Understanding the Importance of a Cost Segregation Study for Your Business

When it comes to the financial health of your business, every possible avenue should be explored to maximize your tax savings and reduce expenses. One of the more complex but potentially lucrative options for businesses is the cost segregation study. This study analyzed assets that were purchased to determine the moment they reached their “end of life” and the part that is still valuable. By conducting a cost segregation study, businesses can greatly reduce their tax liability, increase cash flow, and potentially gain better lending terms. Here’s an in-depth understanding of cost segregation studies, so that you can determine if it can benefit your company.

What is a Cost Segregation Study?

A Cost Segregation Study is a detailed analysis of assets that were purchased using funds that span over a period of time and we determine which assets are depreciated over the shortest time frame permitted by the IRS. This study is carried out by an experienced tax professional that specializes in cost segregation studies. This process involves analyzing a company’s assets to determine which ones are subject to accelerated depreciation over time. Putting it simply, the study breaks down non-residential real estate properties and machines into individual components. Cost segregation professionals will then determine which components are considered as “personal property” and therefore eligible for a shorter depreciation period. The study also determines the actual cost basis of property for capital gains purposes.

What are the benefits of a Cost Segregation Study?

With a cost segregation study, businesses can enjoy benefits beyond just lower tax liabilities. Here are some of the identified benefits of cost segregation studies:

? Reduction in taxes: Dividing your assets into shorter depreciation lives, returns cash flow into your business, deferring the hefty tax burden. This reduction eventually leads to tax savings resulting in a higher percentage of ROI.

? Increased cash flow: As you lower the tax burden, you will increase cash flow which can lead to greater access to better lending terms.

? Accurate financial reports: By determining the actual cost basis of your company’s property, the accountants have more accurate financial reports in regards to the disposal or sale of these assets.

? Reduced audit risk: A cost segregation study can eradicate potential audit risks by laying out succinct detail of your company’s assets and accelerating the tax depreciation time frame.

? Corporate Property Strategy: Cost segregation entities enable businesses to increase cash flow, creating historically low-interest rates and the chance to capitalize on current market conditions.

The Cost of a Cost Segregation Study

The cost of conducting a cost segregation study depends on the size of your business and its assets. It can take from a few thousand dollars to tens of thousands of dollars. When accounting for a cost segregation study, it's crucial to remember that this process has the potential to save your business thousands in taxes, and lead to increased profits and better lending terms. An investment in a cost segregation study pays for itself over time.

Conclusion

Cost Segregation Studies have the potential to be a valuable asset for business owners who are looking to reduce tax liabilities, increase cash flow, and improve financial reports. If you believe that your company could experience these benefits, consult with a licensed tax professional to see if a cost segregation study is right for you. While it can be an investment upfront, the payoff can be substantial in the long run. Maximize your ROI by ensuring that your company is taking every opportunity to reduce its tax burden and increase profits.