Have you just built a new facility? Are you currently constructing a new one? Have you recently expanded? If you answered “yes” to any of these questions, then I have one more for you: Did you take advantage of cost segregation?
Cost segregation lets you optimize cash flow and lower your tax burden. The tax strategy allows you to depreciate discrete construction costs that are directly related to manufacturing processes in 5, 7 or 15 years rather than lumping them in with the facility’s 27.5- or 39-year tax life.
Mitchell Lardner says many small- to mid-sized business owners may be unaware of this tool. Mr. Lardner is director of business development for KBKG, a firm that specializes in cost segregation studies. Cost segregation studies, which are performed by companies that have tax and engineering expertise, identify construction costs that can be depreciated faster. Perhaps most importantly, the studies are structured in such a way as to stand up to IRS scrutiny.
Mr. Lardner says as much as 60 percent of project-related construction costs for manufacturing facilities often can be reclassified. If you have at least $1 million of depreciable costs, then a study is worth investigating, he believes.
Construction elements that support manufacturing equipment can typically be depreciated faster. Examples include electrical and pneumatic runs to machines; thicker concrete slabs; scrap conveyor wells; and dedicated HVAC systems for rooms that need precise environmental control.
Companies such as KBKG begin with basic questions to determine if a you are a good candidate for a study. A calculator on KBKG’s Web site (www.kbkg.com) allows you to get a rough estimate of the possible savings on your own. If those results look promising, you can fill out a more detailed questionnaire so the company can prepare a new depreciation schedule and demonstrate your potential tax savings.
If you and your CPA decide to move forward with the formal study, it then becomes an engineering project. An engineer will perform a site visit and also obtain construction drawings and any other construction cost information. The engineer will then create a study that breaks out the sub-assets that qualify for faster depreciation. Your CPA can then create a new tax depreciation schedule for your property.
If your newly constructed building is placed in service in the current year, then the tax schedule will be optimized from day one. For older buildings, you can restate the depreciation of the accelerated property of prior years and pull it into the current year, reducing your current-year tax liabilities and immediately boosting your cash flow. Who wouldn’t want that?