What is Cost Segregation?
Cost Segregation is an IRS-allowed process of identifying personal property assets that often get buried or lumped together within the Real Property asset category for tax depreciation purposes.
By undergoing a cost segregation study, these personal property assets are classified to the shortest possible depreciable lives to enable the real estate owner to maximize and accelerate tax deductions.
The immediate result is to lower or eliminate taxable income in the early years of property ownership. These tax savings generate cash flow allowing the owner to reinvest in business operations that produce gross profit, further improve their property, pay down their mortgage or other liabilities or to spend on themselves.
Will those tax deductions hold up to IRS scrutiny?
The IRS has published Audit Guidelines that clearly spell out the standards for a quality Cost Segregation Study. The process employed by Dynamic meets or exceeds those standards.
Benefits of a Cost Segregation Study:
Reductions in current tax liability through the accelerated depreciation associated with shorter depreciable lives, bonus depreciation and Section 179 deductions.
Reclaiming “lost” tax deductions:
The difference between the actual depreciation deductions you took in prior years and the depreciation you were entitled to (determined by the Cost Segregation Study) can be taken against the income you report in the year of the Study. It’s called a “Section 481” adjustment.
Higher tax deductions in early years of property ownership mean a reduced tax liability during those years. Taxes on your business income are deferred to later years.
Increase in Cash Flow:
Since you won’t be spending as much money to pay your income tax bill, you will have more cash to fund business operations, pay down liabilities or spend as you see fit.
Time Value of Money:
A dollar today is worth more than a dollar tomorrow. Higher tax deductions put money in your hands today.
Taking abandonment losses:
The Study will associate costs with assets that are likely to be replaced before the expiration of their tax-defined useful lives so their un-depreciated balance can be written off in the year of replacement (Ex. Roof, awnings, etc.)