Reducing the Cost of Your Construction Projects
The Need for Cost Segregation Studies
The formula for success in any company is determined by two factors, maximizing revenues and minimizing expenses thereby increasing bottom line.
A cost segregation study is an extremely useful tool that can help a company minimize its federal tax liability by acceleration or optimization of depreciation on existing, new, renovated, or proposed construction. Acceleration of depreciation deductions for long-lived (39-year) property to shorter periods of 15, 7 and 5 years can produce a sizeable tax benefit. Dependent upon property type and internal bookkeeping methods, the present value benefit to the taxpayer can approximate 20% or more of the reclassified assets. For example, a $1 million-dollar reclassification of real property to personal property could result in a present value benefit of $200,000 or more to the taxpayer.
Benefits
The primary benefit that occurs from a successful cost segregation analysis is the increased annual cash flows that is the result of accelerating depreciation for Federal Tax purposes. This increase in annual cash flows may be used in any number of ways limited only by the client’s internal needs.
Should a Company Undertake a Cost Segregation Study on their Own?
While the premise of Cost Segregation in and of itself is not a complicated concept, the process of maximizing potential savings while minimizing the risk of reversal upon audit takes experience. Our seasoned professionals at Pyramid Consulting Group, LLC, are up to date and clearly understand existing Internal Revenue Service Codes, significant Revenue Rulings and case law that serve to minimize client risk while maximizing benefits.
Significant understatement of depreciation is common when done in-house. The skill sets of taxpayer personnel tend to be more specialized. Therefore, tax personnel that may be extremely competent in tax law and regulations tend to be unfamiliar with the intricacies of extracting eligible items of personal property from construction plans and specifications. Conversely, in-house engineering and construction personnel, while technically competent with regard to construction expertise, tend to lack the tax expertise necessary to interpret regulatory definitions, revenue rulings and applicable case law.
Depending upon property type, we have found that taxpayers often miss anywhere from 10% to 70% of eligible reclassification costs.
The following is taken from an Internal Revenue Service letter ruling1.
Pyramid Consulting Group, LLC 