Cost Segregation Studies

Any individual or company which has acquired, built, or renovated a building within the past 10 years likely has significant opportunity to improve cash flow and lower tax rates through an engineering-based cost segregation study. These studies “carve out” the personal property costs associated with a building project and reclassify them to the appropriate shorter tax life – often 5, 7 or 15 years instead of the 39 years or 27.5 years for nonresidential or residential rental real property, respectively, used to depreciate real property.

The Tax Cuts and Jobs Act (TCJA) of 2017 created historic opportunities. Now, most taxpayers have the ability to receive 100% bonus depreciation on both new and used property. For property acquired after September 27, 2017 and placed in service before 2023, 100% bonus will apply for most taxpayers. However, for property acquired before September 28, 2017, the prior bonus rules apply of 50% for 2017, 40% of 2018, and 30% for 2019 still apply.

In 2013, the value of cost segregation studies increased with the IRS’ release of the long-awaited final regulations (T.D. 9636) on Sept. 13, 2013, regarding the deductibility or required capitalization of maintenance, repair, and replacement costs for tangible property and the re-proposed regulations regarding partial dispositions of tangible property to receive additional current-year write-offs. The combination of the 100% bonus rules along with the tangible property regulations provide taxpayers with significant benefits.

In addition to the potential accelerated depreciation benefits, cost segregation studies can provide the detailed analysis necessary to break out the multiple building systems, and tangible property costs to help facilitate future capitalization versus expensing decisions, and determination of values for dispositions.

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Practice Leader

Bruce Stubbs, JD, LLM
Bruce Stubbs is a nationally recognized presenter and masters-level tax attorney with 20 years’ focus on research and development tax credits, cost segregation studies and tangible asset repair regulations (“repair regs”) related to capitalization versus expensing.