Many executives are curious about cost segregation studies, but are unsure how they work, or even if their business would benefit from one.
Basically, a cost segregation study looks at specific components of your business’ facilities to find which components can be separated out and depreciated over shorter time periods therefore speeding up the related tax deductions. The true value of a cost segregation study is realized by looking at the time value of those tax deductions – being able to take the related tax deductions sooner provides more value for the taxpayer.
The benefit of a cost segregation study is that you would get more deductions in the first five, seven or 15 years than you would if you didn’t do one. Without one, you would get more deductions between years 15 to 39. When you’re looking at value of money over time, you’ve actually lost out without the cost segregation study.
What does a cost segregation study entail?
A cost segregation study is the review of a building by a qualified individual (engineer) to identify items qualifying for quicker depreciation. These studies are a combination of reviewing the blueprints and the cost report (for constructed buildings) or appraisal report (for purchased buildings) to evidence the building make-up and a visiting the actual building to see if there are any other items that can be split out even though that’s not clear in the source documents.