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New Law Increases Tax Savings From Cost Segregation Study For Your Office Building

Have you purchased or constructed a new office building since 1986? If so, you can utilize a little-known strategy to accelerate your tax savings. Under current tax rules, the cost of land cannot be depreciated, while the office building cost must be written off over 39 years. However, using a cost segregation study,* you can allocate much of the building cost to shorter lived assets, to accelerate your depreciation write-offs (deductions) for faster tax savings. 

A cost segregation study is an extensive review by a third-party, using an engineering approach acceptable to the IRS, that allows you to reclassify as much as 40% of the total building cost as non-structural, thus qualifying for faster depreciation. While the total depreciation deductions over the life of the building will not change, the tax benefits are accelerated to the early years of ownership, allowing you to realize the cash flow from the tax savings now, rather than being delayed to future years. This can result in substantial savings for doctors who own larger office buildings (over $500,000) where this approach is cost-effective. 

Jonathan W. White, CPA specializes in personalized dental practice accounting and tax preparation and says that the new tax law has further increased the benefit of a cost segregation study. That’s because building components which are classified as “personal property” and not part of the building can now qualify for additional 100% first-year bonus depreciation and for immediate deduction under the Section 179 expensing election which has been increased to $1,000,000. 

White offers the following examples of building items which normally qualify for more rapid write-off from a cost segregation study:

  • Carpet and furniture.
  • Parking lot, landscaping, shrubbery, sidewalks, roads within the property, storm drainage, outdoor lamps, and fencing can be classified as land improvements, depreciable over 15 years.
  • Special wiring and plumbing installed to support specific dental equipment can be treated as part of the equipment rather than part of the building, and written off over 5-7 years.
  • Vinyl wallcoverings, kitchen water piping, x-ray plumbing connections.
  • Room partitions, raised floors, generators, heating and air-conditioning equipment, elevators, security, and sprinkler systems. 

The IRS has ruled that cost segregation studies can be performed not only for new buildings, but also for buildings purchased or constructed after 1986. For older buildings, you should first obtain a cost segregation study and then request a change in the method of accounting using IRS Form 3115, based on the study results. The IRS will then allow a one-time lump sum deduction, called a Section 481(a) adjustment, in the year you change your method. This allows you to reclassify costs that previously qualified for shorter lives and “catch up” on those missed deductions now (in a single tax year) to reap the cash savings from reduced taxes immediately. So if you qualify, this could provide a much needed tax deduction to help offset an increase in your income.

* For more information on cost segregation studies offered by his firm, contact Jonathan White, CPA at pwhite@jonathanwhitecpa.com or 704.288.1731.

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