The purpose of a cost segregation study is to accelerate tax depreciation by carving out shorter lived assets that might otherwise be capitalized in the overall cost of a large construction project.
Property such as carpeting, wall coverings, lighting, landscaping, parking lots, plumbing and electrical fixtures and capitalized expenses such as architectural fees are among those typically segregated into other categories with shorter depreciation periods. Such personal property is generally depreciated over 5, 7 or 15 year periods as opposed to real property which is generally depreciated over 27.5 or 39 years. This results in faster depreciation deductions which improve cash flow by deferring tax payments to later years. The benefits of cost segregation studies have become even greater under current legislation.
In most cases cost segregation studies are done in conjunction with an engineering study that properly allocates the cost of a building or other large project between real and personal property for depreciation purposes.
These studies are widely accepted by the IRS and deeply rooted in tax court cases.
Candidates for cost segregation studies include new construction, additions, renovations or building purchases taking place after 1986 and companies in virtually every industry can benefit. Your business does not need to have current taxable income to benefit as these studies can generate net operating losses that may be carried back or forward.