Cost Segregation Studies can provide many great benefits for property owners as well as tenants who have made improvements to their property. An engineering based Cost Segregation Study increases a property owner’s cash flow by accelerating the depreciation of assets and writing off qualified retired assets. A CPA can help, to some extent, by utilizing their understanding of tax laws and codes. However, by hiring an engineering based Cost Segregation specialist and having it reviewed by an accountant, it will guarantee that you are maximizing the benefits available to you. Engineers have unique skills that an accountant just does not have which will optimize the benefits available to a property owner.
We frequently hear from clients that their accountants have already performed a Cost Segregation Study, so they have no need to complete an engineering based study. We have a vast library of case studies which illustrates how we can find “hidden” assets that may have been overlooked without the input of engineers. This blog will highlight the difference between an engineering based study and a CPA who believes they have been “aggressive” with accelerating the depreciation of their client’s assets.
When our engineers looked at the client’s depreciation schedule, only $2,000 worth of assets were classified as 5 year property by the firm’s CPA. However, when our engineers completed a full analysis of the property we were able to reclassify $336,000 into short life property for the client. This equated to a first year savings of $108,783 for this client and the cost-benefit of doing the study was 10:1 in the first year alone.
In this particular case, the additional 5-year property was accounted for in the HVAC, hoods, hoods exhaust and make-up air system, cooler/freezers, kitchen plumbing, signage, built-in seating, the bar area (cabinetry, equipment, utilities), specialized equipment, electrical, flooring, lighting, and décor Items. This property also qualified for bonus depreciation. Items such as site paving and landscaping were reclassified as 15-year property.
Building originally placed into service in 2006. Engineering Study date was 2010.
Before Engineering Based Study: After Engineering Based Study:
Total assets: $ 1,895,752 Total assets: $ 1,895,752
5-year assets: $ 2,090 5-year assets: $ 336,804
7-year assets: $ 34,998 7-year assets: $ 40,934
15-year assets: $ 378,038 15-year assets: $ 219,082
39-year assets: $ 1,480,626 39-year assets: $ 1,216,956