Chances are slim that you’ve heard of what cost segregation is, and they’re even slimmer that you’ve heard the right things about it.
According to the American Society of Cost Segregation Professionals, cost segregation includes identifying property components and assets under the federal tax code and assessing whether they qualify for accelerated depreciation, which lowers the income tax burden and increases your cash flow.
Let’s take a look at a few common myths about cost segregation to help you unpack what it’s really about.
Myth 1: Cost Segregation Won’t Save Me Any Real Money
If your business is located in a freestanding building or is in a leasehold improvement, chances are that you will save money with cost segregation.
The only way a cost segregation study won’t save you money is if the entity you own is losing money and can’t carry back or carry forward the generated credit. In most cases, cost segregation yields much better results than the original benchmark estimate.
Myth 2: I Don’t Have Assets That Qualify For Accelerated Depreciation
This is a common misconception about a cost segregation study.
Generally speaking, most buildings have a 5 to 8 percent interior that’s eligible for reclassification into the five-year depreciation schedule. For the exterior components, there’s a chance that it could be reclassified to the fifteen-year depreciation schedule.
Myth 3: Cost Segregation Doesn’t Work On Short-Term Holds
When you purchase a property, it isn’t likely that you’ll have enough organic equity without value addition or capital expenditure to increase the market value when selling.
When the property components are broken up for cost segregation, accurate values are provided for each component. This allows for easy calculation of partial asset disposition (PAD) and helps you avoid recapture tax.
Myth 4: A Cost Segregation Will Increase Our Chances of an Audit
There isn’t much truth to the statement because the IRS has specific rules and regulations that must be followed during the process of the cost segregation study.
When the cost segregation study is conducted with adherence to the rules and regulations, you rest assured that there won’t be any red flags in the eyes of the IRS.
If you want to find out more about cost segregation depreciation, get in touch with our cost segregation company.
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