by Fernando Sosa, ASA, MRICS, Director, Valuation & Advisory | Machinery & Equipment
Stories about missed opportunity are the cornerstone of Hollywood film—the boy missed his chance to ask out the girl, the coach benched the star of the team, the President ignored the sage advice of the scientist.
But what about in business? What are the missed opportunities you might just come to regret? The missed opportunity that hurts your profitability and costs you real money? Overpaying taxes might be one such regret.
Imagine for a minute you’ve expanded a warehouse. The 350,000-square-foot site has all the bells and whistles. You have top-of-the-line metal racking, new truck docks, state-of-the-art robotics, smart lighting—all of which you paid good money for. Once you’ve commissioned this site, you get on with running your business—the invoices go to your accounts payable team, your accountants review the tax payments and find a few deductions and plan for a depreciation life of 39 years. And why wouldn’t they? That’s the default tax life of a building.
Except you just lost over $500,000. You missed a valuable opportunity for savings.
A cost segregation study examines, in detail, the building components of newly acquired or newly constructed buildings and determines which parts are eligible for accelerated tax depreciation. By doing this, the owner can maximize the amount of equipment recognized for shorter depreciation (typically 3, 5, 7, or 15-year tax depreciation) versus the default long life for real estate (typically 27.5 years for multifamily property or 39 years for commercial property tax depreciation).
Business owners with properties in industrial or manufacturing operation can further benefit by segregating the machinery equipment utilized in their business operations as well as the respective electrical, foundation, and process piping in direct support of the machinery equipment.
By accelerating tax depreciation, property owners can defer reported income to future years and, in turn, defer income tax obligations to future years. The overall income tax obligation over the life of the property does not change—only when it is paid.
Cost segregation can also be performed retroactively for property placed in service in previous years, and it can be applied to all asset classes and can benefit the owners and occupiers.
The process to segregate assets requires a study by a qualified engineer with experience in the construction and cost estimating fields, expertise in tax law, and experience in preparing and defending work products that may be reviewed by the Internal Revenue Service.
The bottom line is: no one should pay more taxes than due or pay earlier than necessary. If you’ve recently bought or built, it might be worthwhile to consider a cost segregation study. You never know where your missed opportunity may be.
J. Fernando Sosa, ASA, MRICS, is a Director in the Machinery & Equipment Valuation & Advisory practice for Cushman & Wakefield. With 18 years of experience, Fernando has been performing cost segregation studies since 2006. In addition to manufacturing/distribution, hospitality, retail, office, and multifamily assets, he has completed cost segregation studies and cost certification studies for tax equity financing regarding wind and solar projects. These studies are performed for Investment Tax Credits (ITC), Production Tax Credits (PTC), and bonus depreciation MACRS (Modified Accelerated Cost Recovery System).