Accelerate Depreciation Deductions with Cost Segregation Studies

It typically takes nearly four decades for small business owners to recover the cost of a commercial building through traditional depreciation deductions. However, there's a strategy to expedite this process significantly.

Strategic Approach: Implement a Cost Segregation Study

By conducting a cost segregation study, eligible businesses can identify and accelerate depreciation deductions for certain building components within five or seven years, rather than the standard 39-year period. This method allows businesses to categorize components like electrical systems, plumbing, and removable carpeting as personal property, qualifying them for shorter depreciation periods under the Modified Accelerated Cost Recovery System (MACRS).

Navigating IRS Scrutiny and Guidelines

While the IRS may scrutinize cost segregation studies to ensure compliance with tax regulations, recent guidance has clarified the criteria for acceptable studies. The IRS's Audit Techniques Guide (ATG) outlines how these studies should be conducted and reviewed, providing transparency and guidelines for both taxpayers and IRS agents.

Key Considerations:

• MACRS Rules:

  Commercial buildings generally have a 39-year depreciation period, while personal property can qualify for shorter periods based on its useful life.

• Court Precedents:

  Recent court cases have supported the classification of building components as personal property, especially if they relate directly to business equipment rather than building maintenance.

• Benefits of Cost Segregation:

  Properly executed studies can result in significant tax savings by reclassifying components for faster depreciation write-offs.

Expert Guidance and Compliance

To ensure compliance and maximize benefits, businesses should engage tax professionals experienced in cost segregation studies. These experts can navigate IRS requirements, assist with study preparation, and advise on potential reclassifications and amended tax filings.

Practical Tip:

• Review and Amend Returns:

  When appropriate, consider reclassifying components identified through a cost segregation study and file amended tax returns for applicable years to claim accelerated depreciation deductions.

Conclusion

For small business owners seeking to optimize tax benefits from commercial property investments, a cost segregation study offers a strategic advantage. By identifying components eligible for accelerated depreciation, businesses can enhance cash flow and potentially reduce tax liabilities, provided they adhere to IRS guidelines and requirements.