A Cost Segregation Study (CSS) is an in-depth study of your new or existing property that helps you optimally classify your depreciable assets and generate cash flow savings. Nelson Engineering Company has provided cost segregation services to over 500 diverse companies throughout the United States. We support numerous accounting firms across the country. We have developed a sound process that generates a detailed Cost Segregation report at a minimal cost to our customer. Our experienced engineers deliver a product that is far superior to similar services offered by traditional accounting based auditors alone.
What is a Cost Segregation Study?
Cost Segregation is a strategic tax savings’ tool that allows companies and individuals who have constructed, purchased, expanded, or remodeled real estate to increase their cash flow by accelerating depreciation deductions and deferring their federal and state income taxes.
The goal of a Cost Segregation study is to identify, segregate, and reclassify project-related costs that are currently classified as real property to shorter depreciable tax lives for federal and state income tax purposes. IRS rulings and procedures allow taxpayers to change accounting methods to take advantage of these previously understated depreciation expenses–back to 1987. This is done without amending tax returns. The IRS Cost Segregation Audit Techniques Guide gives a detailed description of the process and what to look for in a quality CSS report.
Primary Benefits of a Cost Segregation Study
Increased current cash flow through accelerated tax depreciation of structure related costs.
Permanent net present value savings on tax depreciation that may be significant.
Independent third-party analysis that will withstand Internal Revenue Service scrutiny.
The cost segregation specialist uses an engineering-based approach, as specified by the IRS. Their job is to examine architectural/engineering drawings for potential asset reclassification. A physical inspection will be performed. Cost data including the contractor’s application for payments, change orders, owner incurred cost and disbursements are examined. Direct labor, material components and indirect costs are allocated based on analysis of drawings and specifications.
An existing property without the above documentation requires a different approach. The engineer must become familiar with the purpose and major functions of the property. Then a full analysis of the property is conducted, including inspection, photographs and measurements. This allows the engineer to reconstruct the property on paper, including all the components. The components are then priced out using standard construction cost data such as R S Means Building Construction Cost Data.
Some examples of assets that have qualified for accelerated depreciation include land improvements, parking lots, fencing, outdoor lighting, landscaping, intercom and security systems, specialized heating, ventilation and cooling systems related to specific business requirements, storage and shelving, ramps, moveable wall partitions, and many others.
The report includes the project description, asset classifications, and depreciation, allocated related fees and services, spreadsheets segregating the assets, reference to tax court cases, revenue rulings and tax citations. An example report can sent to you by contacting:
Tom James, Cost Segregation Study Program Manager, at (321) 576-3470.