What is Cost Segregation?
A cost segregation study is a strategic tax savings tool that identifies certain qualified personal property and land improvements that are eligible for shorter depreciation lives and bonus depreciation to satisfy tax reporting requirements. It allows companies and individuals that have constructed, purchased, expanded, or remodeled any kind of real estate to increase cash flow and ROI by accelerating depreciation deductions and deferring federal and state income taxes.
CARE Act, Coronavirus and Qualified Improvement Property
The tax treatment of Qualified Improvement Property which includes Qualified Leasehold, restaurant and leasehold Improvement property was changed to qualify as 15-year property as a technical correction to the Tax Cut and Jobs Act of 2017(TCJA).
The classification as 15-year property (as opposed to 39-year property) makes these asset subject to 100% Bonus Depreciation deductions for many taxpayers.
The CARES Act adjusts the recovery period for QIP from 39 years to 15 years thus making it eligible for 100 percent bonus depreciation through 2022. This change is retroactive to January 1, 2018.
So when should I get a cost segregation done?
Building a new facility or building
Acquiring an existing building or facility
Improving, renovating or expanding an existing building or facility
Having leasehold improvements done
Past acquisition or construction of assets not properly classified
Types of properties that benefit from a cost segregation study:
Any business that has recently acquired improved real estate or constructed new improvements can likely reduce its taxable income for several years by segregating the property by type and depreciation rate. Typically, properties placed in service within the last 10 years are ideal candidates for retroactive cost segregation studies.
Our vast experience ranging from skyscrapers, such as the Sears Tower and the General Motors Building, to hospitals, regional and neighborhood shopping centers, gives us the ability to perform a cost segregation study customized according to your property.
HOTELS AND RESORTS
HOSPITALS AND HEALTHCARE FACILITIES
DISTRIBUTION CENTERS AND WAREHOUSES
BAR, LOUNGES, AND RESTAURANTS
FITNESS CENTERS, GYMS, AND HEALTH CLUBS
GOLF COURSES AND COUNTRY CLUBS
OFFICE BUILDINGS AND LEASED SPACES
GROCERY STORES AND SUPERMARKETS
RESIDENTIAL RENTAL APARTMENTS
SHOPPING MALLS AND STRIP CENTERS
Bonus Depreciation: Tax Cuts and Jobs Act (TCJA)
The Tax Cuts and Jobs Act (TCJA), signed into law on December 22, 2017, is the largest overhaul of the tax code since the Tax Reform Act of 1986. The changes related to the tax treatment of building construction, building improvements, and building acquisition costs provide taxpayers with new opportunities to maximize tax benefits through a cost segregation study.
Bonus Depreciation — TCJA allows qualifying assets with tax recovery period of 20 years or less, new and used, to now qualify for the 100% bonus depreciation provision in the assets’ first year of service. While the term “bonus” is often misunderstood as an added benefit beyond the asset’s depreciable tax base, it is a boost to accelerate the tax depreciation in the first year the asset is placed in service. In prior years, bonus depreciation existed but only for new construction and some acquired assets (at 50% in 2017). Therefore, tangible personal property, either newly acquired or constructed, will qualify for bonus depreciation.
How it benefits you?
The shorter depreciation lives accelerate depreciation on the property, which reduces the tax burden in the early years of an investment, thus accelerating the cash flows associated with higher tax deductions and boosting ROI.
Cost segregation does not eliminate taxes owed but can defer them until later years, resulting in significant savings today. The after-tax savings are commonly as much as 20 to 50 times the price of the cost segregation study. The steps required to accomplish this include a detailed identification of a facility's components, appropriate classification of each component or property unit for tax purposes, and determination of the cost of each unit.
The MRV Consulting Methodology
Our team of designated cost segregation consultants, appraisers, and engineers analyze the assets, identify the portions that can be treated as personal property, and properly allocate actual capital expenditures, including new and renovation costs, into their appropriate cost recovery periods.
A cost segregation analysis performed by MRV Consulting identifies and segregates assets that qualify as tangible personal property, other tangible property, land improvements, and real property.