With the rebound in the economy, a large number of small business owners have taken on commercial property ownership. There can be some distinct advantages to owning a building vs. leasing, but either way, if you or your client have spent money on the space you occupy, there may be some tax advantages that might be missing.
Cost segregation is an amazing tool for owners of commercial property, yet many building owners do not know of its existence. The tax professional community has been offering cost segregation studies to their clients for over a decade for their clients who own buildings with a cost basis of $250,000 and above. Cost segregation rules provide for a look-back study, so buildings that have been in service for years still qualify. These studies, which are the support documents for this accelerated method of depreciation, are encouraged by the AICPA and Journal of Accountancy.
Dovetailing with the new 2014 Tangible Property Regulations, a cost segregation study provides building owners with a building system cost breakdown which allows tax professionals the ability to make bullet-proof capital vs. expense decisions moving forward. The good news is, if you are correctly interpreting these regulations, tax deductions should be greater than in the past.
Commercial and investment residential buildings are an excellent fit for cost segregation. The tax savings from cost segregation can positively impact businesses immediately. Building owners routinely see $50,000-$100,000 in immediate income tax savings for every one million dollars in building cost basis. This is whether they own or lease. Medical facilities, apartments, hotels and manufacturing are amongst the highest return on investment studies for cost segregation. Of the buildings surveyed, most include upgrades like specialty electrical, which supports MRI, X-ray equipment, and manufacturing lines, Kevlar or lead in walls, hi-end, upgraded finishes like tile, molding, decorative lighting the building owner uses to set themselves apart from their competition. All of these items are moved into shorter depreciable class life categories and will enhance the result of the cost segregation study. Whether you, or someone with whom you associate, are facing a large tax bill and have depreciable real estate, this is the year to look into these very important savings opportunities.