Here Are Your Articles for Wednesday, June 07, 2017
Is this email not displaying correctly?
View it in your browser .
Website Services Industries Resources About Us Contact Us
Share Save

How Does Cost Segregation Affect Your Manufacturing Operations?

 

Cost segregation is the Internal Revenue Service’s approved method of reclassifying your commercial building from real property to personal property and, in the process, allowing assets to be depreciated on a 5-, 7- or 15-year schedule, instead of the traditional 27.5- or 39-year depreciation schedule of real property. Imagine how this could affect your manufacturing business. Current taxable income could be reduced greatly while your cash flow would increase by 5 to 8 percent of your building’s cost.

This can translate to some hefty benefits, such as increased cash flow, reduced tax liability, deferred taxes, and reclaiming missed depreciation deductions from prior years. You can do all of this without amending previous tax returns.

When Cost Segregation Is Required

According to the IRS, cost segregation is required when allocating lump sum costs to specific asset classifications. An engineering study performed by a qualified professional using methodologies and procedures as described in the IRS Cost Segregation Audit Techniques Guide is required. The IRS’s preferred method is an engineering-based approach using site inspection, cost records, and technical documentation.

Because cost segregation evolved from years of litigation and rulings rather than from an IRS code section or succinct ruling, the legal basis underlying cost segregation can be confusing. It is important for you to do your due diligence to see whether your manufacturing property would qualify. Talking with a tax accountant regarding your federal taxes is the best way to start. You may want to consult an appraiser and valuation expert.

How Accountants Can Help

Accountants play a central role in the cost segregation process. They can recommend techniques and review and implement the findings of the engineering report, which segregates assets into four categories:

  • Personal property
  • Land
  • Land improvements
  • Buildings

By segregating these property costs, your manufacturing company cash flow has a wider reach. Tax savings can be realized from accelerated depreciation deductions and potentially easier property write-offs. Use cash segregation when constructing your manufacturing facility; buying an existing facility; or, in certain circumstances, years after disposing of one, as long as the year of disposition is open under the statute of limitations.

As the purchaser of a manufacturing building, you achieve faster depreciation deductions, as well as possible and easier subsequent write-offs. If real property is reclassified as 5-, 7- and 15-year personal property, it may qualify for a 30 percent or 50 percent bonus depreciation that applies to new property the first year it’s placed in service. This can be an enormous benefit and the resulting cash flow can provide the capital for numerous other projects.

Keep in mind that cost segregation is applicable not only when you acquire new or existing structures for your manufacturing business but also when you’ve previously acquired or improved a structure. All you’ll need is the proper engineering report to justify cost segregation.

Which Assets Apply

Assets that qualify for accelerated depreciation through the use of shorter tax life depreciation schedules mean that you maximize annual depreciation, reduce upfront income tax costs, lower cost of capital, and improve shareholder value, while increasing your ability to write off individual assets in the future. A primary goal of a cost segregation study is to identify all construction-related costs for your manufacturing facility that can be depreciated over a shorter tax life than the building, which is up to 39 years for nonresidential real property.

Cost segregation studies are valuable whether you own, construct, renovate, or acquire the building where your production will occur. A cost segregation study will open the opportunity for you to defer taxes, reduce your overall current tax burden, and free up capital. Contact our financial and tax experts to help you review this process today.

 
Share Save

Your Comments

Tim Sinclair
Tim Sinclair
Director
(843) 577-5843
tsinclair@websterrogers.com
40 Calhoun Street, Suite 320
Charleston, SC 29401
Friend Me on Facebook
Follow Me on Twitter
Connect with me on LinkedIn
Saved Articles
Comments and Feedback
Refer A Friend
Your Privacy
Our firm provides the information in this e-newsletter for general guidance only, and does not constitute the provision of legal advice, tax advice, accounting services, investment advice, or professional consulting of any kind. The information provided herein should not be used as a substitute for consultation with professional tax, accounting, legal, or other competent advisers. Before making any decision or taking any action, you should consult a professional adviser who has been provided with all pertinent facts relevant to your particular situation. Tax articles in this e-newsletter are not intended to be used, and cannot be used by any taxpayer, for the purpose of avoiding accuracy-related penalties that may be imposed on the taxpayer. The information is provided "as is," with no assurance or guarantee of completeness, accuracy, or timeliness of the information, and without warranty of any kind, express or implied, including but not limited to warranties of performance, merchantability, and fitness for a particular purpose.
Powered by
Copyright © IndustryNewsletters All rights reserved.

This email was sent to: rhowell@websterrogers.com

Mailing address: 40 Calhoun Street, Suite 320, Charleston, SC 29401