Cost segregation is an engineering-based study that involves identifying and assigning a value to all the sub-components of a building like the electrical wiring, flooring, specialty plumbing and many more. Once identified and documented in a cost segregation report, IRS rules allows various components to be reclassified out of the standard 39 year depreciation schedule for commercial buildings (or 27.5 years for apartment buildings) into a shorter depreciation period of 5 years, 7 years, or 15 years. There are multiple benefits one can expect from this method. The most prominent is the immediate increase in cash flow based on the deferral of taxes. In addition, identifying the value of various components will allow building owners to write off components in the future when a particular asset (ex. roof) is replaced. There are many other inherent benefits to using this method too which homeowners can realize once they begin to understand how the cost segregation study works.
The important thing to note here is that since the IRS recommends an engineering-based approach to properly document and justify the accelerated depreciation, the process will require a cost segregation specialist. Property owners or CPA firms seeking to have a cost segregation study completed for their clients must seek out a cost segregation specialist with a background in engineering or construction management. In addition, it would be prudent to ensure that the firm completing the cost segregation study will also include audit defense as part of their service in case of any IRS scrutiny.
Those who are not quite aware of the concept and want to learn more about cost segregation study can visit the following link to watch a brief 3 minute video designed to educate commercial property owners on how the cost segregation study works. http://acusolutions.net/cost-recovery-services/cost-segregation-study/
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