In today’s economy when cash is king, credit is tight and it’s a “buyer’s” market, “why is Cost Segregation so misunderstood?”
The truth is; it simply makes no sense. Cost segregation is the “tool” used to identify individual building components for income tax purposes. Cost segregation accelerates depreciation on all tangible personal property to 5 or 7 years. Normally, a CPA will “book in” real property assets into a 39-year depreciation schedule. It is the simplest and least time-consuming method. It is also inappropriate. IRS requires real property with varying asset lives to be depreciated over each class life period. These are 5-years and 7-years for tangible personal property, 15-years for land improvements, and 27½- or 39-years for real property (residential/non-residential).
So why, then, do CPAs set up depreciation schedules that are not accurate or appropriate for the real property assets? The answers are varied, but the primary reason is it is the simplest method. There is no number-crunching or long, tedious hours of separating every component into short- or long-life classes. Time is money and most clients do not want their CPA spending “their” money on something they don’t even know about and certainly don’t understand.
One reason cost segregation is misunderstood is the client’s CPA hasn’t shared it with them. Let’s face it; to many clients their CPA is “god.” If they didn’t recommend cost segregation then there is a good reason. So, by sheer omission a building owner would assume it’s not legitimate or doesn’t work.
Another reason cost segregation is misunderstood is it’s “too good to be true!” There is no way cost segregation can deliver such a high ROI. How can cost segregation actually give such high income tax refunds or credits?
The truth is cost segregation is an answer to many building owners who are struggling financially. Cost segregation is the IRS-approved method for accelerating depreciation using the MACRS depreciation schedule. An engineer-conducted cost segregation study is the most thorough and recommended method for identifying and reallocating those short-life assets. The IRS has published a Cost Segregation Audit Techniques Guide for IRS field agents. Anyone can access it online at CostSegAudit to verify the veracity of this article.
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