What is a Cost Segregation Study?
A Cost Segregation study (also referred to as a cost segregation analysis, cost segregation or cost seg) is the process of identifying real property costs, typically in new construction or acquisitions. The objective is to accelerate depreciation for tax purposes. Mandamus LLC works with you to help minimize your taxable income through rigorous, aggressive and substantiated cost allocation strategies.
The objective in performing a cost segregation analysis is to shift property (and the associated dollars) from categories, which have long tax lives to categories, which have shorter tax lives. This allows for greater depreciation during the early years of the asset’s life, thereby lowering taxable income and thus lowering taxes. The result is improved cash flow.
The pure building components must be depreciated over 39 years (27.5 years for apartment type buildings). However, the building’s construction components that are required for the operation of the business can be depreciated over a shorter period (usually 5, 7 or 15 years). The shorter asset lives increase depreciation in earlier years, and increased depreciation results in lower taxable income in these early years.
Cost segregation does not eliminate the taxes owed. Cost segregation defers the taxes owed to later years. This results in significant savings today! The after-tax savings can be well in excess of twenty times the cost of the study.
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