Advantages of a Cost Segregation Study

by BPW | March 14, 2022

Whether putting up a new building or renovating an existing one, companies are discovering that they can strengthen their balance sheets by doing a cost segregation study.

A cost segregation study (CSS) helps managers break down and itemize construction and acquisition costs so that they can be allocated to shorter depreciation lives. In other words, the CSS evaluates all information, including current records and inspections, and presents the findings in a clear, well-documented and easily understood format. A CSS can include a review of cost details for the property, as well as blueprints and a physical inspection of the property.

Shorter Depreciation Time Strengthens the Balance Sheet

For tax purposes, the cost of commercial real estate is usually depreciated over 39 years. The CSS’s primary goal is to identify all property-related costs that can be depreciated over 5, 7 and 15 years.

Immediate Benefits of CSS

Consider two immediate benefits of conducting a CSS:

  • Reduction in current income obligations, which decreases taxes and frees up resources, thereby generating an immediate increase in cash flow through accelerated-depreciation tax deductions. 
  • Quantification of a property’s major components and leasehold improvements so they can be written off when they are replaced or renovated. 

When to Conduct a CSS

Typically, a CSS can be conducted any time after the purchase, remodel, or construction of a property. For new owners, however, the ideal time for a study is during the year in which a building is constructed, purchased, or remodeled. For companies in the planning phases of construction or remodeling, the best time is before the infrastructure of the building is set. Typically, the CSS takes between 30 and 60 days to complete. The length of time is contingent on how quickly construction companies or their management-consulting companies receive the information they need.

Although cost segregation can be complex, it can be a savings strategy well worth exploring if you’re working with the right company. Contact us at (805) 963-7811 if you’d like to discuss what a cost segregation could mean for your business and how you can get started.