Cost Segregation Audit
Save tens of thousands on by significantly reducing your taxable income.
A cost segregation audit is a process of looking at where your construction costs are for a given project and then reclassifying them into their correct tax treatment. This means that any asset spent money on but doesn’t qualify for depreciation must be reclassified as personal property, which has an accelerated write-off under MACRS (Modified Accelerated Cost Recovery System).
Why use a Cost Segregation Audit?
A cost segregation audit can help you reduce your tax liability by reducing the amount of depreciation you would typically take. This is crucial to any business because it saves money upfront, which you can invest elsewhere with interest, and extends an asset’s life. Let’s say you depreciate a $100,000 piece of equipment over ten years. If you paid $50,000 in labor and $50,000 for materials, your depreciable cost is only 50% of the total project.
What kinds of benefits can a business see from a Cost Segregation Audit?
A business can expect to see significant benefits from a cost segregation audit, including:
- Increased after-tax cash flow – A cost segregation study puts dollars in your pocket today that would generally go into Uncle Sam’s pocket. This means you have more money to invest and make even more money.
This also means that those assets pay for themselves faster. So, you can reinvest this money into your business and receive a return on investment (ROI) that would not be possible without the accelerated depreciation write-offs.
- Decreased tax liability – The amount of taxes your business pays today should fall due to a cost segregation study. This means you have more money to reinvest, whether it’s in your business or somewhere else.
In many cases, a cost segregation study could also mean more after-tax cash flow simply by saving on taxes each month.
Who should use a Cost Segregation Audit?
A cost segregation audit should be used by anyone who purchases the personal property. This is usually common for construction companies; however, this could also include corporations that purchase or lease equipment and then pay taxes as leased vehicles. It can also help reduce your taxes if you own rental properties.
How does a Cost Segregation Audit work?
A cost segregation audit works by identifying all construction-related costs that can be depreciated over a shorter life. Each year, the IRS updates its cost segregation tables, which provide an appropriate depreciation schedule for construction projects.
The audit identifies and reclassifies direct, indirect, and even specific indirect general and administrative (G&A) expenses into shorter lives.
A CPA conducts an audit sent to the client, who can then pass it on to their tax preparer.
What’s the difference between Cost segregation audits and depreciation?
Cost segregation is an accelerated depreciation method that can reduce federal income tax liability for commercial properties. A cost segregation study involves allocating the construction costs of a facility to its respective parts to identify the more eligible bases for depreciation deduction purposes. A “cost segregation audit” is performed by a Cost Segregation Specialist and/or Certified Public Accountant (CPA) to determine the compliance of a commercial building’s capital costs to the IRC Section 168 cost segregation rules.
Depreciation is an allocation to a depreciable cost asset, while depreciation methods affect how much and when to deduct for the use of an asset. Methods such as straight-line, 150% declining balance, 200% declining balance, and MACRS is permitted for commercial buildings.
The benefits of using a Cost Segregation Audit Firm
The benefit of hiring a firm specializing in cost segregation studies is that it allows you to use an expert instead of trying to learn about this on your own. There are many pitfalls businesses can fall into if they try to do their due diligence because each case is different. When someone orders a cost segregation study, they are usually looking for two things: money in their pocket today and fewer taxes owed for this year.
Cost segregation firms understand the process and know all of its intricacies, which is why they’re considered experts at cost segregation. They can help make this complicated tax strategy and reduce it to a simple formula that will increase your after-tax cash flow when implemented.
A cost segregation firm can help show you how to save your business thousands, tens of thousands, or even hundreds of thousands in taxes.
What are the costs, and how long does it take to complete an audit?
A cost segregation study can be completed in as little as 30 days, depending on the size and type of property. Typical costs for this kind of audit are based on building square footage and the number of assets to be analyzed.
Typical Fee: $8,500 – $12,000 (20% of the depreciation recovered and included in the first year)
The prudent way to do after receiving your cost segregation audit results:
- Get a hard copy and go over it carefully yourself; don’t guess or take someone else’s word for it. You may be dissatisfied with the audit findings and wish to return and argue your case about switching into and out of the five-year property categories, so you’ll need a detailed written record of the study’s findings and the reasons offered.
- Ask the CPA who did the study if they would be willing to go over it with you in person and give you a presentation on what was found and why.
- Have your CPA run a comprehensive study on the tangible property assets identified in the initial report which you want to retain for longer than five years, including a review of all pertinent tax depreciation statutes and regulations, as well as any other issue that might be pertinent to your specific situation.
- Finalize your real property tax depreciation schedule for the current year’s filing using the extended study findings, applying all tax provisions known by your CPA (including any not covered in the initial cost segregation audit).
- If your CPA has suggested that they lack expertise or won’t cover all the bases required by extending the study, then ask them to refer you to someone who can help you do that.
- Make sure you have a well-reasoned argument to present to your taxing authority when filing any amended returns in the future.