Cost segregation is a technique utilised by businesses in the US which allows them to strategically maximise tax allowances by accelerating depreciation on their commercial properties.

 

When a company utilises cost segregation, they're undergoing the process of highlighting the personal propety assets grouped with their real propety assets, and then seperating them out. The reasoning behind this is that personal property has depreciation schedules of 3, 5, 7 or 15 years, while real property is depreciated over a period of time up to 39 years.

 

The reason for this kind of accounting (and for the cost segregation in the first instance) is to reclassify property elements and related cost into their correct categories. This allows businesses to 'catch-up' on past, under-reported depreciation (all without having the hassle of amending previous tax returns). Other benefits to cost segregation include reduced real property taxes and increased investment tax credits, which will in turn lead to improved after-tax cash flow.

 

There are several fixed asset categories when it comes to cost segregation:

 

Personal Property, which can include items such as carpets, furnishing, fittings and window treatments

 

Real property, including buildings (small and large) and general land

 

Buildings, which is usually split into building components, allowing companies to fully depreciate one component (such as the roof or windows) without depreciating the whole building

 

Land improvements, which normally have a depreciation schedule of 15 years, usually include pavements, fences, etc.

 

Land, generally refers to anything remaining (of value) that doesn't fall into any of the above real property categories.

 

So how does a property become eligible for cost segregation? Generally, the rules are that they must have been built, purchased or remodelled since 1987 and although it's not a rule, it's generally considered not worth the effort for buildings costing less that $200,000.

It is well worth studying the assets and properties held within your business, as you may well benefit from cost segregation. Generally the process is initally undertaken by getting an engineer and an accountant to carefully study blueprints, electrical plans and architectural drawings so that they can begin to seperate the structural, electrical and mechanical components from those fixed assets related to personal property.