There has been an increase in buzz around cost segregation studies with the passing of CARES Act, the $2 trillion federal response to COVID-19. Cost segregation has evolved from an income tax reduction tool into a cash flow tool with real cash behind it.
Cost segregation is the IRS approved method of re-classifying components and improvements of your commercial building from real property to personal property. This process allows the assets to be depreciated on a 5, 7 or 15-year schedule instead of the traditional 27.5 or 39-year life of real property. Five-and 7-year items might include decorative building elements, electrical for dedicated computer equipment, and carpet. Fifteen-year items might include site utilities, landscaping and paving.
Some of the shorter depreciable assets may also qualify for first-year depreciation, referred to as bonus depreciation. Bonus depreciation allows taxpayers to deduct a certain percentage of the total (30%, 50% or 100%) in the first year. If the property is held for 39-years, the total amount of the property will be depreciated, but depreciating more up front is valuable because of the tax savings today. A dollar of tax savings today is more than in 5, 10 or 39 years.
Prior to the CARES Act, this depreciation could only be applied moving forward. If the full depreciation wasn’t full utilized or needed in the first year of application, it can be carried forward until fully used. Now with the CARES Act, there is a five-year carryback of net operating losses allowed if they arose in 2018, 2019 or 2020. The 5-year carryback rules require you to go back 5 years and roll forward from there if the loss is in excess of the carryback year’s income. This means that an investor could have their tax returns revised and receive instant cash from the IRS. Yes, the IRS will cut you a check for prior taxes you have paid. This money could be used in any way you please.
Does some of this sound too good to be true? This is all perfectly legal and a no brainer for anyone owning commercial property. Cawley Chicago has a partnership with one of the top cost segregation firms in the business. They even offer audit protection to alleviate any concerns. Cost segregation quotes and estimates on the tax saving benefits are free.
Call Brenten Blakeman, Senior Associate with Capital Markets, at Cawley today to answer any questions and find out how much you could save in taxes or what kind of refund you could get instantly.