legal advice on any subject matter. Before taking any action based on this information, we strongly encourage you to consult competent legal, accounting or other professional advice about your specific situation. Questions on blog posts may be submitted to your DWD representative.

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