Do you own or plan to own the building your company leases? Consider a cost segregation study.
by Joe Harding, CPA

Do you own or plan to own the building your company leases? Consider a cost segregation study.

I often get questions on how accelerated depreciation methods such as bonus or section 179 work, especially with company vehicles. After all, many businesses utilize automobiles in their operations, and accelerated depreciation can create a healthy tax deduction.

Very few business owners, however, own the building their company leases. There are a variety of reasons for this that I won’t go into. But, if a business owner knew there was an opportunity to obtain a large tax deduction by purchasing a commercial building, that may move them in a direction to at least consider purchasing.

By default, the cost allocated toward the building purchase is depreciable straight line over 39 years while land has no depreciable basis. ?Recognizing the cost of the building over 39 years may not move the needle for a business owner to purchase. Furthermore, accelerated depreciation, such as bonus depreciation, is not available for 39-year property. That is where the cost segregation study comes into play.

A cost segregation study essentially takes what is by default 39-year property and breaks down a portion of the building’s components into 5, 7 and 15 year property. Those components are then eligible for bonus depreciation. On a $2 million building purchase, this has the potential of providing tax savings in the six figures!

The study needs to be performed by a licensed and experienced firm specializing in the area. And the study takes around 60 days to complete. Though, most companies will perform a preliminary estimate on the building to determine if it is even worth moving forward with the actual study.

Keep in mind that this benefit has been allowed through a combination of The CARES Act and Tax Cuts and Jobs Act. And it does expire by end of 2022. That is, you need to close on the commercial building by the end of 2022.

Think you missed out because you purchased the building several years ago? It is possible for you to “catch up” and claim bonus depreciation either in 2021 or 2022.

There are many other items to consider, and this article was not meant to get technical. However, it is something you should consider if you either own or plan to own a commercial building soon.

Make sure you work with an accountant that understands how the study works and can help you make a well-informed decision. ?

Ciara MacMahon

3x your CPA Practice/ Tailored Practice Growth Plans / Reach your True Practice Potential - Tel: 818 209 4125

1 年

Great info - thanks Joe!

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