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by Rick Clifford and Mark Colvin
Cost segregation and fixed asset analysis studies are designed to accurately allocate the cost of commercial buildings that are built, bought, or remodeled. Since 2004, the IRS has regularly reviewed these studies to clarify existing case law and regulations.
After an eight-year project, the U.S. Department of Treasury recently provided guidance on the treatment of fixed assets when considering capitalization versus repair. These new temporary regulations affect all owners or lessees of real property, and all taxpayers need to ensure they are following the proper method of capitalization by December 31, 2014. These regulations are expected to be finalized by the middle of 2013.
While the 2004 IRS Cost Segregation Audit Techniques Guide (CSATG) was helpful to professional cost segregation preparers, it is not a checklist that the general public or infrequent user can use easily. Issues addressed in the temporary regulations related to real estate depreciation are complex and dynamic, so property owners, accountants, and professional engineers must work together to establish support for a tax position.
Historically, our clients have been focused on the segregation of depreciable components of a building that qualify for a shorter recovery period. The temporary repair and maintenance regulations differ from the IRS’s positions on cost segregation studies, in that the regulations call for owners to also segregate their long-life property and building systems (roofs, windows, electrical, HVAC system, etc.). As owners begin to comply with the new repair and maintenance regulations, there will be significant tax benefits available to them by segregating these systems. Many will be able to dispose of structural improvements that were historically capitalized for tax purposes.
The temporary repair regulations have also provided owners with much more guidance on the proper treatment of fixed assets (capitalization versus repair). In addition to many good examples, the regulations introduce new concepts in determining capitalization, such as de minimis rules, routine maintenance safe harbor, and general asset account elections (preserving the ability to dispose of portions of a building at some future date).
There are two reasons to pursue cost segregation studies. The obvious one is that they defer taxes and potentially increase cash flow in the short term.
The second reason is that they offer benefits for the future. A properly performed cost segregation study provides the cost detail for each of the building’s major structural components, so when it is repurposed, repaired, or disposed of, the owner has defined values for those components. Tracking these costs allows owners to properly follow the new regulations and present tax-saving opportunities over the life of the building.
Property owners clearly benefit from cost segregation studies and engineering-based reviews tied to a repair and maintenance analysis. These studies defer taxes, improve cash flow, and provide a benchmark for additional deductions in the future. Once regulations are finalized later this year, professional engineers, accountants, and consultants who are experienced in cost segregation can help review your unique set of circumstances.
Rick Clifford, Partnerrichard.email@example.com or 617- 306-5137
Mark Colvin, Senior Tax Managermark.firstname.lastname@example.org or 309-495-8754
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