Cost Segregation, Fixed Asset Studies: Explore Ways to Save

Cost segregation is a strategic tax planning tool designed to defer federal and potentially state income taxes while increasing cash flow by accelerating depreciation deductions on qualifying building components.

A cost segregation study examines the costs associated with acquiring, constructing, and improving properties, which would typically be depreciated over 39 years for non-residential real estate or 27.5 years for residential real estate. This analysis identifies and reclassifies the building components into appropriate asset categories, effectively "slicing up the pie." This reclassification often results in significantly shorter useful tax lives for these components, such as 5-year, 7-year, and 15-year property, allowing for accelerated depreciation in the year the building is placed in service. State conformity to federal bonus depreciation rules varies.

Real estate is a distinct industry, yet its principles and tax planning strategies are applicable across numerous industries. Whether in agribusiness, food and beverage, manufacturing, health care, or any other industry, effective real estate tax planning can significantly improve financial outcomes by leveraging opportunities such as cost segregation and accelerated depreciation. Explore some real-world examples.

Agribusiness, food, and beverage

Client A: Brewery expansion 

Situation: Client A invested $1 million to expand its production capacity by adding a new brewery facility. The structure included a pre-engineered building, general HVAC components, basic plumbing for a restroom, and general electrical components.

Need: Client A wanted to accelerate depreciation and increase cash flow for the current tax year. CLA recommended a cost segregation study as part of its tax planning review.

Outcome: Upon visiting the property, it was determined most of the plumbing was for specific production use and a dedicated septic system was required. The flooring was reinforced concrete to support the weight of barrels and equipment. By analyzing these components, CLA's cost segregation team was able to reclassify almost 50% of the cost of the improvements from a 39-year recovery period to 5-year and 15-year assets, resulting in first-year depreciation deductions of approximately $425,000.

Manufacturing

Client B: Automotive components manufacturer 

Situation: Client B — a mid-market automotive components manufacturer — spent more than $10 million over five years expanding and renovating its facilities. Rapid growth and financial success also increased its projected taxable income.

Need: Client B aimed to reduce taxable income. CLA suggested a fixed asset study to identify areas for accelerated depreciation and repairs deductions.

Outcome: By reviewing the tax depreciation schedule and reclassifying assets from a 39-year recovery period to shorter periods such as 7 or 15 years and performing a repairs analysis, Client B reduced its taxable income by nearly $2 million, which almost eliminated its taxable income for the tax year.

Health care

Client C: Skilled nursing and assisted living facility operator 

Situation: Client C planned to acquire five facilities as part of a growth strategy.

Need: As part of the accounting and tax planning review for these acquisitions, CLA suggested a cost segregation study to accelerate depreciation deductions for when the properties were acquired and placed into service.

Outcome: By reviewing the acquisitions, CLA's cost segregation team reclassified over 20% of the $35 million depreciable basis from a 27.5-year recovery period to shorter periods, such as 5, 7, or 15 years. This allowed Client C to accelerate approximately $3.5 million in depreciation deductions for the current tax year.

It’s important to note effective January 1, 2023, the amount of allowable bonus depreciation decreases by 20% each subsequent year. For example, the 60% rate in 2024 is scheduled to decrease to 40% in 2025 and 20% in 2026. Many of the provisions of the Tax Cuts and Jobs Act of 2017 (TCJA) will expire at the end of 2025. This means absent congressional action, on January 1, 2026, the tax law would revert to the law before the TCJA’s passage. President-elect Trump and the Republican-controlled Congress are expected to support the extension of many of the provisions of the TCJA, including the restoration of 100% bonus depreciation on qualifying property.

How CLA can help with cost segregation, fixed asset, and repair studies

Faster depreciation through cost segregation, fixed asset, and repair studies can lead to significant tax savings. Our consultation and analysis have lowered taxes across industries and asset classes — contact us to see how we might help you.