Fast-track building write-offs Cost Segregation

QTA Consultants, Ltd./Renata Bliumaite

Unfortunately, it takes 39 years— almost half a century—for a small business owner to completely recoup the cost of a commercial building through depreciation deductions. By that time, you or your business may no longer be around. But you may be able to pick up the pace.

Strategy: Authorize a cost segregation study. If you qualify, you can use the study to write off certain building components in just five or seven years, without applying to the IRS for an accounting method change. That’s not to say that the IRS will give you free rein to write off separate building components over a short period of time. In fact, the nation’s tax collection agency often challenges cost segregation studies used by taxpayers to justify faster write-offs for buildings. However, you may still pass inspection based on the latest IRS guidance.

Here’s the whole story: Under the Modified Accelerated Cost Recovery System (MACRS), the cost recovery period for a commercial building is 39 years. On the other hand, personal property can be written off over just five years if the property has a useful life between four to ten years. A sevenyear period is used for property with a useful life between 11 and 15 years. As a general rule, “personal property” is defined in the regulations as tangible depreciable property (other than buildings and their structural components) used in special industries, such as transportation and communications, and several other specialized types of property. Key point: Several recent court cases have held that parts of a commercial building may be treated like personal property if they relate only to the equipment used in a business located in the building instead of maintenance or operation of the building. This can include components such as electrical systems, plumbing systems in restaurant kitchens and removable carpeting. Because the write-off periods for components often depend on the use of the building, taxpayers often commission tax pros and other experts to provide cost segregation studies with breakdowns of the write-off periods for various components. After years of uncertainty, the IRS recently issued a 115-page Audit Techniques Guide (ATG) to help its agents determine when a cost segregation study is up to snuff. Good news: The IRS isn’t trying to hide anything. Both taxpayers and their cost segregation experts can check out the ATG at https:// The guidance explains why cost segregation studies are performed, how they are prepared and what agents should review. If anything, the ATG may help you nail down faster write-offs when they are warranted. But remember that this can’t be cited as authority in a court case. To be on the safe side, enlist the services of a tax pro if you think you qualify for a cost segregation study of building assets. The tax pro can tell you where you’ve gone wrong in the past and how to change things in the future.

Tip: When it makes sense, you may reclassify certain components and file amended returns for the appropriate tax years.