Cost Segregation; A Powerful Tax Management Tool 

Who would have known? A few years ago, when obstetrician Dr. Chris Riegel built new offices near Plano Presbyterian Hospital, he had no idea that his choice of wall covering would lower his federal income tax bill, but he learned that it did after getting a Cost Segregation Study from Dallas based CutFedTaxes.com. Another Collin County physician, Dr. Jerry Schechter of North Texas Orthodontic Associates in Frisco, Plano and Allen, has also used Cost Segregation to reduce his federal tax payments. Dr. Schechter recently had Cost Segregation done on his company’s newest building in McKinney, Texas. "I only wish I knew about Cost Segregation sooner . . . it has been very good for us," says Dr. Schechter. Cost Segregation is growing in popularity, since being legalized in 1997. Many commercial property owners in the DFW Metroplex, as well as hundreds of thousands across the United States use Cost Segregation to reduce federal income tax payments for up to fifteen years.

What is Cost Segregation? A Cost Segregation Study (CSS) is an engineering-based analysis of expenditures for a new building, a renovated property, or an existing structure. The purpose of a CSS is to allocate the cost of a building into the best asset classes for the fastest permissible depreciation. For example, Dr. Riegel’s medical office contains many specialized electrical circuits that power medical or diagnostic equipment. Because the medical equipment is depreciated faster, the special circuits that power them get faster depreciation, as well. The vinyl wall covering, mentioned at the beginning of this article, is also eligible for quick depreciation, 7-years in fact, since it is attached with a removable adhesive. Paint on the walls, on the other hand, is considered by the IRS as a permanent part of the building and, thus, its cost must be depreciated over 39-years. There are literally thousands of special circumstances that allow the acceleration of depreciation for a building and a Cost Segregation Study can find them.

Why consider Cost Segregation for your building(s)? The huge benefit is depreciation acceleration. Every dollar of depreciation reduces the amount of taxes payable now. By taking depreciation deductions sooner, a property owner reduces the amount of income taxes they pay now, shifting them to be paid many years in the future. This, in turn, significantly increases after tax cash flow for up to 15-years. Cost Segregation creates more immediate working capital for a business, and that increased cash can provide property owners with the money to reduce principal, expand the business, stock new lines or invest for greater financial security.

How does a Cost Segregation get done? The best Cost Segregation providers use the engineering approach. This is where an expert analyzes all plan documents for a building and its site, as well as conducts an on-site inspection to verify the plans and adjust for anything not contained in the plans. Then the expert itemizes all significant components in the building. After that, he assigns the amount that each component contributes to the total amount paid for the building. Once all costs are correctly assigned, the consultant classifies each component into the correct depreciation term. Upon completion of the research and cost assignment, the findings of the Cost Segregation Study are published in a bound volume containing an executive summary, a detailed report, tabulation of all depreciation totals, dollar amounts assigned to depreciation class by term and by type of asset, and all statements and documentation as recommended by the IRS.

With Cost Segregation, substantial amounts of a property’s cost are switched from entirely 39-year depreciation to a mix of 5-year, 7-year, and 15-year depreciation. Cost Segregation can be successfully used with any type of commercial property. It will typically accelerate depreciation for 25% to 45% of a property’s value. What does this mean in terms of dollars and cents? Results will vary, depending on the type and size of a property, but the range of return on investment is between 700% and 8,000%. Generally speaking, cost segregation results in a first year tax reduction that greatly exceeds the cost of the consulting service. We’ve seen it as high as eight times the cost. To help a property owner assess the potential of Cost Segregation, most consultants prepare a free analysis projecting the expected benefits of Cost Segregation, specific to a property. This represents a risk-free way for a property owner and their tax professional(s) to evaluate the decision.

In this time of higher federal taxes looming ahead, a business must do everything it can to preserve cash flow. "Our Cost Segregation Study shifted 31% of our building cost from 39-year to faster depreciation rates. It more than paid for its cost in first year tax savings. It was well worth the investment," says Dr. Riegel. Cost Segregation is one of the few ways that commercial property owners have to significantly and immediately reduce tax payments and elevate net cash flow.

Jerry Ferch is President of www.CutFedTaxes.com

12901 Hutton Drive, Suite 200,
Farmers Branch, TX 75234
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jerry@cutfedtaxes.com