Many interesting developments over the past year affect cost segregation studies, how they are used, and where they might be heading. This article discusses some of the major items.
100% bonus depreciation is a great benefit
Passage in late December of the 2010 Tax Relief Act increased bonus depreciation from 50% to 100% for a limited time.
What does this mean for cost segregation? It means you can write off 100% of the cost of new construction components with a tax life of less than 20 years in the first year of service. This includes all property identified as 15-year sitework, in addition to 5-year or 7-year personal property. The result is significantly reduced current taxable income.
The only disadvantage to this write-off is the short window of available time. Qualifying assets must be placed in service between September 9, 2010 and January 1, 2012.
A cost segregation study analyzes component parts of new construction and determines tax lives that are more beneficial (and more accurate!) than the 39 year recovery period (27.5 in the case of residential rental real estate) that would otherwise apply to the entire property.
With a cost segregation study, you get correct identification of all property that qualifies for faster depreciation, plus supporting documentation for backup in the event of an audit. The study reclassifies the dollars spent into different tax lives, with appropriate assets using faster depreciation, including the current year 100% write-off.
The present value of the tax savings exceeds the cost of the study many times over; therefore the study pays for itself.
What else qualifies for 100% write-off?
Qualified leasehold improvements are also entitled to 100% bonus depreciation. The improvements must be used exclusively by the lessee and made to the non-structural interior portion of a building more than three years after the building was first placed in service. The lease must be a written agreement between unrelated parties.
Other developments provide guidance
A recent Tax Court case confirmed the tax treatment of site lighting fixtures and poles as 7-year personal property. Cost segregation studies identify such assets and separate them out for favorable tax recovery treatment.
In recent years, the IRS published a series of Field Directives identifying other items that qualify. Although the directives are not official pronouncements of the law or IRS position, they provide valuable guidance for a broad range of industries. Along with the IRS Audit Technique Guide from 2004 (designed to help IRS auditors review and understand cost segregation studies), the IRS is now scrutinizing cost segregation more closely, reinforcing the need for well-documented studies such as those we provide.
Now is the time to ask our professionals for help. Contact your account director or any member of our real estate and construction team, or call Mark Vorkapich at 888-556-5580 or 414-465-5503.
Mark Vorkapich, ASA, specializes in cost segregation studies for new construction, purchase price allocations, 1031 exchanges, and look-back studies. Mark is on our cost segregation team and real estate and construction team.