Under the IRS guidelines for Cost Segregation Studies (“CSS”) published in April of 2004, property owners have the opportunity to realize significant tax benefits from accelerated depreciation supported by Treasury regulations.
Oxford CPC has been working with property owners and CPA firms throughout the U.S. to provide the most thorough Cost Segregation Studies utilizing a detailed engineering approach from actual cost records in accordance with the IRS Audit Technique Guidelines. OXFORD CPC’s cost segregation staff includes a unique blend of licensed engineers and architectural professionals, who are able to skillfully identify and re-classify building components from real to personal property thereby maximizing the depreciation deductions available and directly increasing the related tax benefits for an owner of investment real estate.
Cost Segregation is a strategic tax savings tool that allows companies and individuals who have constructed, purchased, expanded, or remodeled real estate to increase their cash flow by accelerating depreciation deductions and deferring their federal and state income taxes.
The goal of a Cost Segregation study is to identify, segregate, and reclassify project-related costs that are currently classified as real property to shorter depreciable tax lives for federal and state income tax purposes. Recent IRS rulings and procedures have allowed taxpayers to change accounting methods to take advantage of these previously understated depreciation expenses–back to 1987. This is done without amending tax returns.
The time value of money is based on the premise that an investor prefers to receive a payment of a fixed amount of money today, rather than an equal amount in the future, all else being equal.
In other words, the present value of a certain amount a of money is greater than the present value of the right to receive the same amount of money at time t in the future. This is because the amount a could be deposited in an interest-bearing bank account (or otherwise invested) from now to time t and yield interest. (Consequently, lenders acting at arm’s length demand interest payments for use of their financial capital. Additional motivations for demanding interest are to compensate for the risk of borrower default and the risk of inflation, as well as other, more technical considerations.)
The Internal Revenue Service recommends using a third party for all cost segregation studies. Restaurateurs should work with someone who specializes in cost segregation, rather than just a standard CPA.
A cost segregation specialist should have engineering expertise that will enable them to identify the various components within a restaurant facility that qualify for accelerated depreciation.
The specialists should also be (or work with) a CPA who is not only an expert in tax law related to cost segregation, but who is also capable of determining whether a restaurateur qualifies for a cost segregation based on their specific tax situation.
The ideal time to begin a Cost Segregation study is when plans are drafted to purchase, construct, expand or remodel a building. If possible, the study should be completed in the year the building is placed in service.
However, a Cost Segregation study can be performed on any property as far back as 1987. Recent IRS procedures make it easier for you to reclassify your assets without amending prior tax returns. You can recapture all of the understated depreciation expense for any asset that has been improperly classified in previous years.
For example: You placed an asset in service in 1990. Its original basis was $100,000. The tax life you gave this asset was 31.5 years and the depreciation method was straight-line. This asset has depreciated 41.3% over 13 years. The remaining basis of this asset is $58,700. The correct life of this asset should have been 5 years. The IRS states that if you have truly made a classification error–as in this case–you can make a correction to this asset without being penalized. Therefore, you can bring forward the understated depreciation expense of $58,700 in the year that you are correcting the misclassified asset. According to the IRS, the full amount of the understated depreciation expense deduction can be claimed on your tax return in the year of change.
Real property eligible for cost segregation includes buildings that have been purchased, constructed, expanded or remodeled since 1987. A study is typically cost-effective for buildings purchased or remodeled at a cost greater than $500,000. A cost segregation study is most efficient for new buildings under construction, but it can also uncover retroactive tax deductions for older buildings. Building types studied include
