Cost segregation studies
Organizations with new buildings currently under construction or recently completed
Organizations with purchases of existing properties
Organizations with existing buildings that have undergone renovation, remodeling or expansion
Organizations with leasehold improvements
Improve cash flow due to lower taxes from accelerated depreciation
Provide detailed cost data for compliance with final regulations for expensing vs. capitalization
Increase in cash flow helps offset total project costs and could allow more extensive or timely facility improvements, acquisitions or renovations than originally projected
Engineering-based cost segregation provides an independent third-party audit trail for depreciation classification of assets (compared to less stringent, less accurate percentage-of-project cost estimates sometimes used by firms without cost segregation specialists)
How AGH's cost segregation studies can help your organization
Cost segregation studies “carve out” the personal property costs associated with a building project and reclassify them to the appropriate shorter tax life – often 5, 7 or 15 years instead of the 39 years or 27.5 years for nonresidential or residential rental real property, respectively, used to depreciate real property.
The tax laws signed into law in 2017 have more favorable bonus depreciation rules and expanded definitions for Qualified Improvement Property (QIP) which allow cost segregation studies to provide additional value. Bonus depreciation on eligible assets is going from 50 percent in 2017 to 100 percent on property placed in service after September 27, 2017, and on or before December 31, 2022. Thus, the greater the amount of shorter life property identified in a cost segregation study, the greater the benefits.
How we conduct our studies
Similar to a research and development tax credit study, there is no cost to you for AGH to conduct an initial scoping to determine whether your company could potentially benefit from cost segregation. This initial scoping provides an estimated benefit to you. Once the initial scoping is completed, we provide the estimated cost to complete the study so a final decision to move forward can be made. Our fee is 100 percent deductible and, in general, clients routinely receive present value cash-flow savings of 10 to 20 or more times their investment for the cost segregation study.
Our studies involve the following steps:
Investigation of the property
- A thorough examination of architectural/engineering drawings and specifications by a construction engineer to determine assets available for accelerated cost recovery
- An on-site visit, inspection and documentation of the property
- Discussions with you, your staff and other key staff about the purpose and function of the property and related equipment
Review and reallocation of related costs
- Analysis of the capitalized costs, including the general contractor’s application for payment, change orders, architectural fees, owner-incurred costs and other submitted costs
- Allocation of indirect costs to project assets
- Classification of final project costs
- Research of applicable tax authorities (e.g., court cases and revenue rulings, state sales/use tax law and related cases, etc.)
Recommendations and report
- Preparation of final report with detailed breakdown of assets by appropriate recovery period
Sample case studies
Below are a few examples of how a cost segregation study could improve your cash flow.
Property: Industrial manufacturing and assembly office
Purchase of an existing 93,519-square-foot office warehouse used for assembly and manufacturing of industrial earth-moving and construction equipment
| Project cost: |
$ 5,100,600 |
| Property basis reclassified: |
$ 1,570,000 |
| Increased cash flow first five years: |
$ 550,000 |
Property: Four automobile dealerships — showroom remodel projects
Demo existing showrooms down to shell, move interior and exterior walls and remodel
| Average project cost: |
$ 2,167,318 |
| Average property basis reclassified: |
$ 717,565 |
| Increased cash flow first five years: |
$ 223,419 |
Additional current year write-off
for partial asset dispositions and removal costs:
(average per location)
|
$ 383,402 |
Property: Apartment complex
New construction, multi-building apartment complex, clubhouse and pool
| Project cost: |
$ 16,935,000 |
| Property basis reclassified: |
$ 4,687,000 |
| Increased cash flow first five years: |
$ 1,447,000 |
Property: Indoor and drive-up bank
New construction for bank in a single-story, 4,500-square-foot building with indoor banking, offices, vault and drive-up tellers
| Project cost: |
$ 2,200,000 |
| Property basis reclassified: |
$ 660,000 |
| Increased cash flow first five years: |
$ 200,000 |
Property: Independent and assisted-living center
Combined 111,000-square-foot independent and assisted-living center with 185 rooms and 5.8 acres of grounds
| Project cost: |
$ 11,450,000 |
| Property basis reclassified: |
$ 2,260,000 |
| Increased cash flow first five years: |
$ 600,000 |