Jerry Ferch

Can Cost Segregation help the unprofitable business? We say an enthusiastic, “Probably!”.

First let’s look at how Cost Segregation helps property owners. Cost Segregation speeds up depreciation to cut payable taxes now.  Standard commercial building depreciation is 39-year straight line and Cost Segregation allows reclassification of up to 50% of a building into either 5-, 7- or 15-year depreciation. This means Cost Segregation can increase first year depreciation up to ten times.  This big increase in depreciation really cuts taxes.  For example, with federal tax @ 35% and state @ 5%, the tax reduction is $40,000 for every $100,000 of extra depreciation. 

Most cost segregation studies happen a few years after the building is put in use, so we usually apply changes in depreciation from prior years as a one-time adjustment using an IRS 3115 “change in accounting method” form.  However, this does not help a business with no current profits! It is true that, in the following years, the “stockpile” of depreciation will eliminate income taxes when the business becomes profitable, but this is a delayed upside and it is not the great benefit situation that usually accompanies Cost Segregation.

But there is a silver lining: Cost Segregation can also be used to reduce taxes from prior years. 

It’s a fact.  Cost segregation can be used to amend returns going back up to four years.

For example, if a business made profits in the prior four years, then taxes for those years are eligible for refund if returns are amended.

A typical $2,000,000 building yields a tax cut of $50,000 in the first year with cost segregation, versus $20,000 with straight-line, a $30,000 upside.  The second year upside would be $25,000 and for year number three, it should be about $21,000, which totals a $76,000 tax refund from those profitable years. 

Thus, if a business needs extra working capital or cash for additional inventory, cost segregation can deliver a substantial tax refund from prior years, even if current business conditions are less profitable.

Nearly every building can help reduce payable income taxes.  We provide a free no obligation estimate of the financial benefits of cost segregation, based on the specifics of your building. Just click the link, fill in the form, and we will send you the best estimate summary in the business.