A great tax benefit manufacturers can seek is something you already have in operation – your factory, facility or office building.
Business property, as a whole, can be depreciated over 39 years. But many building components can qualify to be depreciated over far fewer years, which allows for greater tax savings.
This method is called cost segregation depreciation and requires an engineering-based study to use this tax strategy.
While there’s a cost to such studies, there can be far greater tax savings. The American Institute of Certified Public Accountants advises the benefits of cost segregation overwhelmingly outweigh the drawbacks.
Not only can cost segregation depreciation reduce your current tax liability, it can also provide an immediate increase in cash flow to free capital for reinvestment in your business. Additionally, you may be entitled to “catch up” depreciation on previously misclassified assets placed in service during a prior year. Amended returns are not required to claim the accelerated depreciation.
A wide range of building elements can be classified as shorter-lived assets, including electrical installations, plumbing, mechanical components, and finishes. These assets can be depreciated over as little as 15, 7 or even 5 years.
As the IRS notes, the shorter the asset’s useful life, the larger the current tax deduction, thus providing an incentive for tax purposes.
While many business owners are aware of depreciation benefits, few take full advantage of them. Cost segregation depreciation, in particular, is one of the most valuable tax strategies available to business owners today.
Here’s an example of how much you could save using cost segregation depreciation assuming a 35 percent tax bracket and an 8 percent discount rate:
- Reclassifying from a 39-year to a 5-year depreciable asset would provide a net present value benefit of approximately $181,000 for every $1 million dollars of property
- Reclassifying from a 39-year to a 7-year depreciable asset would provide a net present value benefit of approximately $165,000 for every $1 million dollars of property
- Reclassifying from a 39-year to a 15-year depreciable asset would provide a net present value benefit of approximately $100,000 for every $1 million dollars of property
Cost segregation depreciation is available to a wide variety of business types, including C Corporations, S Corporations, Partnerships, LPs, LLPs and LLCs.