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Cost Segregation Study and Accelerated Depreciation

May 13, 2021

Summary | ten-minute read | Cost Segregation studies accelerate depreciation on real property. Watch these short videos to see if a study makes sense for you: 

Cost Segregation Video

There are seven short videos daisy-chained together. At the end of each video click on the next to start it. The total length of our video presentation is 10 minutes. Or, you can read the transcript of the videos underneath the contact form.

Contact Tom James

    Video Transcription

    01. What are Cost Segregation Studies?
    My name is Tom James with Nelson Engineering Company. I’ve been with them for 12 years, and I’m here to talk about cost segregation studies. Nelson Engineering has done 1,700 plus cost segregation studies over the last 20 years throughout the United States. We’ve done segregation studies in 42 states.

    It’s all about the time value of money.

    We can assist you in accelerating depreciation. You’re not identifying any new depreciation; you’re just accelerating depreciation. Everybody has a straight-line track depreciation for commercial properties. It’s either 27 1/2 years or 39 years. What we’re doing is we’re breaking it up into chunks where you can take that depreciation faster.

    So, it’s about the time value of money.

    We get that dollar today as opposed to the dollar tomorrow. And that’s what savvy business owners will do. They’ll take that dollar that they’ve saved through the cost segregation study and invest it in something else or capital improvement projects for that particular property or investment capital for another property.

    So that’s the basis of the cost segregation. Get that dollar today.


    02. Types of Facilities

    We perform cost segregation studies on a multitude of commercial properties.
    We’ve done restaurants. We’ve done medical facilities, auto dealerships, retail centers. So, we can look at any commercial property and segregate it. Highly beneficial facilities would include anything that has a lot of integrated systems that support the businesses. An excellent example of that would be an automotive dealership. In the repair shop they have:

    • Compressors
    • Hose reels
    • Different types of drainage systems
    • Higher electrical voltage to power equipment

    Different types of equipment inside an auto dealership qualify for accelerated depreciation of the five-year category. But this also applies to any business with integrated systems supporting operations.

    $28 million in five-year property identified for this client to claim

    03. ROI and Case Study

    We’ve had ROI’s as high as 100 to 1.

    For example, one of our case studies would be an acquired five-star hotel in South Florida. The total segregation target amount was $132 million. This facility was a mixed facility:

    • Hotel
    • Office space
    • Restaurants

    So, is it a mixed bag of commercial property. Out of $132 million, about 2% was pushed into a 15-year category. The 15-year category is all your site development.
    Since it’s urban development, it is primarily vertical development, limiting the number of site improvements on this property. We had minimal 15-year property. Hardly any site improvements.

    But on the inside, we had a wide variety of commercial property types we were able to accelerate, much five-year property. We did about 22% five-year property, which was a considerable amount of money on a $132 million property. The 21% ended up being close to $28 million in five-year property identified for this client to claim.
    That’s the acceleration that they can take today instead of waiting for 39 years to write it off.

    …it’s a turnkey report for CPA firms, so we’ll do all the legwork

    04 How We Work and What is in a Report

    At Nelson Engineering we perform cost segregation studies. We work directly with the CPA, or we work directly with the client, so we have many direct client engagements or work directly with the CPA’s. So it’s a turnkey report for CPA firms, so we’ll do all the legwork. Throughout the engagement process, everything is done through Nelson Engineering, all the way up to turning over the full report to the CPA for filing purposes.

    We also do turnkey direct client engagements on a regular basis. If somebody comes to us and wants to do a cost segregation study on a commercial property. We will gladly do that for them directly, and then they can take our report and present it to their CPA who can file their taxes.

    Building assessment is where we come to the site and take our field measurements, our pictures, and all. Our photographs will go into a photo file that will back up our report. So in case of an audit, we can prove to the IRS that we were on-site and these systems did exist.

    So once we finished up with our site assessment, we assemble the report which is comprised of three different documents:

    • We have spreadsheets that summarize all the cost data associated with the project and organized into specific categories. It’s the high level
    • The component level detail is the heart of the report, and each line will have specific components and assemblies that are were found in the building and a cost that’s associated with them, so we can show the IRS that this system did exist and what is cost today would be
    • The photo files of the facility and integrated components

    The component unit detail is the heart of the report.

    Fully comprehensive reports usually run around 30 to 40 pages long. It’s easy to understand as all the definitions and all the information is clearly presented for this engineering study.

    We have studied millions of square feet, giving us the proper qualifications to perform cost segregation studies.

    05. Qualifications and Why Nelson

    Our folks have spent thousands of hours inside facilities. They understand the difference between a unit heater and a chiller. They know electrical systems. They know what’s behind the drywall, and that’s important. So they know how buildings.

    We have studied millions of square feet, giving us the proper qualifications to perform cost segregation studies.

    It’s our attention to detail.

    We pay close attention to the components that we select. We source our costing directly from a nationally recognized cost database. You’re going to get an accurate cost and accurate count and an overall good experience working with us.

    It’s the level of detail.

    From the photo file, selecting the right pictures to go in with components that we want to show or something that may be in question, we want to hit the IRS questions off at the pass. We want to have our report answer our questions for us instead of us go into an audit.

    It’s the layered approach:

    • We have the schedules that have the accurate cost data
    • We have the actual cost of the components
    • We have a narrative section that explains our theory with the theory is behind cost segregation.

    It’s also our study our turnaround time. Just eight weeks is fast to get a report out the door. That is accurate.

    What we’re trying to do is avoid an audit:

    We want to make sure that the customer gets the most benefit out of the cost segregation study without an audit

    We do support audits, and we have supported audits, but most of the time, they’re headed off at the pass with a phone conversation or a couple of emails. Instead of having to sit down with IRS and explain our rationale or our approach to the study, we let the report speak for itself

    While rare, we do sit down with the IRS to support clients.


    06. How to Get Started

    It starts with the inquiry.

    As soon as I get an inquiry from a client, I have a questionnaire that I send out—a one-page Excel document. The client populates the data and with that information, I can put together a net present value and return on investment calculation fee calculation for you.

    We can get a good idea of how much property we can segregate and what categories they would follow.

    It’s a good time because it’s a bonus depreciation year meaning that everything can be accelerated and written off in year one. Still, you must check with your CPA to validate that, but that is a tremendous tax-saving advantage.

    IRS Announces Bonus Year Depreciation

    Check the IRS website and consult with your CPA

    The questionnaire is where we first start.

    Once I get the information from the client on the questionnaire, I’ll put together the net present value calculation, return on investment, and a fee calculation. So that’s all free.

    When we put together the quote for the project, we don’t charge anything for that, so we’ll put together the net present value, return on investment, and fee calculations at no charge at all.


    07 What is My Investment?

    We operate on a firm fixed price for all cost segregation studies. At project start, I’ll quote a specific firm fixed price or the cost segregation study our fee ranges. We’ve done these for as low as $4000 all the way up to 10’s of thousands of dollars depending on the size of the property.

    Size of the property and how much property we’re segregating drives the cost up so the larger the property obviously, the more time that we’re going to spend on-site and the longer larger the report will have to be to capture all the components that qualify for accelerated depreciation.

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