Cost Segregation

Engineering-based analysis of all capital expenditures associated with a newly constructed, renovated, or recently purchased property designed to optimize tax depreciable positions related to construction costs.

 

Cost Segregation Services

Cost segregation studies can increase cash flows, reduce tax liability, and uncover missed deductions. With the recent Tax Cuts and Jobs Act (“TCJA”) of 2017, the benefits are more favorable than ever. 

 

A cost segregation study is a tax incentive product, based on the principles of engineering, that owners, investors, and tenants of real estate can use to improve their tax positions. These studies involve a detailed review of a corporation’s real property assets to identify if portions of the building’s costs can be treated as personal property.  By segregating personal property from the building itself, these studies will be able to reclassify costs that would have been depreciated over a 39-year period for Tax purposes to asset costs that will be depreciated over 15, 10, 7 or 5-year period, or perhaps even expensed immediately. 

 

The TCJA made cost segregation studies more valuable by updating criteria surrounding Bonus depreciation, which allows individuals and corporations to immediately deduct personal property costs in the first year they are placed in service for tax purposes.  

 

Specifically, the TCJA made used property eligible for bonus depreciation for the first time in history and increased the bonus percentage from 50 percent to 100 percent through the tax year 2022. As a result, performing a cost segregation study now will have a more significant impact when managing taxable income.   Any assets that are removed from the real property classification and placed into the personal property classification may now be eligible for immediate expensing in the first-year costs are incurred. 

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Consider the following example: A taxpayer incurs costs to either construct, remodel, or acquire a building worth $10,000,000. After performing a cost segregation study, the taxpayer is eligible to reclassify 25 percent of those costs to be personal property. By assigning these assets a shorter tax depreciable life, they can apply bonus depreciation and write off $2,500,000 of that $10,000,000 construction budget in Year 1. A taxpayer with a 21% tax rate would save $525,000 in taxes or 5.25% of the original construction costs in the first year. 

Calculation of Section 48 and Section 30C Green Energy Tax Credits included in all Cost Segregation Projects.  Please see the Green Energy Tax Credit section below for more details.

Tax Depreciation Optimization

Many companies classify fixed assets in incorrect asset classes for tax purposes in their fixed asset accounting systems, resulting in missed depreciation deductions or improperly depreciated assets.  Ensuring that your company gets the most accelerated depreciation deductions allowable under the current tax laws can be complicated and time-consuming for many reasons:

 

  • Real Estate construction assets are generally accounted for based on limited supporting invoice detail.

  • Assets are capitalized and recorded in a corporation’s tax fixed asset ledger with little oversight from the Tax department due to time and resource limitations. 

  • Acquired business assets are often pooled within the fixed asset systems, leading to asset tracking issues.

  • Major ERP systems struggle to provide accurate tax reporting features due to the ever-changing tax laws affecting asset capitalization.  This often leads to tax accounting and cost capitalization for tax fixed assets to be handled offline without system support.

 

Centiv Fixed Asset specialists can perform a comprehensive review of existing federal and state tax fixed asset ledgers to identify opportunities to catch up “missed” depreciation deductions from prior years.  Assets placed in service in earlier years can be optimized through an adjustment of depreciable lives, methods, and conventions.

 

Depreciation optimization results in additional deductions that generate significant cash flow and reduce tax liability at both the federal and state levels in the current tax year.  “Missed” depreciation can be captured in the current tax year via Section 481(a) adjustment, utilizing an automatic Form 3115, Application for Change in Accounting Method – No need to amend prior tax returns!

 

Depreciation Optimization studies will put your company in the most advantageous tax position for all currently capitalized assets.  To ensure all prospective assets are appropriately capitalized, Centiv offers Tax Depreciation Outsourcing services.

Tax Depreciation Outsourcing 

In today’s complex tax environment, corporate tax departments often have a difficult time keeping up with the demand of calculating depreciation for federal and state compliance.  In addition to multiple federal and state depreciation reporting requirements, companies are challenged by the ever-changing tax code, mergers & acquisitions, or lack of support in ERP systems.  As a result, many corporate tax departments have little confidence in their tax depreciation calculations.  This often leads to tax accounting and cost capitalization for tax fixed assets to be handled offline without ERP system support (“top-side schedules”).

Additionally, many companies classify fixed assets in incorrect asset classes for tax purposes in their fixed asset accounting systems, resulting in missed depreciation deductions, improperly depreciated assets, or potential IRS audit exposure.  Ensure your company gets the most accelerated depreciation deductions allowable under the tax laws by having seasoned tax fixed asset specialists maintain your tax fixed asset portfolio.

 

Consider Centiv Fixed Asset Specialists for outsourcing some or all your Federal and State Tax depreciation function for fixed asset tracking, depreciation calculations, and production of tax reports (e.g., Form 4562, Form 4797). 

Benefits of Outsourcing:

  • Enable tax department resources to focus on other value-added activities

  • Identification of areas to improve the capitalization process or optimize fixed asset positions on an annual basis

  • Review and validation of your company’s asset data each period

  • Support for short period calculations, state decoupling, and ADS depreciation calculations 

Tangible Property Regulations Review

The IRS and Treasury Department released final Tangible Property Regulations or Repair Regulations in September 2013 regarding the deduction and capitalization of tangible property.  These regulations generally apply to all taxpayers who improve, replace, or acquire depreciable property.   

 

Many companies capitalize costs for tax purposes utilizing procedures outlined with financial accounting concepts (“Book = Tax”), which tend to over-capitalize costs when compared to favorable tax accounting concepts outlined in the Repair Regulations.    

 

Centiv Fixed Asset specialists have an in-depth understanding of the various tax law and industry-specific rulings that govern the capitalization requirements outlined in the Repair Regulations. With this expertise, Centiv can perform a Tangible Property Regulations Review on current policies and fixed asset ledgers to identify current or prior period repair and maintenance deductions.

 

Identified repair and maintenance deductions can generate significant cash flow and reduce federal tax liability in the current tax year.  “Missed” repair deductions can be captured in the current tax year via Section 481(a) adjustment, utilizing an automatic Form 3115, Application for Change in Accounting Method – No need to amend prior tax returns!

Green Energy Tax Credits

Green Energy Tax Credits (“GETC”) have recently been extended and continue to gain bipartisan support from lawmakers.  GNTCs are powerful tax planning tools that provide benefits to both the developer/contractor as well as the owner of the property.  Centiv specialists can calculate and claim the three most common GETCs, each explained below. 

The GETC which typically provides the most benefit is the Section 45L Energy Efficient Home Tax Credit.  This credit provides $2,000 per dwelling (commonly referred to as “per door” in multifamily housing facilities) in a qualified building.  To qualify a building must meet certain energy efficiency standards as outlined by the IRS.  Centiv specialist will review building blueprints prior to any formal engagement at no cost to determine a building’s eligibility.  This product provides additional benefits when related to low-income housing.

The Section 48 Investment Tax Credit (commonly referred to as the “Solar Tax Credit”) is a credit related to solar PV panels and related inverters, racking, balance-of-system equipment, any other ancillary equipment, as well as sales & use tax.  Centiv specialists will calculate the maximum credit as well as complete and file the necessary forms to claim the credit. 

The final GETC is the Section 30C Alternative Fuel Vehicle Refueling Property Credit.  Similar to the solar tax credit, this credit is calculated using the basis of the alternative fueling stations (e.g., electric charging stations).  This credit can be maximized by ensuring all costs related to the installation and function of the property is included in the basis for the credit.  Centiv specialist will ensure credit is maximized, then complete and file all necessary forms to claim the credit.

As mentioned in the Cost Segregation section above, Section 48 and Section 30C credits are included with cost segregation services.