Jerry Ferch

When you construct your next building, remember that temporary is better.  While it sounds counterintuitive, it is true that Cost Segregation will do you the most good if you choose a temporary way to attach things to your building.  Why?  Because a component of a building that is attached with a non-permanent adhesive or a detachable mechanical apparatus, is often allowed, under the tax code, to be treated as rapidly depreciable personal property, qualifying for 5-, or 7-year depreciation, versus 39-year, if is permanently attached.  And, the further benefit is that 5- and 7-year property can be accelerated even faster by the use of double declining balance depreciation, resulting in first year total depreciation that we have seen as high as ten times the prior 39-year straight line.  Before you worry that this means components of your building will start falling off, rest assurred that the temporary adhesives are all strong enough to hold up for the life of the component.  The key difference is that that, when it is time to remove the asset, you can more easily remove it, often with minimal damage to the attaching surface.  This also saves money on installation of the replacement surface.

What are some ways that you can apply this financially lucrative concept to your next building?  Here are a few:

1. Vinyl flooring can be temporarily attached (with “strippable” adhesive).  The “strippable” adhesive allows flooring to be depreciated in five years versus thirty-nine.
2. Ditto for removable adhesive for vinyl wall coverings
3. There are now wallpapers that are identified as “temporary”.
4. Carpeting can also be glued down with permanent or temporary adhesive.
5. Cabinets should be built with all sides enclosed.  They should not have open backs, where the wall of the building performs as the back enclosure of the cabinet.  The back enclosure should be of a substantial material so as to match the strength of the other cabinet surfaces.  When installed, the cabinet should not be glued to the wall or floor.  It should also not be nailed in place – it should be attached only with removable screws.  It should also be placed on top of flooring.  Flooring should not be installed so as to treat the baseboard of a floor standing cabinet as a boundary of the flooring installation.
6. Electrical circuit designs should, when at all possible, isolate service to equipment that is clearly specific to the business occupying the building and not part of the general building electrical service.  For example, in a dentist’s office, the electricity powering an exam chair, the drilling equipment, x-ray modules, and exam room computer system(s) should be installed and identified as specific to such equipment so as to enable rapid depreciation.
7. Non-standard plumbing installed to specifically service an installation of equipment for medical or manufacturing purposes should be identified.  Plumbing lines that are “home runs” are clearly the easiest to identify, whereas plumbing that junctions other lines will be more difficult to isolate and cost individually.
8. If a building makes extensive use of “mood” lighting or lighting that is essentially a décor item, versus an item that is strictly utilitarian, the only way these expensive and extensive lighting décor items are allowed to be accelerated is if the building has a secondary, more basic, lighting system installed that is capable of illuminating the interior such that work could be done with only that lighting functioning.  Thus, the décor lighting could be termed as temporary, since its removal would not render the building devoid of light.  In this case, then, the circuitry powering the décor lighting would also be treated a rapidly depreciable property.

These are just a few examples of things you can consider when building to make the depreciation law work in your favor.  If we are involved at the beginning of the construction project, we will suggest all possible favorable changes to be made to optimize the use of Cost Segregation.  Generally speaking, it always better to think “temporary” when you install anything in your building.  The more temporary the asset is, the greater the potential for it be able to be rapidly depreciated.  We will generally touch on this area of opportunity when we create the free no obligation estimate of cost segregation for your construction project. Just click on the link, fill in the form, and we will send you the best cost segregation estimate in the business.