As a banker, you often look for ways to set yourself apart from the competition. Communicating with your business customers about the advantages of a cost segregation study is one way you can demonstrate what you “bring to the table.” A cost segregation study allows many businesses to accelerate depreciation of their property, resulting in tax savings now and better cash flow.
By taking time to review a client’s cost segregation study, you will gain an in-depth look at the client’s buildings and their components, allowing you to assess potential hidden value. Although a study does not increase the depreciable base of a building, it may highlight additional value that you might not have otherwise seen in an assessment of your customer’s assets.
How does it work?
Cost segregation studies focus on building components that appear to be real property, but they are more accurately classified as personal property depreciable over five or seven years or as land improvements depreciable over 15 years.
Using engineering and tax accounting principles, a cost segregation study identifies building components that qualify for accelerated depreciation. This enables a business to cut its tax bill or claim a refund for missed depreciation deductions in previous years.
Usually, commercial real estate is depreciated over 39 years. This lengthy recovery period applies to real property, which includes buildings and structural components, such as walls, concrete floors, paint, windows, ceilings, and HVAC systems. But the 39-year period does not apply to personal property, such as furniture, carpeting, appliances, shelving, cabinets or counters, and public address (“PA”) systems. Such items generally can be depreciated over five or seven years.
Although every business is different, an often-cited rule of thumb says that, for each $100,000 of assets reclassified from 39-year property to five-year property, a business could realize a net present value savings of about $22,000. (This assumes an 8% discount rate and a 40% marginal tax rate.)
Who should conduct the study?
Generally, there are no requirements or certifications necessary to perform a cost segregation study. However, a thorough understanding of tax advising and the tax code is a must-have for the study to stand up in an audit. For larger projects, professional input may be needed from a contractor, engineer, or architect. The “tab” for a cost segregation study varies greatly depending on the scope of the project.
What can lenders do?
When talking with your customers, remember that new buildings being put into service always should undergo a cost segregation study unless the tax status of their ownership is such that additional depreciation will produce no tax benefits. Most existing buildings have the potential for accelerated depreciation if a cost segregation study has not been previously performed.
Remember the benefits.
The primary benefit of a cost segregation study is an increased depreciation deduction that might be allowed on your customer’s business tax return. An increased depreciation deduction results in a lower net income, and that will lower the amount of tax owed by the company’s owners.
Additionally, you will likely get a better idea of the true value of your customer’s building by understanding its “insides.” You may also be partly responsible for adding funds to his or her cash flow– and that certainly adds value to your role.
If you would like to discuss the impact of this information on your business, please contact the expert listed below at PYA, (800) 270-9629.
