Cost Segregation

Cost segregation is the Internal Revenue Service’s (IRS) approved method of reclassifying your commercial building from real property to personal property and, in the process, allowing assets to be depreciated on a short-term schedule, instead of the traditional long-term depreciation schedule of real property. Imagine how this could affect your manufacturing business. Current taxable income could be reduced greatly while your cash flow would increase by 5 to 8 percent of your building’s cost.

This can translate to some hefty benefits, such as increased cash flow, reduced tax liability, deferred taxes, and reclaimed missed depreciation deductions from prior years. You can do all of this without amending previous tax returns.

When Cost Segregation Is Required

According to the IRS, cost segregation is required when allocating lump sum costs to specific asset classifications. The IRS will require an engineering-based site inspection, cost records, and technical documentation to make the determination.

Because cost segregation evolved from years of litigation and rulings rather than from an IRS code section or succinct ruling, the legal basis underlying cost segregation can be confusing. It is important for you to do your due diligence to see whether your manufacturing property would qualify. Talking with a tax accountant regarding your federal taxes is the best way to start. You may want to consult an appraiser and valuation expert.

How Accountants Can Help

Accountants play a central role in the cost segregation process. They can recommend techniques and review and implement the findings of the engineering report, which segregates assets into four categories:

• Personal property
• Land
• Land improvements
• Buildings

By segregating these property costs, your manufacturing company cash flow has a wider reach. Tax savings can be realized from accelerated depreciation deductions and potentially easier property write-offs. Use cash segregation when constructing your manufacturing facility or buying an existing facility or, in certain circumstances, years after disposing of one, as long as the year of disposition is open under the statute of limitations.

A lot of information is at stake when considering cost segregation for your manufacturing company. Contact our financial and tax experts to help you review this process today.

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