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Clayton & McKervey shareholder to business owners: “Look at the advantages of doing a cost segregation study before purchasing your building”
Clayton & McKervey Posted 08/16/2019
Take the tax benefits of owning real estate to the next level when armed with strategic information
Southfield, Mich. — James Biehl, CPA, a shareholder with Clayton & McKervey, a certified public accounting and business advisory firm helping growth-driven companies compete in the global marketplace, recognizes that while many business owners decide to buy the buildings in which they operate to bolster equity in their investments, there is an additional approach they should consider which could maximize their future tax benefits—the cost segregation study. This strategic process identifies and separates tangible personal property components and land improvement costs from the lump-sum building cost to enable the building owner to depreciate those costs over a shorter life (such as five, seven or 15 years) instead of using the traditional 39-year straight-line depreciation method.
“Many business owners base their decision to purchase rather than lease a building by looking at the current real estate market and prices, rental costs and interest rates,” Biehl said. “But why stop the analysis there? By completing a cost segregation study, business owners can take the benefit of real estate ownership ‘to the next level’ by squeezing out future tax benefits now.”
According to Biehl, the 39-year straight-line depreciation method is punitive to business owners - especially because most commercial mortgages require a 20-year repayment, which results in the building cash flow and the tax attributes not being synchronized. Instead, there are distinct advantages to completing a cost segregation study:
1.) The focus of the time-value of money: The study’s focus is on the time-value of money with the current deductions and related current tax savings worth significantly more today than in the future. The time-value of the deduction is accelerated further due to recent tax legislation that has extended and expanded the IRC section 179 expense allowance ($1 million in tax years beginning in 2018) and bonus depreciation (up to 100% on certain qualifying assets).
2.) Can be conducted on previously purchased buildings: Cost segregation studies can analyze existing buildings that were purchased years prior and allow for “catch-up” by taking a current year cumulative depreciation deduction on the difference between what could have been taken as deprecation if the assets were classified to a shorter life, versus the actual depreciation taken utilizing the default 39-year straight-line method.
3.) The long-term benefit outweighs up-front costs: There is an expense to conduct the cost segregation study, and there may be some additional tax preparation time should “catch-up” on the deduction be required. However, any preliminary analysis (usually done for free) factors in these costs when computing the total potential benefit of doing the study, and the up-front tax benefit on the time value of money can be significant, outweighing any cost related to doing the study.
4.) Prior compliance with recent repair regulations: A cost segregation study can be expanded to determine prior compliance with the recent repair regulations for the cost of structural components and sub-components of a building for which a retirement loss may be claimed when improvements are made to the building. Through a partial disposition election, taxpayers have the opportunity to claim a retirement loss on the un-depreciated part of any retired portion of a building, such as the roof, windows, doors and lighting.
After factoring in these advantages, companies may conclude that a cost segregation study is a strategic approach they would like to explore. Biehl urges business owners to do their homework and consult with the appropriate tax and accounting specialists who are well-versed in commercial property ownership and valuation of real estate.
About Clayton & McKervey
Clayton & McKervey is a full-service CPA firm helping middle-market entrepreneurial companies compete in the global marketplace. The firm is headquartered in metro Detroit and services clients throughout the world.