By Peggy J. Baugh, CPA

Could there be cash hidden in your walls? If you have not considered the implications of a cost segregation study for any building constructed, purchased, or renovated and put into service as far back as January 1, 1987 – read on. We’ll explain how to extract cash from your facilities using an IRS approved methodology that can defer your taxes and increase your current cash flow.

Simply put, a cost segregation study is a strategic tax process that allows you to increase your cash flow by increasing depreciation tax savings from your existing or newly constructed facilities. By carving out shorter-lived assets from new or existing facilities you can classify property once lumped into a 39-year depreciation category to 5, 7, and 15-year improvements. Certain fixtures and other property that relates to equipment or operations have a shorter life, and therefore, should be separately depreciated in a shorter period of time. Utilizing this process allows greater levels of depreciation earlier on in the life of the building, resulting in deferred taxes and increased current cash flow.

A team of experienced accountants, architects and engineers should work together to properly classify all available short-life property in your facility. This is not a process that is taken lightly – no “guestimates” are used. An accurate and detailed study includes the review of invoices, blueprints, and building plans. IRS statutes specifically allow for the classification/re-classification and substantial case law is on the books which supports each classification. However, the key is to engage a qualified team of professionals who understand the engineering and financial implications and will properly document the cost segregation study.

Why is it so attractive to have done? It pays for itself! Oftentimes, the first-year cash flow increase is more than the cost of preparing the study – and that is just in the first year. A cost segregation study is also attractive because the savings continue for many years, not just the first year. In addition, you can file for a change of accounting method and claim your understated depreciation as far back as 1987.

The following example reviews just how a cost segregation study can increase depreciation, thereby increasing tax savings, and cash flow.

Sample Savings Example:

• New facility; $3.5 million construction project
• Identified short-life property; $1.02 million
• Total income tax savings; $125,000 in first five years
• Assumes 35% tax rate and 8% present value rate

As you can see, the cash flow increase is significant in the first five years of ownership, likely when you need that cash the most. This example is not a rarity, but an average return. We’ve seen many studies produce a greater percent of short-life property particularly in the health care, hotel, and specialty manufacturing industries.

A cost-segregation study makes sense when the investment is a minimum of $750,000. Some industries, by nature, have higher percentages of short-life property in the average construction than others. These industries can realize an even greater benefit than in the example listed above. Overall, the following facilities can be excellent candidates for a cost-segregation study:

• Health Care Facilities
• Manufacturing Facilities
• Hotel Facilities
• Restaurant Facilities
• Office Buildings
• Residential Buildings

We encourage you to find the cash hidden in your walls by investigating how a cost segregation study may be able to help you.