Woodbury, NY (PRWEB) December 06, 2013
Leading accounting and business valuation firm Gettry Marcus CPA, P.C., comments on reasons why performing a cost segregation study can save businesses money.
In general, business assets are depreciated over statutorily-prescribed recovery periods, the most common ones being: 39 years for commercial real estate, including leasehold improvements; 27.5 years for residential real estate; 15 years for land improvements; and 5 or 7 years for personal property.
Over the last decade or so, Congress has seen fit to use bonus depreciation as a tool to assist with the rebuilding of lower Manhattan in the wake of 9/11 and then later to help jump start the economy during the economic recession. Bonus depreciation has enabled a taxpayer to deduct either 100% or 50%, depending on when an asset was placed in service, of the cost of the property in the year it was placed in service, with the balance, if any, depreciated over the prescribed recovery period.
In addition, a significant added benefit of the depreciation of rental real estate (commercial and residential) is the rate arbitrage that is provided by the Internal Revenue Code for those taxpayers who are subject to a capital gains tax rate that is lower than that for ordinary income. That is, even though an individual taxpayer in the highest tax bracket potentially gets a Federal income tax benefit equal to 39.6% of the depreciation deductions claimed on rental real estate, the tax gain recognized on the sale or exchange of the real estate that is a direct result of the total amount of depreciation deducted on the property is taxed at only a Federal income tax rate of 25% (provided the property is held for more than a year).
Unfortunately, many real property owners have left a lot of money on the table by not making use of cost segregation studies to maximize the amount of tax depreciation deducted in the early years of a property’s life. In the simplest situation (where the real estate is held for its entire recovery period) the total amount of depreciation deducted will be the same regardless of whether a cost segregation study is performed. However, the economic benefit achieved by doing the study is based on the time value of money concept; that is, a deduction claimed today is more valuable than a deduction claimed the future.
In a cost segregation study, elements of a purchased or constructed building are analyzed by using engineering and cost-estimating technologies which are then segregated into their proper class lives for depreciation purposes based on Treasury regulations, IRS rulings and case law
A cost segregation study can be performed on newly-acquired or constructed real estate. In addition, cost segregation studies can be performed retroactively on properties acquired in past years even if the statute of limitations (generally 3 years) has run on the year of acquisition.
One may believe that having a cost segregation study done can be perceived as being aggressive and would result in an IRS audit. In actuality, the opposite is true. Without a cost segregation study, the entire building cost will be depreciated as real estate and will result in less tax depreciation being claimed; however, at the end of the day, this is incorrect. A cost segregation study allows the taxpayer to properly classify its assets and to deduct the correct amount of depreciation on its tax return.
To read the entire article about cost segregation, visit the Gettry Marcus website.
Gettry Marcus CPA, P.C. is a Top 200 firm nationally with offices in Woodbury, Long Island and New York City. We provide accounting, tax, and consulting services to commercial businesses, high net worth individuals and various industries which include Real Estate and Health Care. We have one of the premier and most credentialed Business Valuation, Litigation and Forensic Accounting Groups in the New York Area. Our experience in diverse industries and a highly talented and experienced professional staff gives us the ability to share valuable insights into our clients’ businesses, to better understand their goals and problems and to help them attain the vision they have for their company.
Gettry Marcus is "Always Looking Deeper" to build value for our clients.
Media inquiries: Contact Fayellen Dietchweiler at 516-364-3390 ext. 225 or fdietchweiler(at)gettrymarcus(dot)com.