How Smaller Construction Projects Can Reduce Tax Liability with a Mini Cost Segregation Study

Cost segregation studies can significantly reduce federal and state tax liability for construction projects by accelerating the timing of depreciation deductions. While a full blown cost segregation study may not be worth the price tag for smaller construction projects, there is another option these projects can take advantage of.

Mini Cost Segregation Studies for Smaller Projects

Building, renovating or remodeling a portion of a building includes costs that are not considered repairs or maintenance, and must be capitalized and depreciated. The cost of these projects are typically in the tens or hundreds of thousands of dollars, and would not necessarily warrant an in depth cost segregation study.

In those cases, instead of throwing up your hands and giving into the traditional 39 year straight-line depreciation method, we can help perform a “mini” cost segregation study.

Information Needed for a Mini Cost Segregation Study

How do we go about doing this?  We would ask for information such as:

  • A contractor’s detailed application for payment, commonly called the schedule of values
  • Contractor’s change orders
  • Owner’s incurred costs such as architecture and engineering fees, and any other cost detail required to be capitalized
  • A complete set of plans and copies of the specifications is also helpful

How Mini Cost Segregation Studies Work

After analyzing the costs and details available, we would classify assets that are easily identifiable into the proper class lives.  For example, we can identify if certain property can be depreciated over 5 or 7 years and break out those expenditures of the total project cost.  Depreciable land improvements can also be determined.

Our analysis would conclude with a total capitalized cost breakdown between proper asset lives for your project. The invoices, schedule of values and other information used in our evaluation would become part of your depreciation records.

Cost segregation studies help lower the current tax liability of what is often your largest asset through the acceleration of the tax depreciation deduction. Contact an Anders advisor to learn how your real estate or construction investments can benefit from a qualified cost segregation study.