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Tax & Business

Cost Segregation

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As a top-ranking accounting and consulting firm, Marcum offers over 50 years of experience and the support of over 1,100 employees. With its broad expertise, the Firm has established the Marcum's Cost Segregation Group as a team of professionals who specifically focus on helping clients realize the benefits related to cost segregation.

The Group is uniquely positioned to guide commercial and residential property owners and lessees through the recent tax rulings that have opened the door to significant savings.

Cost Segregation is a process through which particular portions of real estate (owned or leased) can be reclassified for depreciation purposes. Specifically, as allowed by recent court cases and authoritative pronouncements, certain portions of buildings and surrounding real assets can be depreciated over shorter periods of time than the traditional periods of 27.5 or 39 years.

While the total deduction over the 27.5 or 39 years does not change, the timing of the deductions does. Various components of a building, such as wiring, plumbing, concrete and HVAC may be segregated. This means they can be written off more quickly – which can mean a substantial increase in cash flow.

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Cost Segregation Studies: The Key to Savings

A Cost Segregation Study (CSS) is a tool used to realize the benefits of Cost Segregation under the tax law. Thus, a CSS is the process of producing various analyses and reports (prepared by qualified engineers, appraisers and financial advisors) that provide the support and basis for accelerating periods of depreciation.

Benefits of a cost segregation study include:

  • Increased cash flow.
  • Increased depreciation in earlier years.
  • Taxpayers can receive an extra 50% depreciation deduction on certain new "qualifying" assets.
  • Allows for future write-offs when structural components are replaced.
  • Creates losses so you can carry-back if needed and carry-forward when applicable.
  • Amended tax returns do not need to be filed as the IRS has an automatic change procedure that allows taxpayers to file forms with their current tax returns and realize the benefit in one year.
  • The cost of the analysis is relatively in expensive compared to the ultimate savings.

What is eligible?

Types of properties that may benefit from a Cost Segregation Study include, but are not limited to:

  • Apartment buildings.
  • Auto dealerships, service centers.
  • Casinos.
  • Banks.
  • Daycare centers.
  • Distribution centers.
  • Gas stations.
  • Hospitals.
  • Hotels.
  • Manufacturing facilities.
  • Nursing homes.
  • Office buildings.
  • Restaurants.
  • Retail stores & plazas.
  • Ships, ocean cargo vessels.
  • Truck terminals.
  • Warehouses.
 

Example

Without a Cost Segregation Study

A building acquired for $1.9M depreciated over a 39-year life will have an annual tax deduction of approximately $48,000. Over a four-year period, the total deduction would amount to approximately $192,000.

With a Cost Segregation Study

With a Cost Segregation Study, qualified components of the building would be reclassified from 39 years to 3-, 5-, 7-, and 15-year lives resulting in a revised depreciation deduction of $488,000 over the same four years. Over the life of the building, the cash flow savings as a result of a CSS would be approximately $124,000. The savings is computed by applying a 44% tax rate over the additional accelerated depreciation of $296,000, utilizing in this case, an 8% discount rate.

 

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Cost Segregation Brochure

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Robert Babek, Office Managing Partner, Tax & Business

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Tax & Business
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