Section 179 and Cost Segregation Studies – When, What, and How?

A CPA recently asked us why he should consider a Cost Segregation Study for clients when he can simply use Section 179 deductions.

Section 179 refers to a portion of the federal tax code that allows business deductions on equipment purchased within a given tax year, as stated on

    “Essentially, Section 179 of the IRS tax code allows businesses to deduct the full purchase price of qualifying equipment and/or software purchased or financed during the tax year. That means that if you buy (or lease) a piece of qualifying equipment, you can deduct the FULL PURCHASE PRICE from your gross income. It’s an incentive created by theU.S.government to encourage businesses to buy equipment and invest in themselves.”

Section 179 expensing should be used in conjunction with a Cost Segregation Study to determine the maximum benefit.  There are limitations to Section 179 such as a maximum deduction of $139,000 in 2012 and the deduction must be taken in the year it was placed into service.

Cost Segregation Studies have no limitations on the amount of property where accelerated depreciation can be applied and there is no limitation on how old the property is when a study is completed.  Additionally, for any new property or equipment in 2012 that is accelerated there is a first year bonus depreciation of 50% for those assets.

An engineering based Cost Segregation Study will provide a client with an existing building, a new acquisition or new capital improvements the ability to benefit from the accelerated depreciation on assets beyond what is traditionally considered to be equipment assets.  Examples of these assets include finishes, cabinetry, décor items, signage, infrastructure for equipment, land improvements, etc.

The following table is a useful guide for property owners and CPAs to keep track of the different qualifications, limits and uses for each:

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