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Jerry Ferch

Jerry Ferch

Jerry Ferch is president of www.CutFedTaxes.com
jerry@CutFedTaxes.com, Phone: 214-986-0920

The Truth About Cost Segregation

The title of this article sounds a bit controversial, but what I am going to say should not be controversial at all: The truth about Cost Segregation is that it accelerates depreciation and will immediately cut taxes, however it cannot create more depreciation.  We can never depreciate a property more than the amount that the property originally cost, plus any additional asset investments.

So why bring this up? … because there is a tendency, in the Cost Segregation business, to tell property owners that they are getting “tax savings” by doing Cost Segregation and I have a problem with that choice of words.  To me, saying you are getting “tax savings” implies that, somehow, you are paying less in total taxes, but no cost segregation study can ever do that because no cost segregation study can ever increase total depreciation.

What Cost Segregation does (very well) is move depreciation around.  In some cases, it moves A LOT of depreciation, up to 50% of the cost basis!  Sometimes you can depreciate over 10% of the cost basis of a property in the first year!  This is because we find all the components eligible for 5-year, 7-year and 15-year depreciation and all three of these more rapid depreciation terms are also eligible under the law for either 200% declining balance (200 DB) or 150% declining balance (150 DB) depreciation.  The short story on 200 DB and 150 DB is that they will stack massive amounts of depreciation into the first few years of property ownership and that means big tax cuts in the early years of ownership… BUT you will pay those taxes later – much much later, from 16 to 40 years later, in fact.

So, the truth is that Cost Segregation moves depreciation and taxes around.  Anywhere that Cost Segregation moves depreciation into, it moves taxes out of and the place where the depreciation got moved out of is where the taxes get moved into.  The idea is to stack up as much depreciation as is legally possible as soon as possible.  This creates a lot of extra cash flow compared to when depreciation is entirely done on a 39-year straight line basis.

The key to making cost segregation pay off is to do something intelligent with the extra cash flow.  You can invest it.  You can use it to increase a SEP/IRA and allow it to grow untaxed and build up your retirement funding.  You can pay down a business loan, which benefits you by removing interest expense.  You can use the funds to add square footage, deepen inventory, widen inventory, or any number of profitable actions.  You are a smart business owner and I am sure there is something intelligent you can and will do to build your wealth (by the way, just don’t use it to buy a boat).

Anyone who sells you cost segregation because of “tax savings”, is not being entirely straight with you.  You are not getting tax savings,  but you are getting a 15-year to 40-year income tax abatement that will greatly increase cash flow during that time, allowing you an additional (and quite substantial) opportunity to build wealth.  If you manage the extra cash correctly, it can mean hundreds of thousands and even millions of dollars.

And that’s not bad… Not bad at all.

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.

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