Most accounting professionals and real estate investors know to consider a cost segregation analysis for new construction or in the year of acquisition. But sometimes, it doesn’t make sense to pursue a cost segregation analysis right away, for a variety of reasons: the business can’t use the losses, the exit strategy is uncertain, or the topic came up too late to file the return.
Regardless of the reason, situations change. The good news is that the IRS recognizes cost segregation studies as a valid basis for submitting depreciation changes. Current property owners are entitled to go back and “catch up” on depreciation they could have deducted from the day the property was placed in service, without amending prior tax returns.
“Catch Up” is the difference between the depreciation taken thus far, and the depreciation that could have been taken by using proper cost segregation techniques – commonly referred to as a “Lookback” Study. The IRS permits investors to go back and correct misclassified assets and “catch up” on missed depreciation as far back as 1986.
This additional “catch up depreciation” can be taken within a single tax year, providing a significant reduction in income taxes and an unexpected cash windfall.
The retroactive application of this amendment provides a significant opportunity for a boost in cash flow on qualifying property that was previously bonus-ineligible 39-year assets placed in service after Sept 27, 2017.
QIP refers to an interior portion of a nonresidential building that was improved after the building was first placed in service. Examples include qualified restaurant property, qualified retail property, and qualified leasehold property. Excluded are any expenditures related to the enlargement of a building, as well as an elevator or escalator, or the internal framework of the building.
This means that property owners can recover QIP costs incurred in the past two years as bonus depreciation, adding significantly to a company’s cash flow at a critical time.
Has your property undergone frequent renovations via property refresh or tenant turnover? Or, are you expanding an existing facility or undergoing major renovations? With a good, detailed study, the opportunity for dispositions is maximized both retroactively, and in current or future years.
In addition, Cost Segregation can provide defensible values in determining whether prior expenditures are capital improvements or deductible repairs.
Cost segregation is a frequently overlooked opportunity for existing real estate holdings. Yet, some taxpayers are still reluctant to use cost segregation, equating it with a high-risk tax shelter. In truth, their reluctance is misplaced. Historically, when taxpayers purchased real estate, they allocated a portion of the purchase price to land and a portion to building. While the IRS rarely questioned this approach, purchasers did themselves a financial disservice.
If the cost of the components in the engineering report are well-documented, an IRS examination should be painless, and the client will sustain the claimed tax benefits. In contrast, an accountant’s ad hoc cost segregation calculation or reliance on a contractor can be a recipe for disaster under examination. Let us help.
Our estimates can help you determine the cost/benefit of catching up on tax benefits currently locked in your books. Provide us with a depreciation schedule and we will give you a no cost, no obligation estimate of benefits.
Cost Segregation is not always the appropriate solution. However, taking 15 minutes to gather the basic documentation needed for us to provide you an estimate could increase your cash flow by several hundred thousand, or even millions of dollars, depending on the size of your property.
Knowledge you can trust. Results you can measure.
Meridian Financial Solutions
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Chicago IL 60606
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