Improve Your Cash Flow Through Accelerated Depreciation
Oct 08, 2014
Do you own commercial property? Here’s how you can improve your cash flow using cost segregation (CS).
What is Cost Segregation?
Cost segregation is a tax savings tool that allows companies to identify and qualify assets for accelerated depreciation.
How Does it Work?
Accelerated depreciation allows a company to reclassify assets. When you accelerate the depreciation on these assets, you are eligible to increase cash flow and defer federal and state income taxes. While most organizations focus on furniture and assets that depreciate over five years, accelerated depreciation goes far beyond that by dissecting costs that are depreciated over 39 years.
Some common assets include cabinetry, dedicated electrical, dedicated plumbing, and millwork. Other assets include oversized fans, range fans, landscaping, curbs, sidewalks, parking lots, and more. Several commercial properties are packed full of these assets, opening a large area for accelerated depreciation. These savings generate substantial cash flow that owners often use to reinvest in their business, purchase more property, apply to their principal payment or can freely spend on themselves.
How to Get Started
Cost Segregation Services, Inc. (CSSI) is an experienced and qualified company, which performs IRS defined engineering-based cost segregation studies as an essential tax savings tool for commercial property owners. The study accelerates the depreciation of a building or renovation components into shorter depreciation categories such as three, five, seven, or ten years rather than the conventional 27.5, 31.5 or 39.5 years schedule.
Know What Assets Qualify
What can be included in these accelerated programs using five to seven years schedule includes decorative building elements, electrical for dedicated computer equipment and even carpet.
15-year items could include site utilities, landscaping and paving. This IRS- defined engineering based cost segregation study results in much higher depreciation expense and significantly reduced taxable income for the property owner. Best of all, the IRS ruling states that cost segregation can be applied to categories of buildings purchased or built since 1986, including renovations, and there is no need to amend your tax returns.
The landlord or building owner often times are not aware of what items qualify for accelerated depreciation. Therefore, missing the opportunity to capture sizable tax savings when they renovate the space for the next tenant or contribute to build out costs for the tenant, who are commonly capitalized. Working with CSSI, a landlord can help them identify write-down costs for the value of materials disposed and provide a new schedule that will identify the landlord’s costs by the tenant.
The tenant using CS can properly classify assets by costs, which then can be applied to the proper party (either the landlord or the tenant). If the tenant is funding a remodel or expanding the space, this process can help the tenant show them how to enhance their cash flow through the accelerated depreciation deduction that CS can deliver.
Example of Savings
Here is an example of savings. Let’s say you made leasehold improvements for an office tenant of $1.4 million. The first year tax savings by accelerating your costs over five years is $131,569.
If you are interested in learning more about how cost segregation can help improve your cash flow, visit www.costsegserve.com.
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Written by: Hans Hansson
Hans Hansson is President of Starboard TCN Worldwide Real Estate Services as well as a member of the Board of Directors for TCN Worldwide Real Estate. Hans has been an active broker for over 29 years in the San Francisco Bay Area and specializes in office leasing and investments. If you have any questions or comments please email email@example.com or call him at (415) 765-6897. You may also check out his website, www.commercialspacefinder.com.