March 20, 2018
by Kevin Harris
Thanks to the Tax Cuts and Jobs Act of 2017, taxpayers in several categories will enjoy lower income tax rates beginning this year. While individual filers will experience modest tax rate reductions on their personal returns for 2018, rates for corporate income tax were reduced significantly to a flat rate of 21%. Previously, the higher rate was approximately 35%.
Cost segregations often prove beneficial to owners of real property. Coupled with the 2018 tax rate reduction, however, tax benefits realized by accelerating deductions into 2017 through the process of cost segregation are notably significant.
What is Cost Segregation?
Cost segregation is an IRS-approved process of separating the costs of tangible personal property, other tangible property, indirect costs and land improvements from building and improvement costs for income tax purposes. Segregated costs are generally deducted over a five-year, seven-year and 15-year recovery period, instead of a 27- or 39-year recovery period. Personal property assets found in a cost segregation study usually include items that are affixed to the building but do not relate to the overall operation and maintenance of the building—specifically, a building’s nonstructural elements, exterior land improvements and indirect construction costs. Accelerated depreciation methods are also permitted for personal property, but not for real property.
Increasing cash flow and accelerating tax deductions in the near term is achievable by reclassifying certain components of real property as personal property or land improvements. When real property has been depreciated for a number of years prior to the cost segregation being performed, this accelerated deduction benefit is even greater. Why? Depreciation that could have been taken in prior years can now be caught up and taken all at once.
Most cost segregations before 2018 were performed primarily to capitalize on the time value of money associated with receiving a tax deduction and the related cash flow benefit earlier than would have been realized otherwise. Now, by having a cost segregation performed before filing income tax returns for 2017, the permanent tax savings that can be achieved enhances this benefit in a big way.
What to Do?
If you have constructed or purchased a building in the last five years, it’s worth consulting with an experienced tax professional to determine whether a cost segregation study could potentially be beneficial. A cost segregation study allows a taxpayer to write off building components more quickly and realize tax benefits more quickly. When prepared by a qualified practitioner, a cost segregation study can provide an immediate increase in cash flow, and it can deliver concrete value for years – even decades into the future – by supporting the write-off of the remaining cost basis of the replaced building component.
The 2017 filing deadline is fast approaching, so the window to take steps toward leveraging these deductions at the higher 2017 income tax rates is closing fast.
Note: This content is accurate as of the date published above and is subject to change. Please seek professional advice before acting on any matter contained in this article.