Pre-Construction planning benefits from cost segregation.
Regardless of the type building being contemplated to construct, cost segregation should be among the first considerations. The reason is simple…cost segregation delivers results. When cost segregation is applied during the design phase of a building, many components that would normally be considered real property “become” tangible personal property. When an architect or engineer trained in cost segregation is involved from the beginning, any building project will benefit. Cost segregation engineers are often able to add significant value (help clients accelerate more assets) by providing tax-engineering consulting prior to the completion of a building. Let’s look at some real examples of cost segregation delivering results:
A distribution client had an exterior loading area with High Intensity Discharge (HID) lighting – that was the only lighting for the area. Our cost segregation engineers suggested adding three additional “low-cost” high-output lights, allowing us to reclassify the $150,000 worth of HID lighting as 5-yr assets.
Our cost segregation engineers also suggested rewiring circuits in a restaurant/bar to segregate lights that are used for after-hours clean-up. This allowed for the separation of 39-year light into 5-year lighting.
During construction, structural fill identified for the parking and roadways should be tracked separately from the structural fill for the building pad. Cost segregation identifies it as 15-year assets instead of it being allocated to land.
- Using a separate A/C unit for the kitchen instead of branching off a unit used at the seating area makes the separate A/C unit a
5-year asset because it has a special purpose. Cost segregation is used to classify it as such. If the sole justification of the HVAC is for a piece of equipment or part of a process, it then becomes an integral piece of that equipment or process.
Wiring computer receptacles on a dedicated circuit allows the entire run from the panel to the junction box to be classified as a 5-year asset when cost segregation is applied. The same holds true for electrical services to specific pieces of equipment or machinery that are not part of the normal operation and maintenance of the building. When any “short life” asset is supported for a specific purpose by an asset that is otherwise considered “real” property, that asset then qualifies for reclassification as a 5-year asset. Cost segregation is the tool used to reclassify.
Porticos attached to the building are 39-year assets. If, however, the roofs are designed to overlap but not connect, the portico becomes a 15-year asset. Changing flooring material from ceramic/granite/marble to some other such as laminate wood, vinyl or epoxy will change the depreciable life to 5-year property by cost segregation applied.
Elimination of ceramic tiles on walls or changing walls from gypsum wallboard to movable partitions, changes the depreciable life from 39-year to 5-year when cost segregation is applied.
- Applying cost segregation to specialized electrical outlets on drawings by labeling them as “dedicated” or “special electrical” changes their classification from 39-year to 5-year when supporting short-life property.
An automobile dealership had a $250,000 lighting system for the showroom. Since these were the only lights for that area, they would be classified as 39-year. Our cost segregation engineers suggested that they install a couple thousand dollars’ worth of fluorescent lighting. The fluorescent lighting then served as the primary lighting for the building. This lighting was classified as the task lighting under the 39-year classification. The $250,000 lighting was then reclassified as 5-year decorative lighting. Cost segregation delivered an additional $100,000 in depreciation.
By using a simple expansion-joint between the building and a retaining wall, the retaining wall was reclassified from 39-year building to 15-year land improvement. Not only did this benefit the company for tax purposes, but if a car ever ran into the retaining wall, the building would sustain much less damage, if any. By applying cost segregation in this manner, it also reduces the property insurance cost.
As one can see from these few examples, pre-construction planning benefits from cost segregation. In a typical pre-construction estimate, when cost segregation is applied during the design phase, an additional 15% of the 39-year property can be reallocated to 5- or 15-year property. Of course, there are many factors affecting how much can be reclassified, but the ultimate decision rests with the owner. Some cost segregation recommendations will add to the construction cost and many will reduce it. The real decision-maker is the ROI as determined when cost segregation is applied. When cost segregation delivers a positive ROI, it should be implemented.
Cost segregation delivers results every time it is applied.
To learn more about cost segregation and how to apply it to your specific situation, contact us…