The Who, What, When, Where, Why, and How of Cost Segregation Studies
I had a college professor who always said, “To be a good accountant, you need to understand the tax code. To be a great accountant, you need to think like a journalist”. In other words, a successful accountant needs to both understand the tax law and be able to communicate this information to his or her clients.
In keeping with this theme, I have broken down the topic of Cost Segregation Studies to its primary journalistic components.
WHAT? A cost segregation study is an IRS approved approach that allows a taxpayer to identify, segregate, and reclassify assets that are currently classified as real property to shorter depreciable lives for federal and state income tax purposes.
WHY? The primary benefit of performing a cost segregation study is an immediate increase in cash flow due to reductions in federal and state tax liabilities achieved from accelerated depreciation.
HOW? Due to the complexities of cost segregation studies, the IRS mandates that the study be performed by professionals from both the engineering and accounting disciplines.
WHO? Cost segregation studies are most commonly utilized during new construction, renovations, or acquisitions. In most situations, buildings constructed or purchased since 1994 have the best potential for tax savings.
WHEN? The best time to begin a cost segregation study is when plans are drafted to purchase, build, remodel, or expand a building. If possible, the study should be completed in the year when the building is placed in service. However, cost segregation studies can be performed on properties that have been placed in service in prior years.