Coal, stone and gravel, wind and oil and gas continue to be major growth industries in Pennsylvania, Ohio and West Virginia, as evidenced by the acquisition and/or construction of new facilities and buildings. The benefits of a cost segregation study have expanded and provide businesses an opportunity to reduce and minimize their current federal and state income tax liability, as a result of the Internal Revenue Service’s issuance of the final tangible asset regulations in September 2013.
A cost segregation study reduces a business’ overall tax liability and increases cash flow by accelerating depreciation. This process carves out shorter-lived assets, which qualify for the 5-, 7- or 15-year depreciation provision embedded in a building’s construction or acquisition costs (generally depreciated over 39 years). The tax savings hidden in buildings and real estate include:
- New buildings presently under construction.
- Renovation, remodeling, restoration or expansion of existing buildings.
- The purchase of an existing building and related land improvements.
- Office/facility leasehold improvements and “fit outs.”
- Post-1986 real estate construction, building acquisition or improvements, where no cost segregation study was performed (even though the statute of limitations previously closed on the property construction/acquisition year).
In addition to the benefits of a traditional cost segregation study, the new tangible asset regulations have changed the methodology and have expanded the purpose and benefits of the study. An engineer-based study will not only analyze the “personal property” (5- and 7-year property) but also expand on the “real property” (15- and 39-year property). This study will identify assets for future repairs and remodeling, and provide the detail to obtain potential future deductions. For example, the cost segregation study will provide the cost basis of an existing roof, which can be deducted/expensed when the roof is replaced.
The following are the types of studies that can be performed to obtain the benefits of the new tangible regulations:
- Cost Segregation – An analysis of all building construction and improvement costs that properly classifies the costs into the correct recovery periods for depreciation purposes. It generates a time-value-of-money benefit for taxpayers.
- Asset Management – This study provides a greater level of pricing detail, particularly with the 27.5/39-year assets (a.k.a. real property). The purpose for this detail is to assist businesses in writing off the remaining basis of assets being replaced or retired. It will identify the assets for future dispositions, remodeling and repairs.
- UoP – Unit of Property is a newly created term for the repair versus a capital expenditure. It is a required process that allows a business to determine if an expenditure at a property is required to be capitalized or can be expensed. The UoP details the cost of a building’s nine main components. This list tracks the cost changes over time within each of these nine areas.
- ReCap – This study provides the cost detail beyond that of standard cost segregation study with the express purpose of defining the cost of assets that have been replaced in the past so that the business can expense the remaining basis of these assets. It also provides a review of past history for assets that have been capitalized, which could have been expensed.
As a result of the new tangible asset regulations, a cost segregation study in conjunction with an asset management study, a unit-of-property study and/or a recap study can result in significant cash flow savings.
To receive a complimentary analysis of your property and to determine if you or your business can obtain the cash flow benefits of a cost segregation study and the new regulations, please complete the following brief information request form or contact a member of the Energy Team.
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This advice is not intended or written to be used for, and it cannot be used for, the purpose of avoiding any federal tax penalties that may be imposed, or for promoting, marketing or recommending to another person, any tax related matter.