Cornerstone Business Services LLC

Cost Segregation Studies Information

What Is a Cost Segregation Study?

A cost segregation study is a comprehensive analysis that carefully breaks down construction and/or acquisition costs of a new or existing building, and allocates them to specific categories-maximizing accelerated depreciation for qualifying building components.

How Does It Work?

A cost segregation study identifies items that should be classified as tangible personal property or land improvements rather than real property that is depreciated over 39 years (31.5 for real property placed in service prior to May 13, 1993).

Building costs are generally classified under the following three categories:

Recovery Period

Depreciation Method

Tangible Personal Property
Land Improvements
Real Property

5 or 7 years
15 years
39 years

200% db
150% db
STRAIGHT-LINE

Our analysis will identify overlooked costs that may be segregated for accelerated depreciation. The allocation is based on an engineering approach with extensive knowledge of construction methods and the Internal Revenue Code, as well as, the applicable tax courts and revenue rulings.

What Are The Tax Savings Realizations?

	Accelerated tax depreciation deductions that will reduce taxable income that results in lower income taxes. The shorter the depreciation period, the greater your tax savings.
	The tax benefits begin in the first year and continue throughout the depreciable life of the identified assets.
	Recent tax litigation and subsequent IRS pronouncements pave the way for realization of significant tax benefits associated with depreciation of real property.

- The tax court recently ruled that certain costs that had been classified buildings subject to 39-year class life, should be classified as personal property subject to a 5, 7 or 15 year life.
- In accordance with the IRS Revenue Procedure, the taxpayer can reclassify assets that have been incorrectly depreciated in tax years as far back to 1987.The change in depreciation is prospective and no amended returns are required. The IRS allows the taxpayer to recognize during the four years following the change, the difference between depreciation that would have been allowed had the property been classified as personal property from the original placed in service date.

Using qualified appraisers, architects, or engineers to perform the analysis is preferred to a taxpayer (or the taxpayer’s accountant who is not a qualified appraiser) doing the study and is more likely to withstand an IRS challenge to the allocations.1

What Other Benefits Will A Study Provide?

-     May increase your sales tax exemptions
-     Lower your property taxes
-    Provide the basis for your property records

Which Businesses Can Benefit From A Study?

Retail

Sports Facilities / Health Spas

- Department Stores

Apartment Complexes

- Shopping Malls

Office Complexes

- Distribution Centers

Hospitality

Manufacturing

- Hotels / Motels

Restaurants

- Golf Ranges

- Fast Food

- Resorts

- Dining

Pharmaceutical

Financial Services

Health Care Services

- Brokerages

- Physician Practices

- Banks

- Medical Centers

Public Utilities

- Care Facilities

Airports

Professional Services

1National Tax Advisory, July 1999

Click here to see Sample Cost Segregation Studies.

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