Cost Segregation Studies For Small Businesses

by Karen Stern

Any time you buy, build or remodel a building, there’s an opportunity for a cost segregation study. A cost segregation, or cost seg, study can save you money by increasing depreciation deductions, deferring taxes and increasing cash flow.

When is the best time to talk to my adviser? The best part about a cost seg study is that it is almost never too late to conduct one. If you acquired or built a building several years ago, you can still do a cost seg study today.

How does a cost seg study work? The IRS requires a long depreciation life for buildings, which varies based on whether the building is a residential rental property (27.5 years) or a nonresidential property (39 years).

A cost seg study will identify assets with shorter lives, usually five or seven years, which can be pulled out of the building and depreciated faster. Generally, property that is movable, relates to a particular function or is unique to a particular trade or business qualifies for a shorter life.

Does the type of business matter for the study? The amount of costs reallocated to shorter lives varies based on the industry:
• Warehouses = 10-15%
• Office buildings = 12-25%
• Retail = 15-30%
• Hotels = 20-35%
• Restaurants = 20-40%
• Medical facilities = 25-40%
• Manufacturing facilities = 30-60%

If you have plans to buy, build or remodel or if you have done so within the past few years, now is the time to act! If you have any questions about cost segregation, contact your business adviser or Rob Haggerty, partner in the Brown Smith Wallace Tax Services Practice, at         rhaggerty@bswllc.com.  

Karen Stern (314-983-1204 or kstern@bswllc.com) is partner in charge of BSW Entrepreneurial Services Group, which provides small business tax and accounting services.