Property owners are re-opening their storefronts, businesses are working to get back to normal, and it’s tax season. Now more than ever, gaining extra savings on your property and increasing your business bottom line is likely top of mind.
Beginning your cost segregation study now is critical for long-term savings and benefits for many property owners looking to maximize their assets to better position themselves for tax seasons.
Cost segregation studies are a great way for property owners to save money on their tax bills; however, it’s important to become aware of the factors that may determine the extent of your savings before you order your study. Timing is crucial if you’re looking to save money using a cost segregation study. It’s essential that you coordinate the proper planning strategies with a trusted firm in a timely manner to help ensure that the additional depreciation from a cost segregation study will result in maximum savings.
Here are the 3 best ways to maximize the benefits of your cost segregation study:
Timing
If you’re considering a cost segregation study, it’s important to have the timing just right. If you believe your business may benefit from a cost segregation study, then it should be conducted as soon as possible. Once your assets begin accelerated depreciation you will have access to those savings. Remember, money that is available to your business in the present is always more valuable than money that may be available in the future.
Another timing consideration should be when and if you sell your depreciating assets. Make sure that you don’t sell your assets too soon after qualifying them for accelerated depreciation as you may lose out on savings and defeat the purpose of conducting your cost segregation study in the first place. A good measure may be to only perform a cost segregation study if you plan on holding a property for at least five years.
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Tax Bracket
Your tax bracket can have a major impact on the profitability of your cost segregation study. Any qualifying deduction will be determined by your tax bracket, and the higher the tax bracket, the greater the deduction.
For instance, if you’re in a federal tax bracket of 10%, the maximum federal tax savings available is 10 cents per dollar. However, if you’re in the 39.6% range, the maximum federal tax savings is almost 40 cents per dollar. Keeping this in mind, it may be most beneficial to order your cost segregation study when your marginal tax rate is at its highest.
Recapture
Recapture is another important consideration when timing your cost segregation study. Depreciation recapture tax is a federal tax imposed on taxpayers who “dispose” of an asset that had previously provided tax advantages through depreciation. And since a cost segregation study re-classifies real property into tangible property, the recapture depreciation tax will apply. The IRS will require that you pay taxes at the ordinary rate on any depreciation claimed the year of your study. It’s important to crunch the numbers beforehand and make sure that the balance of your recapture tax bill won’t exceed the amount of your deduction.
The Bottom Line
Cost segregation studies can be a smart and effective tax planning tool if you plan properly. Become informed and have an experienced firm oversee your cost segregation analysis to support you in maximizing your bottom line.
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