r&d amortization 2022 irs

The When and Why of Cost Segregation Studies

Patrick Esteban

Senior Director

What are the Benefits of a Cost Segregation Study?

There are a number of benefits associated with a Cost Segregation study and its various applications. To the extent you have taxable income, a study will help mitigate some or all of the tax liability for the current and possibly future years. This is most often achieved through the acceleration of depreciation deductions and the resulting tax deferral. The study will identify assets that are eligible for Bonus Depreciation treatment.

When prepared correctly, these studies can also be an excellent reference tool to deploy the various strategies available to property owners as contained in the Tangible Property Regulations with respect to expensing of certain incoming improvements as well as taking advantage of the Partial Asset Disposition (PAD) deduction.

Also, in light of the Tangible Property Regulations, a comprehensive study such as, Fixed Asset Review, can also properly document all assets that might be subject to disposition in the future.”

To learn more about using cost segregation throughout the Life Cycle of Real Estate, and the additional benefits that may be available please visit our Life Cycle of Real Estate page.

When Should a Cost Segregation Study be Conducted?

The timing of a cost segregation study can have a significant impact on the potential benefits and tax savings. Here are some ideal scenarios when a study should be conducted:

Conducting a study shortly after the construction or acquisition of a commercial property ensures that the maximum tax benefits are captured from the beginning. This also allows for more accurate data collection and easier access to relevant records.

If you have recently completed renovations or improvements to your property, it’s an excellent time to conduct a cost segregation study. The study can help identify assets with shorter depreciable lives, allowing you to accelerate depreciation and benefit from immediate tax savings.

If the property’s use has changed, such as converting a warehouse into office space, it may warrant a new cost segregation study. This can help identify assets eligible for accelerated depreciation based on the new usage.

If a cost segregation study was not performed at the time of acquisition or construction, a “catch-up” study can still be conducted. This allows you to claim any missed depreciation deductions in the current tax year by filing a Form 3115 (Application for Change in Accounting Method) with the IRS. This can result in a significant tax saving without amending prior years’ tax returns.

If your business has experienced a profitable year and you need to minimize your tax liability, a cost segregation study may help by accelerating depreciation deductions and reducing your taxable income.

If you have made significant leasehold improvements to a rented property, a cost segregation study can help identify and allocate costs to shorter-lived assets, allowing for quicker cost recovery.

Related Articles

Contact Source Advisors for a Free Assessment

Embrace the power of tax credit savings with Source Advisors and propel your business towards growth and success. Partner with us today to unlock your company’s full potential.